Industry rankings based on organizations’ overall revenue are of course ubiquitous: The Fortune 500, granddaddy of them all, is a revenue ranking. And we can all understand the appeal.
First, bigger vs. smaller is a comparison we find intrinsically fascinating, and without question it reveals interesting information about the structure of an industry.
Second, never underestimate the power of plain old pride: Many people (far too many, in my mind, but that’s a topic for another day and another social science discipline) get a real kick of being able to tell people at a cocktail party that they’re with one of the largest law firms in the world. Saying they were at a boutique—even a boutique the cognoscenti would recognize and respect—just wouldn’t do it for them.
Finally and without doubt, a certain minimum revenue tonnage is required to build out a serious geographic footprint, domestically or globally, and/or to develop deep bench strength in sophisticated practice areas.
But the problem with raw topline revenue is that it reveals nothing about—indeed it obscures—which firms are performing best against their strategic objectives. Well, actually, it might be telling for a small subset of that industry: That handful of firms for whom growth per se is their strategy.
A few examples may help. Start with the obvious: Who among us would disdain Cravath, Slaughters, or Wachtell because their revenue doesn’t put them in the top tier of rankings? But more important is what this statement of the blissfully self-evident reveals: They’re pursuing a different strategy than growth per se. And this makes my real point: Let’s evaluate firms based on performance as against their stated strategy. For a small handful, as noted, growing topline revenue is the strategy, but how about other strategies:
- Maximizing collaboration across and between offices, so a key metric would be percentage of revenue originated in one office but serviced elsewhere;
- Making sure clients always get hands-on partner-level attention, so minimizing leverage is the metric;
- Delivering outstanding professional development and training and thereby creating a rich, deep, and loyal alumni network of clients (percentage of revenue from alumni);
- Generating maximum PPP in a world of relentless price compression (a decision to engage in purposeful slow shrinking may be the way to get there);
- Being a self-conscious, self-proclaimed “lifestyle” firm (reasonable billable hours);
- Drilling deeper than nearly anyone else into XYZ practice area, which may or may not be an intrinsically large market (market share in that practice area).
You get the idea.
Bottom line: The world is a far larger, and vastly more interesting and diverse, place than our topline fixation would admit of.
Let’s let every firm stake out its strategy, and then measure their performance by how well they hew to it. The topline is the “incoming” to your P&L: But everything that happens below that line tells the real story of your firm.
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.