|Photo by Kolleen Gladden on Unsplash|
[Ed. Note: Today’s post comes from guest blogger, Steve Nelson from The McCormick Group. – TB]
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, firm management, partners and other legal professionals have a tendency to 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. Less discussed are 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.There’s also a tendency for legal professionals to overlook several other factors that are raised in the financial reports. Here are a couple of other data points that should be assessed:
- 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.