Steven Brill’s audacious decision to publish AmLaw profits per partner figures starting over three decades ago was without question the single most brilliant journalistic stroke Law Land trade media has ever experienced, creating an enduring franchise to this day. Whether it was on the whole a good thing or a bad thing or just a sooner-or-later-inevitable thing for the industry is a separate question.
That is not our question of the month.
Our question is hopefully a bit more circumscribed and tractable: What is the single best measure of law firm performance?
A couple of modest observations to put this in context:
- By “best” we mean which measure contains the highest quotient of overall information about how a law firm is doing. It does not mean you have to like it or “endorse” it; it just means that you think it packs the highest density of content.
- And second, we studiously put no descriptor in front of “law firm performance:” Whether that should be judged primarily in terms of finances, expertise, caliber of service, client/lawyer satisfaction, impact on the profession, or otherwise is yours to know and the audience’s to infer.
Ready?
[poll id = “8”]
My “something else altogether” vote is to measure performance by income per lawyer (not partner): add partner profits to associate salaries and divide by the number of lawyers. To give an example: a firm with two lawyers, an owner that makes $900,000 and who pays an associate $100,000, is doing quite well for the owner, but as a firm it’s performing at the same level as a two-lawyer firm with two partners who each make $500,000, or for that matter a two-lawyer firm with one owner who makes $600,000 and pays the other lawyer $400,000.
Hi Midrange – This is really interesting; have never seen this mentioned as a metric for law firms. I do have a question – which of these 3 hypothetical firms is performing better?
Janet, it depends on how you define “better.” When my son was in grade school, his class did a science experiment to find the best paper towel on the market. The hidden ringer in the teacher’s assignment was that each group had to define “best” independently. One said cheapest, one said most absorbent, one said most durable, one said most environmentally friendly. There were many other answers. If “better” or “best” applied to law firms means “which one would I invest in” or “which one do I think will last the longest,” I’d pick the two lawyers who are each making $500,000 even though they have the lowest PPP of my three examples. The $900,000 one-owner firm is likely too dependent on the skills or rainmaking of the owner, who won’t be able to hand the business down. If the $600,000 owner finds his/her associate worth $400,000/year but doesn’t want to share ownership with the associate, the associate will likely eventually leave, notwithstanding the high pay, in order to have the chance to become an owner.
The way I’ve often thought about law firm’s performance is “If I could buy shares in ABC law firm in the stock market, would I?” And there is plenty of data that is lacking in current law firm financial metrics (gross revenue, RPL, PPP) that would make me avoid investing in a law firm entirely. I cannot tell if a firm is likely to succeed or fail with those numbers/metrics alone.
Given the recent collapses of firms (Bingham, Dewey, etc.), I would absolutely ask for debt/long term obligation type financials and the ability to actually cover for them (Free Cash Flow, Book Value, etc.). Those firms were doing well by Am Law financial standards (Bingham was #37 in 2014 Am Law 100; Dewey was #28 in 2012 Am Law 100) but their inability to cover debt/long term commitments were key factors to their respective failures. All the success by Am Law financial measures did not matter in the end.
I will also note that Bingham’s and Dewey’s former clients often followed the their ex-Bingham and Dewey lawyers as they settled into other firms. One can hypothesize that client retention/satisfaction could have remained high at those firms if the lawyers could have stayed. (Disclaimer – I voted “Client satisfaction and retention”.)
Ha! I see what you did there. An existential question really. However, after thinking it over for a bit, I went with RPL growth rate over a five year period. At the end of the day, the numbers do not lie. RPL trends show how clients actually decide to spend their money, and who they value most over a significant time horizon within certain peer groups of firms at that given time. The more granular the analysis is, the better. Sure, gross revenue has its limits. But like you’ve pointed out many times, it is a solid number at virtually all firms, with an obligatory nod to the shenanigans that swallowed Dewey. And it serves as a better proxy for what the specific market actually looks like (what clients do) than any sort of client satisfaction measurement (largely what clients say).
But let us dig a little deeper. Leave aside the squishiness of “client satisfaction” and the umpteen ways a firm might try to manipulate that metric. And let’s also assume we can design some sort of comprehensive survey tool that can be applied across firms and clients of all shapes and sizes that could actually measure that metric within some sort of acceptable range of error. For a whole host of reasons depending on the type of work and client, clients decide to use certain firms for certain matters despite being less than satisfied. Maybe the client literally has no choice in that particular practice area. Maybe exit costs are too high. Maybe the personal relationships at a high level obfuscate what is actually going on in the day-to-day trenches where the work gets delivered and consumed. Maybe the client’s voice alone can get the performance level to “good enough” as they say. Maybe there isn’t even a unified voice within the client as to the firm’s performance (this, I would posit, happens frequently). The market actors just are not perfectly rational. Pretty far from it in some cases I would argue. Nor can they be when we are talking about large institutions on both sides of the table.
Now, client satisfaction is still a useful tool in many respects, both to those inside and outside the firm. Good marks on this front can boost morale, and provide some real purpose and meaning to lawyers within the firm. And I personally think that something like Chambers rankings do a pretty good job at getting the client point of view, and delineating who’s who within a particular market at a very granular level. An interesting thought experiment might be to see how something like Chambers rankings correlate with practice area-level RPL numbers. And for firms struggling in this area, a really well designed survey and the resulting feedback can provide some concrete aspirations and actionable items. But in terms of reflecting the operating environment and what firms are gaining ground and which ones are losing, RPL over a time period is a superior metric.
For my money, the best measure of performance is the measure that helps you both monitor performance in near real time AND helps individuals self-adjust as they work. That’s because “performance” is not “results” — performance creates results.
I posit the ideal performance metric as the Results-to-Resources Ratio, aka the 3R.
In an industry where quality can be subjective, one might multiply the 3R by the Net Promoter Score, that ubiquitous “on a scale from 1 to 10 how likely would you be to recommend us to your friends and family?” If a better quality measure is available, use it.
You’d want to tinker with which Results and which Resources to include in your 3R. An easy first choice being Revenue per Hour per Lawyer. (I’d suggest at first not using Billable Hours but rather total hours, to penalize those who work too many hours. Burnout is not anyone’s friend.)
Tweak this over time until it’s helping all associates self-adjust. Make it normal to compare yourself, not to Joe or Janice, but to yourself last month and last year. Everyone can improve, given autonomy and a game with clear rules.
Hat tip to The Game of Work by Chuck Coonradt.
Thomas:
First of all, thanks for contributing to the thinking. One of my favorite themes is that “performance creates results,” so your comment is doubly welcome. (We usually phrase it as profitability being a residual outcome of doing lots of other things well, but same idea.)
In particular, the idea of continuous (self-)improvement is fabulous and consistently underappreciated/underemployed in Law Land, IMHO. I may have to take a closer look at Game of Work.
On a slightly separate note, you’ve seen the discussion about how awkward it can be to measure “client satisfaction,” which seems to be the leading vote-getter here. Would you recommend the “Net Promoter Score?”
Thanks again!