[Linklaters Managing Partner Simon] Davies said the firm was focused on overall profitability rather than its revenue, which has suffered due to the deflated M&A market with about 40 per cent of income generated by the corporate department.
“Our objective has never been to maximise our revenue,” he said [emphasis supplied]. “We’re not focused on being the biggest firm by revenue but on being the leading firm as far as our clients are concerned.”
–From The Lawyer story announcing Linklaters’ 2009-2010 results, showing a decline of 8.8% in revenue to £1.18bn and also a decline of 6.88% in PEP to £1.21m.
This raises the question: If not revenue, or if not PEP, what are the optimal metrics on which to judge law firm performance?
Orrick famously announced back in May that it would cease “using or reporting, internally or publicly, the metric of Profit Per Equity Partner.” And on the heels of that announcement I wrote about some alternatives I might endorse. The list included:
- 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.
Most importantly, however, I believe we as a profession and as a management class need to stop genuflecting to the one-size-fits-all model of law firm performance.
What do I mean by that?
Simply that firms are increasingly segmenting themselves into different market positionings, and that applying one, or even a few, unitary metrics across firms pursuing avowedly different strategies is guaranteed to produce misleading–and downright odd–results.
For example, much as I respect Simon Davis, I think being part of the Magic Circle means that you are, among other things, judged on overall size, that is to say, on annual revenue. Who would claim that a firm with half, or one-quarter, of the revenue of Allen & Overy, Clifford Chance, Freshfields, or Linklaters would seriously be viewed as on a par with those? In this league, size does matter. (Which, among other things, is why Slaughter & May is not “really” a Magic Circle firm, or at best is one with an enormous bold asterisk after its name.)
Another set of firms–and yes, folks, we can name names–including Cravath, Slaughters, Wachtell, Weil Gothsal, and perhaps some relative newcomers such as Boies Schiller or Quinn Emanuel, positively invites us to compare them on the basis of PPEP.
Yet another set would like us to find them strong in global coverage: Say, for example, Baker & McKenzie, DLA, Jones Day, Latham, Sidley, and White & Case, with a slightly newer orientation to the “global” value proposition represented by K&L/Gates, Orrick, and Reed Smith. (Caveat, folks: The trouble with naming names is you’ve named some people and you haven’t named other people. That’s why letters to the editor are available; and I urge you all to exercise your right to add, subtract, and in general dissent.)
Another, separate, problem with cross-firm metrics has to do with averages. Averages mislead. Yes, seriously. (In my original piece on this I used the familiar example of “Bill Gates walks into a bar….”, and the average net worth in the place goes up to $5-billion.)
Here’s a fairly trivial example of how averages can mislead: Imagine a firm with the vast majority of its lawyers in New York, or New York and London. Now compare that firm’s PPEP to another firm with relatively few lawyers in those high-margin markets. Surprise! Same would happen with Revenue per Lawyer, and, on the unflattering side (unflattering to the capital markets-centric firm, that is), with cost per lawyer. The headline news would be if the capital markets firm had lower PPEP.
When stated baldly this way, none of us is the least surprised that “averages” across firms with completely different business models, strategies, and geographic footprints mislead at least as much as they reveal. To abstract from our industry, what does the average fuel economy of Toyota’s models tell you compared to the average fuel economy of Ferraris? To say that Toyotas have “better” fuel economy is to focus on facts at the expense of the truth. (Focusing on facts at the expense of the truth is at the heart of many a cross-examination technique.)
Not to go metaphysical on you, but to do justice to the concept of what metrics are appropriate for measuring law firm performance, we need to delve for a moment into the difference between facts and truth.
Facts are convenient, tough, hard, unyielding little pebbles. Not just facts like water freezes at 32°F or Oxygen is the 8th element in the periodic table, but facts like “during your deposition you said you’d seen this email and now you say you can’t remember?” Or, facts like today’s announcement that “Clifford Chance boosted its average PPEP by 25% in the past fiscal year.” It’s very hard to argue that facts don’t stand for irreducible little nuggets of reality. But facts can also tempt us into sloppy, lazy, and unreflective “analysis.” Such as: “If CC boosted its PPEP by 25% and Linklaters and A&O didn’t do as well, then that’s bad news for Links and A&O.” Well, not so fast.
The difference between facts and truth brings to mind Oscar Wilde’s famous definition of a cynic as someone who “knows the price of everything and the value of nothing.” As an economist, I’d be the last to tell you that price doesn’t contain a lot of information. But at times, as with the recent housing bubble, or the tech stock bubble of ca. 2000, prices can’t really be trusted. What you really need to know is what’s the value of the asset?
And thus with law firm performance metrics.
Before you conclude that any particular firm is doing well, doing poorly, or hanging out in the middle of the pack, you first need to figure out what that law firm is setting out to do. What is their strategy? Is it to be a “category killer” in employment law like Littler Mendelson or Jackson Lewis? Then a high PPEP is probably not something they’re striving for and it’s unfair (and worse, irrelevant, and sloppy thinking, as noted above) to pretend that metric has much of anything to do with them.
Then what am I suggesting?
Not just that there is no “one size fits all” metric, which should be obvious if you’re a student of almost any industry (autos, apparel retailing, wine and beer, cellphones), but that to gauge how any law firm is doing you first have to do the hard work of analyzing what they are trying to do.
Are they trying to be a global, but non-headquarters dependent, powerhouse? Then you might want to know what percentage of their revenue comes from matters using substantial amounts of lawyers’ time from multiple offices; or what percentage of revenue is “earned” by offices other than the originating one. A little tougher to figure out than the Big Hard Rock of PPEP, isn’t it?
Sorry to break this to you.