Here’s another sneaking suspicion I’ve harbored for quite some time now: My hunch is that most partners–in their instinctive approach to things—don’t really grasp the difference between revenue and profit. In other words, they’ve never seen a dollar of revenue they didn’t like.
To say this leads to a promiscuous approach to business generation is to understate the magnitude of the concupiscence with which they pursue any plausibly available work, strategic alignment with the firm’s ostensible goals be damned.
So why do we continue to worship this false god?
Two reasons, I believe, one “internal” and one “external.”
The internal one popped up a few paragraphs ago: The question on everyone’s mind when comparing partners to partners, laterals to laterals, laterals to partners, is “What’s your book of business?” Wrong question. How about, instead: “What’s your contribution to profit?” Reasons to favor profit over revenue are, to my way of thinking, remarkably straightforward:
- Unless you’re a conscientious objector to capitalism (in which case, what are you doing in BigLaw?), profit is really the motivator. (Yes, profit earned fair and square by delivering superb client service with counsel they value, etc.: So stipulated.) Simply stated, profit is what keeps firms in business and enables them to grow, invest, and enhance what they can offer. Does anyone think the decades GM spent in the profitless wasteland was good for the company and that they were a stronger, more capable and competitive organization all those years because they generated enormous (loss-making) revenue?
- It’s the most meaningful yardstick for measuring what Partner X’s practice actually contributes to the common weal. If you doubt this, here’s a thought experiment. Step 1: Assume Partner X has a stupendous book of business—say $20-million. But it’s highly commoditized, in an area where clients have driven prices right down to the floor and on into the sub-basement. It takes legions of low-level, low-hourly-rate people to service it, and your CFO has concluded that over all it’s just barely a breakeven proposition. Step 2: Imagine what would happen to the rest of the firm—that “common weal” I invoked—were Partner X and his practice surgically detached from the firm. Precisely nothing. Nobody would be better off, nobody worse off. Economically speaking, Partner X, despite his sky-high book, is a nobody.
- If nothing else convinces you profits matter over revenue, one simple question: With what currency are partners paid? Hint: It’s not revenue.
Here’s the external reason: Industry rankings.
Bruce, you have done it again! A recent example is Dell Computer’s revenue for laptops is huge and their profit is so small it is a grain of sand on the beach of technology.
The law firms have been timing the high jump. Measuring raw hours and revenue when as you clearly point out misses the reason to be in business. Great article.
while it’s true law firms are wise to focus on profit – without revenue, there is no chance to do so. The tenor of the piece seems to suggest law firms are effective at generating top-line revenue. They’re not even close to being effective. I don’t believe there’s a single AmLaw 100 law firm with a dedicated sales force. Kent Zimmermann outlined recently on Bloomberg Law why firms ought to emulate the business practices of GE. Well GE has a crack sales force and rewards their sales employees handsomely. What is missing in this analysis and every analysis I ever read about revenue vs profit and efficiency – is a sober assessment of what firms are doing to generate revenue. And frankly, in the AmLaw 100 – there are essentially zero sophisticated efforts aimed at generating top-line revenue. I myself worked in an overseas capacity for an AmLaw 100 law firm sales division that no longer exists. I know from personal, first-hand experience what those efforts do to add 8 figure new, greenfield top-line revenue to an AmLaw 100 law firm. A focus by legal sector consultants like yourself on how firms can generate top-line revenue effectively is long, long overdue. This would save BigLaw. There is no question about it. But firms aren’t going to listen to one lone commentator like myself. It needs more than one. And I’d encourage you to pursue this. I’d be happy to discuss it anytime.
I’d like to suggest, and have sometimes attempted to calculate, a metric that’s related to RPL but seldom used. (I’ve never seen it in print.) It’s profits per lawyer — not profits per partner (PPP), but profits per lawyer (PPL). Take the partner profits, add the associate salaries, and divide by the number of lawyers. The quotient is the average income per lawyer at the firm, without regard to status as an owner or a serf.
It removes the opportunity to game the system that PPP offers, because PPL doesn’t change as lawyers join the partnership or are de-equitized.