Orrick announced on May 12 that “it will no longer use or report, internally or publicly, the metric of Profit Per Equity Partner.”
Please join me in prayer, dear congregants, that this will inaugurate a trend.
I’ll explain in a moment, but first, Orrick deserves the floor (from their press release):
The firm believes the fundamental changes taking place in both the business of law and in the relationship between law firms and its clients have made the metric no longer constructive or informative for the firm or the industry.
“The legal profession is at a transformative moment, and now is the time to reconsider all of the metrics we have traditionally used to measure success,” said Ralph Baxter, Orrick’s Chairman and CEO. “Our partnership is engaging in a serious dialogue to identify more appropriate metrics to evaluate our firm, to strengthen our client relationships, and to make our lawyers’ careers even more meaningful. Moving away from the Profit Per Equity Partner metric is a step toward greater accuracy and transparency about law firm economics, and it will focus us even more on how we deliver value and efficiency to our clients.”
(Disclosure: Ralph and I have discussed alternative metrics for law firms in general, but I did not have any hand in Orrick’s decision.)
Now, let me specify what I’m not going to talk about: Nothing logistical or prudential about this decision. I’m not interested in whether The American Lawyer can reverse-engineer the Orrick PPEP calculation (with or without willing sources); I’m not interested in whether competitors or even Orrick partners might conceivably wonder if the firm had something to hide; and I’m not interested in whether his will help, hinder, or be immaterial to Orrick’s prospects in the lateral market. All those things I leave for others to speculate upon. So to the game.
Why do I “pray” (I exaggerate, but only to underline my belief in Orrick’s move) that this become a trend? Let me count the ways:
- We all know, wink-wink, that PPEP is a consummately manipulable number. Even The American Lawyer has never mounted a resounding rebuttal to this widespread assumption. If it’s a metric that can be gamed, how much weight does it deserve?
- PPEP is an average. As Cesar Alvarez of Greenberg Traurig famously said, the only PPEP that matters is “profits per me.” I’m not being facetious. There are firms with (for example) a reported PPEP of $1.2-million and a band of equity partners’ actual incomes from $500,000 to over $5-million. It’s like the old joke about “Bill Gates walks into a bar….” (and the average net worth of those in the bar becomes $5-billion).
- Of far greater weight is the indictment of PPEP on the merits. Unfortunately, in the 30 or so years since it came to prominence under the fabulously talented Steve Brill, it has come to encapsulate Everything You Need to Know about a law firm. That of course is unadulterated pap, but we find ourselves drawn to it with an almost voyeuristic pull, much as we’d be drawn to salacious, compromising pictures of prominent politicians or Hollywood celebrities.
- And with the same effect: It tends to override the reasoning faculties of our frontal lobes.
- So what, if I’m proposing to dethrone PPEP, matters more in terms of evaluating a law firm’s performance? Here are just a few candidates:
- On the quantitative side:
- Revenue Per Lawyer
- Compound annual growth rate (CAGR) of revenue over a multi-year period
- Realization rates (implying, I would argue, clients’ perception of value-for-services-received)
- Associate retention rates (or attrition rates, measured negatively)
- Percentage of business from clients of long-standing duration (say, more than 3 or 5 years)
- Percentage of all legal spend from top 10 (20/50/100) clients
- On the qualitative side:
- Client satisfaction
- Lawyer morale
- Commitment to and investment in professional development
- Commitment to and investment in such things as diversity and pro bono
- The quality of firms the firm takes lateral talent from and the quality of firms they lose lateral talent to
- The quality of firms the firm wins assignments from and the quality of firms they lose assignments to
- Quality and morale of professional and support staff.
- On the quantitative side:
And I could go on, but you get the point: PPEP is a remarkably crabbed, narrow, and, at this point, antiquated measure of law firm excellence. “Antiquated,” in particular, because we’ve all learned long ago how to game it. It doesn’t mean what it used to mean, at least if meaning consists in reliable comparability across firms.
You, there in the back, standing up and waving your hand?
Yes, I know, there’s a case to be made that it’s only fair that PPEP be “a part of the mix” of evaluating a firm, and that it tells the market something important about how a firm is able to distill the ineffably convoluted blend of clients, talent, markets, global platform, and infrastructure into a magic output.
I’m here to tell you the pendulum long ago swung preposterously far in your direction. And that we’re long overdue for a big correction.
Far be it from me to aver that profits don’t matter; they matter tremendously. Baxter feels the same way, judging from his talk with Above The Law:
We’re not saying that it doesn’t matter to be profitable, it does. We’re not saying that it’s not important that our most senior partners are compensated in a way the matches the great law firms in the world. And they will be.
Whatever possessed us to rely on this shockingly narrow and unitary metric for so many years, I believe its time has passed. It served a salutary purpose in the beginning. That purpose was (a) transparency where opacity previously reigned; (b) objective comparability where impressions and reputations previously reigned; and (c) shining a light on quality of management where kitchen-table and seat-of-the-pants amateurs had always prevailed. That time is long past.
A final observation: Do you know what your clients’ GC’s make? (Unless they’re public companies and the GC is one of the top five highest-remunerated officers, the answer is almost assuredly not.) Their AGC’s, deputy GC’s, or business head units?
Then why should they know that (roughly, that is) about you?
This may be the key point.
Clients hate PPEP. All it can possibly accomplish is to inspire envy. “I work just as hard or harder as XYZ, and s/he makes $#.#-million!”
Is this a terribly smart thing for us to be doing to ourselves?
Let us close by joining in prayer….