Spoiler alert: If you’re looking for a hard-hitting expose of everything that’s wrong with RPL, look elsewhere.
I’m on record as saying that RPL is the most telling metric we have, and I stand by that with permission to amend, or permission to put all the stress on the last phrase: “The most telling metric we have.”
That one of its core virtues needs to even be mentioned is an embarrassment to our industry, but it’s that RPL is hard to play games with. Revenue is, with the rarest and typically most disastrous of consequences, a real hard number for calendar year fiscal, cash basis reporting firms: Cash receipts from midnight January 1 through midnight December 31. The exceptions are not worth dwelling on, save to share with you the remark of a partner fleeing a firm flagrantly cooking its books who, when asked when the firm closed the year out, replied, “January 45th.”
Similarly, the number of lawyers at your firm is, or ought to be, trivial to determine. If anyone wants to quibble about part-time, flex, contract, or otherwise, can we just all be adults and stipulate FTE’s?
As I said, an embarrassment to have to mention, but there you have it. Now to substance.
For simplicity, let’s diagram this:
| Pros | Cons |
|---|---|
| Roughly represents what clients are willing to pay for a year to rent one of your lawyers, or put more directly, how much they value what you provide | Different practice areas have intrinsically different rate structures and hence RPL’s |
| Fairly directly corresponds to span of your firm’s rate structure (high, medium, low) and rates roughly reflect sophistication/degree of difficulty of work performed | Firms with higher leverage, all else equal, will have lower RPL—but leverage ratios are randomly correlated with quality of work |
| If your firm’s RPL is higher as against your peer group, may reflect how clients assess relative quality | Rates vary notoriously by geography, and firms’ geographic center of gravity has nothing to do with sophistication or quality |
I wonder if you discern the same pattern here that I do: It strikes me that RPL is much more significant in the context of any given firm from year to year than it is in service of trying to make cross-firm comparisons.
Here are the general characteristics of firms with low RPL:
- geographic center of gravity outside of the top global capital markets or leading metropolitan areas;
- higher leverage; and/or
- a preponderance of rate-sensitive practice areas.
Let’s visualize such a hypothetical firm. It’s based in the US South, Midwest, or Great Plains—pretty much anywhere except the Northeast Corridor, California, or major financial/commercial centers of gravity like Texas or Chicago—and it caters to price-sensitive clients, perhaps small and mid-sized privately held companies who tend not to have shockingly complex legal needs, and does so efficiently and effectively by deploying large numbers of associates per partner.
What, I ask you, is “wrong” with such a firm? It sounds like a very stable business, a sane place to work, and one providing valuable services to its clients which they personally appreciate. Yet I guarantee you its RPL is well below average.
As you say Bruce … Among the rest of the population, the “non-lawyers,” I bet much of the time the reaction would be the reverse: “I hope no one else is doing this!”
Exhibit 1 – Jim Collins Good to Great, Chapter 5, Simplicity Within 3 circles.
The third circle is “What Drives Your Economic Engine”. Often paraphrased as “what you can make money at”, but what Collins actually described was how all of the Good to Great businesses had found a strategically important metric, which no-one else in their industry had uncovered.
By focusing on this new metric they went on to sustained success, and in some cases upset the established order in their industry. Of course some have since lost their edge, but Collins qualification criteria meant that they all had at least 15 years of outperformance.
What would we give for a metric which would allow us to dominate till 2030??
Bruce,
Thanks for all your insight. One shared insight and one query (which you may address later):
1.) A sign of a mature company or organization is that they can look at talented and marketable individual and say “Yes, person Z is great. But Z isn’t who we are and what we do here.”
2.) The third post is likely to cover PPP. I know you’ve mentioned in the past that you would like to see retained earnings as another metric that law firms should disclose. Any others? (Debt or liability obligations, Free cash flow, historical and future revenue growth, share dilution, etc.) I know I’m “borrowing” terminology from publically traded companies. I would welcome your thoughts on this has application to big law and their financial performances.
Bruce, how about a metric that’s in between revenue per lawyer and profits per partner, which is income per lawyer? Add partner profits to associate salaries, divide by the number of lawyers, and out comes IPL. This struck me as a potential metric some years ago when I was at a large (for here) firm, the management of which was complaining that its profit per partner was not as high as most of the competition. I suggested that the firm de-equitize all but the two highest-paid partners and pay the de-equitized partners what they’d been making before. The firm’s PPP would have jumped from $300,000 to $750,000 overnight, yet it would still have been the same business, and its IPL would have stayed unchanged.
In order to derive metrics that would be useful (which obviously are the ones we want), one has to determine and be clear about what is important to the law firm. Only then could one begin to characterize the issue in a way that could be measured. Bruce has written a book, A New Taxonomy: The seven law firm business models [Adam Smith, Esq., New York 2014]. It seems that these models (and I suppose there could be others) are sufficiently different that no simple metric could hope to be equally important to each type, much less accounting for the preferences and values of the partners in each. Then, one might consider what happens when Firm A in one of Bruce’s models decides that it wishes to act as and become more of a new type. What characteristics would need to change, and how would one measure change of those characteristics? If a current, published “metric” would suffice as a measurement of something that is important to one’s firm, then the firm – which supposes that the term “firm” has functional meaning – is justified in adopting that metric as useful. “Horses for courses.” So what is the course for your firm?