Financial results for law firms have been trickling in and, in a couple of weeks, The American Lawyer will publish its rankings of the 100 largest law firms in the U.S.
As usual, candidates evaluating potential opportunities will focus on one statistic—profits per partner—as the primary indicator of success or failure of a law firm. But as has been noted throughout the years, that number is the most susceptible to manipulation, mostly due to who is determined to be an equity partner. Rarely do we field inquiries about revenue per lawyer and profit margin, both of which are all available from the AmLaw data. Most observers will assert that those metrics are more reliable indicators of a particular firm’s health than profits per partner.
Evaluating all of the relevant statistics is not the only thing that candidates should be focused on. Here are a couple of other data points that candidates should assess:
- A firm’s 3-5-year performance, rather than just the comparison of 2016 and 2017. A single year’s performance can be skewed by such things as contingency fees or the impact of the integration of a merger, so that evaluating on the basis of that year alone can be quite misleading.
- Situations where profits have increased but revenues have declined. Those instances often mean that gains in profitability were largely produced through cost-cutting and/or the de-equitization of partners. While those actions do indicate a firm’s ability and willingness to address difficult expense-related issues and expectations of partners, the latter in particular is a strategy that is unlikely to be repeated in future years. And, while not the case with well-managed, forward-focused firms, could indicate the extent of a firm’s willingness to support partners’ practices with marketing and other investment.
The AmLaw reports provide quite a comprehensive picture of the financial performance of large law firms. But too often, the focus is on one imperfect metric. The message is to look beyond the headlines.
TMG’s Take is a regular e-mail advisory produced by The McCormick Group. The company’s Legal, Government Affairs, and Law Firm Management groups combine the expertise of more than 15 Consultants to help law firms fulfill all of their lawyer and administrative recruiting needs. TMG’s Take covers topics across the spectrum of law firm management, including associate and partner compensation, growth strategies, marketing and business development, operations and facilities management, finance and accounting, professional development, and technology. Please direct all inquiries to Steve Nelson, Managing Principal at (703) 841-1700 or snelson@tmg-dc.com.
