After reading Jordan’s interesting post on Why do law firms exist?, I received my annual copy of the AmLaw 100 rankings. The two events lead me to analyze the factors driving profitability of law firms.
Jordan’s post, among other things, noted that firms: “manage production and process indifferently, and share knowledge haphazardly and grudgingly." These comments suggest firms are all over the board in how they operate and manage their work. So I analyzed the AmLaw 100 listing with an eye towards spotting trends in what makes a firm profitable.
As I have previously noted, leverage can have a strong impact on profitability, since it is non-partners who generate the profits that go in partners’ pockets. Yet leverage amongst this list does not correlate well to profitability. Size didn’t matter either (sorry about that one). The only strong correlation I found was between “Revenue per Lawyer" and profits (be it PPEP or Profitability Index).
This tells us two things:
1) Jordan’s assessments are likely spot on. The haphazard way in which firms are managed and run is reflected in the AmLaw 100 profitability stats. How a firm is structured and run does not seem to impact profits.
2) Revenue per lawyer matters. However, this likely reflects the old way and not the new normal. Revenue per lawyer is based on billable hours, at least for now. So the old adage of more hours billed and collected equals more partner income was still in effect in 2010.
My Assessment: The new normal did not catch up to most law firms in 2010. However, Jordan’s question appears to be persistent and expanding in the market. Even with the economy doing better, clients continue to ask hard questions of their law firms and maintain pressure on reducing fees in a sustainable way. 2011 may well be an inflection point year in this process.