Here’s another nice disclosure:

Firmwide revenues in 2012 were essentially flat as compared to 2011. In the Americas, revenues decreased by 2.5% on decreased average headcount of 7.0%. Revenues grew by 24.7% in the Asia Pacific region on decreased average headcount of 3.3%. Revenues increased by 17.2% in the Europe/Middle East region on increased average headcount of 13.4% (including the opening of an office in Milan).

This displays the relative relationship between regional revenue and headcount, something I’ve never seen reported before. I hope most of you chuckle  under your breath, with me, when you read a managing partner triumphantly announce that their firm’s revenue was up X% while learning a bit further along that their lawyer headcount was up >X%.  I see.

One last point with starkly revealing implications: The only financial figure that might raise a Wall Street analyst’s eyebrow is a year end to year end decrease in cash on hand of $40.43-million (-15%). This is noted as:

Specifically, cash decreased during 2012 due to scheduled investments in leasehold improvements and related long-term assets, advancement of funds for the retirement of a merger partner’s debt prior to its combination with K&L Gates, and reduced partner discretionary capital.

I think the only rational way to read this is that K&L spent some large part of that $40-million to pay off debt on the books of Middletons in advance of the merger’s effective date of January 1, 2013. This implies a high degree of rigor around the principle of debt aversion, showing “-0-” across the board for low, high, and year-end bank debt.

Finally, forget K&L and for that matter, The American Lawyer.

This type of thoughtful, comprehensive, nuanced disclosure can only be good for our industry. What does it mean, to the audiences that matter (primarily current and prospective clients and lawyers) how the PPP or RPL of a K&L stacks up against a Paul Weiss or a Wachtell? (How do you expect them to stack up? Three guesses.)

What matters is whether all or any of those firms are effectively pursuing what they say they’re pursuing. So rather than average, what I propose focusing on are multi-year CAGR’s (compound annual growth rates). CAGR’s take your business plan as they find it and let you tell a story (victorious or defeated) about how you’re doing on the task you set in front of you.

Let a thousand business models bloom; what I want to know is can you succeed at being who you say you are.

The fundamental issue is simple.

The AmLaw 100 accounts for over $80-billion in revenue, a sizable, important, and newsworthy industry even viewed in isolation from the rest of the private legal sector. it deserves critical, mature, disciplined analysis and reporting. At peril of offending friends, The American Lawyer’s current methodology falls short of the standard we and the public audience deserve.

This is not an indictment of motivation or effort, nor dare anyone read into this the remotest implied whiff of an accusation of careless or casual intent.

The indictment is one of methodology and intrinsic design.

Nearly a year ago now, the head-spinning revelation that Dewey had submitted fallacious financial numbers to The American Lawyer-apparently for some years-came to light and I hope none of us will soon forget that. Cynics may smirk, but I viewed this as an unforgivable transgression against decent behavior and fundamental honor, one committed against at least some of its own partners but also against the public trust. I was confident The American Lawyer would revise its standards of review (which are a black box to this day) to impose some independent, objective standard of reviewing or auditing — they are, after all, the industry publication of record.

But the reply that came back to my email inquiring about their plans for tightening standards was that it while it was a “great idea” it would be “tough to pull off.”  Unfortunately, I’m unaware of any tangible  movement forward on this.  I hope I’m wrong.

We can do better.

Just a few more firms need to take the time and thought required to develop penetrating and thorough disclosures about their own performance-highlighting what they think they need to, and letting the audience judge their candor and completeness-and we will find ourselves both as an industry and profession in a landscape more lit by sunlight than darkness.

We lawyers excel at disclosure; if we do it every day for our clients, we deserve to spend a day a year doing it for ourselves. Your clients, your lawyers, and prospective members of both categories, will thank you. The status quo is broken, and this is readily within our grasp.

What’s stopping you?

Update (Fri 22 February):

This morning’s WSJ, under the headline “Big Law Firm K&L Gates Lifts Veil on Financial Performance,” adds a bit to the mix, particularly in terms of a focus on the reliability of AmLaw numbers and the continuing fallout from Dewey’s flat-footed misrepresentations.  A few key excerpts:

But critics say those [AmLaw] numbers aren’t always reliable and can be subject to manipulation by law firms.

For instance, last year the now-defunct law firm Dewey & LeBoeuf LLP reported 2011 revenue of $935 million to the magazine. But as The Wall Street Journal reported in March, former partners at the firm said revenue was actually around $780 million, about 16% lower.

“I was embarrassed to be part of the same profession and industry as Dewey & LeBoeuf,” Mr. Kalis said.

At the time, Dewey leaders said that the American Lawyer uses different metrics to measure firm revenue than those used in general budget calculations, and that the two figures weren’t comparable.

The American Lawyer later revised its 2010 and 2011 financials for the firm downward.

“Dewey & LeBoeuf’s managers misled their bankers, partners and clients—as well as The American Lawyer,” the magazine’s editor in chief, Robin Sparkman, said in a statement Thursday. “In the 25 years we have been publishing The Am Law 100, we have no reason to believe that Dewey is anything other than an anomaly. We continue to compile the industry benchmark for tracking the biggest law firms in the world.”

Bruce MacEwen, a lawyer and legal consultant who writes about law-firm economics, said the K&L Gates disclosure challenges that ranking system by providing a fuller picture of a firm’s financial health.

In Dewey’s case, clients and some of the firm’s own lawyers weren’t aware that the firm was laden with at least $200 million in debt.

“I can’t tell you how many times in the last year people told me they were having misgivings about having given critical work to Dewey when they couldn’t run their own shop,” Mr. MacEwen said. “If you care about the long-term viability of your suppliers and your trusted advisors, it’s important.”

If I can juxtapose the facts of the Dewey debacle (they lied to The American Lawyer) with the publication’s defense (“we have no reason to believe that Dewey is anything other than an anomaly”), it strikes me as “didn’t know and are doing nothing to prevent the next one.”

But that’s just my opinion; please draw your own conclusions.

Update #2:

Peter Lattman in the NYT‘s DealBook has some nice coverage also tying this back to Dewey.

Update #3 (Fri 1 March):

K&L’s disclosure has suffered some blowback–unfair in my humble opinion–because the results they released were unaudited.  It came up yesterday in my Bloomberg Law interview when we touched upon the topic, for example.

Here’s the story:

• In the real world, with real (corporate) clients, earnings releases almost always go out  unaudited, that is to say, before the auditors have  formally signed off.  The market rightly demands timely information, and auditing takes weeks if not months.
• Frankly, law firm cash basis accounting consistent with US IRS requirements are pretty simple: Accounting 101, you might say.  There’s very little if any judgment or finesse required if for no other reason than the paramount issue of revenue recognition is completely cut and dried; the firm received the cash during the reporting period or it did not.  12:01 am the day after the reporting period ended doesn’t count.
• Finally (as I alluded to on Bloomberg), the K&L numbers will be audited. If there are any material changes, they will be disclosed, which is nice in and of itself, but the critical point is that if K&L wanted to put lipstick and mascara on the numbers, doing so in a release distributed to and covered by, among other outlets, The Wall Street Journal, The New  York Times, Above the Law, and our hometown favorite, Adam Smith, Esq., would probably qualify the firm as a finalist in the running for the Darwin Awards.