Earnings Season is now in full throat, and we’re beginning to see a remarkably consistent pattern emerge:
- Revenues essentially flat to down 10%
- Profits flat to slightly down-but PPP flat or even up a bit
I generalize, of course.
But here is some of the evidence (these are randomly selected from more recent releases):
| Revenue | Net Profits | RPL | PPP | |
|---|---|---|---|---|
|
Arnold & Porter
|
+2%
|
+12.3%
|
-1.1%
|
+1%
|
|
Bracewell & Giuliani
|
+<1%
|
-7.7%
|
+4.2%
|
+10.2%
|
|
Dechert
|
-12.6%
|
n/a
|
n/a
|
-8.6%
|
|
Fulbright & Jaworski
|
-7.5%
|
-6%
|
-6.3%
|
-5.2%
|
|
Holland & Knight
|
-10%
|
flat
|
-1%
|
+2.6%
|
|
Howrey
|
-16.3%
|
-28.3%
|
-19.2%
|
-34.9%
|
|
Kirkland & Ellis
|
+2%
|
+16%
|
-3.6%
|
+1%
|
| Mayer Brown |
-14%
|
-19%
|
-7%
|
-4%
|
|
Patton Boggs
|
-2%
|
n/a
|
-7.4%
|
+3.7%
|
|
Paul Hastings
|
-9.8%
|
n/a
|
+4.4%
|
-1.4%
|
|
Vinson & Elkins
|
-4.8%
|
+5.5%
|
-6.2%
|
-3.1%
|
I could go on, but you get the idea. And again, I emphasize that these are random names, selected, frankly, from the latest data I could readily put my hands on. I would like to think a random sample implies it might be statistically representative of a larger universe.
So what do we see?
The first column, revenue, ranges from essentially flat (certainly inflation-adjusted flat) to rather seriously down. This is of course the pole star that management must manage to. It’s a rigid, unyielding number, particularly in cash-basis accounting businesses, from which there is no escape in terms of everything else you can try to manage on the expense side of the income statement. More on the implications of this in a moment.
“Net profits,” the second column, are pretty much all over the place, but I’m not sure how much information that metric contains, so this doesn’t particularly alarm or delight me.
When it comes to RPL, however, faithful readers will know that this is one of my favorite all-purpose law firm “performance” measures. Why? First of all, it’s hard to fudge either the numerator or the denominator. (Sure, you can play games with FTE’s and so forth, but frankly most firms aren’t that focused on this metric to go to the bother.) So what’s the RPL story?
To the extent it’s disclosed, or calculable, I view RPL as something of a rough proxy for “quality of practice.” By that I simply mean that the more clients are willing to pay you, on average, for a lawyer-year’s worth of time from your firm, the higher the value clients place on what you do for them. At the margins and in the short run, this may be influenced by tweaking hourly rates or recognition percentages, but over the long run and in extremely revealing ways, the trend of your firm’s RPL (vis-a-vis your peer group, as always–discipline, people!), be it up or down or sideways, tells an enormously important and almost incontrovertible story about the trajectory of your practice. You can be going up-market, down-market, or staying-market, but RPL, over time, won’t lie.
So again, what does RPL reveal? Pretty simply this: It was a tough year. If you eliminate the highest and the lowest changes in RPL, the remaining cross-section looks like it’s down in the middle single digit percentages. The sky is not falling, but people clearly aren’t as busy, or aren’t as busy on valuable matters, as the previous year. But the most important part of that sentence is the introductory clause: We’re not in dire straits.
Finally, of course, column #4, the sexiest column of the all. Permit me to suggest that the PPP story is the second simplest story to tell, after the gross revenue story. Again, eliminating the highest and the lowest to normalize against outliers, the story is one of essentially flat year over year PPP.
The two key numbers come back to this: Revenue flat to seriously down, PPP flat to very mildly down.
Here’s where I think law firm management deserves credit (again, generalizing).
Most of corporate America would be delighted to have emerged from 2009, or any difficult period, with revenue decidedly down but profits marginally up. It takes turning the ship quickly. And here’s the good news from our industry: We did just that.
If you look at any of the charts tracking layoffs during 2009 (if you haven’t, that’s OK, I have so you don’t have to), more than half the year’s total layoffs took place in the first 3 months of the year. In other words, management reacted quickly.
Remember that September 2008 was the carpet-bombing month of damages to the financial system: Not just the Lehman bankruptcy, but the WaMu takeover, largest in history by the FDIC, the death of investment banks as we know them, the BofA/Merrill takeover, the $85-billion AIG investment, the Fannie Mae/Freddie Mac implosions, and even more-all in a single 19 days.
For firms’ management, widely if not across the board, to have responded with historically drastic measures one short quarter later is, to me, nothing short of surprising. Management deserves more credit than it may have gotten.
As an industry, we did respond with alacrity. Kudos where kudos are due.
Now, two last thoughts.
First, the human toll of layoffs.
Putting aside partners who were overdue to be “spoken to,” non-equity partners who were in place only because of a cowardly preference by their practice group leaders for avoiding awkward conversations, associates who long since “checked out” psychologically and in terms of commitment, and staff who might have come to view their jobs as sinecures–all of whom needed to be excused for the health of the firm overall, and overdue much of it was–there are still the legions of people who were collateral damage. People who were doing their best, even if it wasn’t good enough. My heart goes out to them, and I’ve known more than a few.
But second, the Darwinian logic of the marketplace that compels firms to sustain PPP in the face of the most gruesome downturn in any of our careers is not cavalier and not selfish.
Why is PPP so important?
Because it is nothing less than the lifeblood, in today’s currency, of firms’ ability to compete for talent in the market. (Whether tomorrow could look different is a story for another day.)
If management allows PPP to take a serious hit in today’s hyper-mobile environment, they may find that all of a sudden there are fewer partners and no profits. Lights out. And that, of course, is when the collateral damage to the secretaries with 20 years’ service and a learning-disabled child at home hits you between the eyes.
Jack (“Neutron Jack”) Welch famously said that his 20/70/10 forced-ranking of stars, the solid bench, and the ankle weights who had to be cut off, was not inhumane. It was the only way to provide a healthy and ever-renewing organizational environment going forward in which the stars and the solid citizens would not be tethered to the subpar and the serving-time.
So looking ahead to 2010, take heart. By and large we did what we had to do at the start of 2009, and the numbers, which overall and in the long run don’t lie, are starting to report that story.
