Today, a column from Janet Stanton, inviting us (with her) to take a fresh view of Law Land with a brain uncorrupted by having lived her entire life in Our World:
A challenge to our readers: Just how profitable are law firms?
Having spent most of my professional career in Corporate Land, I was innocent of the Alice-in-Wonderland business practices that abound in Law Land.
For today’s discussion of the Corporate/Law Land divide, let’s focus on law firm profitability.
Again, some perspective: I spent a good deal of time working with or for some of industry’s most successful and respected consumer-oriented companies: J+J, P&G, Colgate, Kraft, M&M Mars, Pfizer, etc. (OK, I also spent some time on such duds such as the New York Racing Association, a diet dog food brand and a product that alleviated sexually-transmitted diseases. ‘Nuff said.) And I had the pleasure to work on some significant brands: Johnson’s Baby Powder, Colgate Toothpaste, Scope Mouthwash, Snickers, etc.
In this realm—both at corporations and their ad agencies—consistently attaining a 20% PBT (profit before tax) on any business I led was considered strong performance. It is attainable, but it requires tradeoffs, re-jiggering and a dash (or more) of luck. Much less than 20% profit meant significant components of the business plan weren’t firing on all cylinders. Much more might indicate that we weren’t investing enough in the business—in terms of R&D, product development, human capital, training, technology, etc. and that we might be setting ourselves up for a fall.
Consistent with that, following are the most recent annual profitability for the public companies I mention above. All figures are pre-tax profit as a percentage of revenue. We chose this metric as it seems most directly comparable to what Law Land figures since, as we all know, law firms themselves pay no taxes:
- Johnson + Johnson: 21.0%
- Colgate: 20.5%
- Kraft: 13.4%
- Pfizer: 30.5%
Having benefited from the rigorous business and marketing acumen such experiences instill, I marched into Law Land bristling with confidence that I had a very sound, even somewhat nuanced, understanding of the principles of good business. And a none-too-shabby appreciation for and facility with the financials. I spent a lot of time at the feet of the CFO of any organization I was at and sponged up as much learning as I could. I really liked this stuff.
Once in Law Land, one of the first (among many) perplexing metrics was law firm profitably. How could it be that on average the reported profits for the AmLaw 200 is 36.5% (median of 35.0%) – even after The Great Reset? There were even some firms reporting profits in the 60% range. I’d worked at large professional services firms—heck, I even ran a mid-sized one. I know how professional services firms work. I know how they make (and lose) money.