A prior article proposed a new way to rank Am Law firms using a multi-factor performance index, which incorporated revenue per lawyer and profit margin in addition to revenue. In this article, we will explore the trends that emerge from this new approach and look specifically at performance indices over a 10 year period from 2009 to 2018 for individual law firms to highlight four key findings.
Firms have unique performance trajectories
Plotting the performance index of a single firm over the years is a nice visual representation of its overall performance. We find that each firm does have its own unique trajectory, which we will illustrate with two examples. We first look at two firms with identical performance indices of 1.1 in 2009 and follow their different paths to 2018.
Consider two medium sized firms, Steptoe & Johnson and Barnes & Thornburg. Steptoe’s performance on all three indices has declined from 2009 to 2018. Revenue has been relatively flat; and while RPL has risen, profit margins have steadily declined. Performance index in 2018 has fallen to 0.89. In the other hand, Barnes has improved its revenue significantly, RPL has increased smartly, while its high profit margins have also inched up in this period. All this has contributed to a solid increase to from 1.12 in 2009 to 1.17 in 2018. Figure 1 visually displays the discernible divergence in their performance from a common point in 2009 to very different end results.
What of two firms which have the same performance index in 2018? Consider Holland & Knight and Jenner & Block, each with identical levels of 0.95 in 2018, but with vastly different situations in 2009. Jenner’s level of 1.07 in 2009 has dropped due to a reduction in all its three key performance indices. Revenue has increased, but at a lower relative pace than the top firm, thus revenue index has declined. RPL has remained relatively flat, thus the index has fallen. Since 2012, profit margins have dropped significantly, a key negative contributor of the decline. On the other hand, Holland’s performance index has improved from 0.87 in 2009. It’s revenue, RPL and profit margins have all simultaneously increased at a pace faster than the top firm in the industry, which together have boosted its performance index. Figure 1 shows how these two firms have arrived at the same spot in 2018 but from vastly different starting points in 2009.
Increases in performance are not easy
We note that it is quite hard for any firm to increase its performance index over time. The denominator of each index: revenue, revenue per lawyer and profit margin are the highest achieved value in each year by any firm in the Am Law 200. And these have sharply increased from 2009 to 2018 (see Figure 2). In the face of such large increases, flat or modest improvement in the numerator (or each firm’s individual performance) will make the performance index trend downwards. A flat or upward trajectory indicates the firm is outpacing the top firm in the Am Law 200, thus demonstrative of solid financial strength.
A Tale of Two Chicago Firms
Kirkland and Ellis has the highest performance index of all firms in 2018 and thus ranks number 1. With revenues of $3.165 billion, it has the highest achievable score on revenue of 1.00, RPL of $1.6 million places it at 50% of Wachtell and profit margins at 58% are within striking distance of Irell & Manella’s 66%. Kirkland’s performance index has been steadily rising each year. Let’s review 2004, when things were somewhat different – Kirkland’s performance index was 1.61, with a rank of 11.
Let’s look at another Chicago based firm, McDermott Will & Emery, which had a performance index of 1.59 in 2004, and ranked 12th that year, just behind Kirkland. Figure 3 displays nearly identical performance indices prior to 2004, but significant divergence since. McDermott’s revenue and RPL have certainly increased from 2004 to 2018, but not at the pace of the top firm in the industry. And its profit margins have largely declined. As a results, it performance index has fallen to 1.08, with a rank of 54 in 2018. Last year, Kirkland’s revenue was treble, and its RPL and profit margins were nearly twice that of McDermott’s. The variance in performance is certainly dramatic.
Mergers and Performance Indices
A merger creates a combined firm from two constituent firms, for example, the recent merger of Arnold & Porter and Kaye Scholer on January 1, 2017. We can add revenues, profits, and number of lawyers for constituent firms, and derive consequent ratios of revenue per lawyer and profit margin. We note that the performance index of the merged firm is not the direct sum of their indices. Why? While the merged firm certainly has higher revenues, its revenue per lawyer and profit margin are generally at the average of the merging firms. From 2012 to 2017, performance indices of Arnold & Porter and Kaye Scholer have both declined, perhaps this was a catalyst for the combination (see figure 7). The trend for the combined firm naturally follows the downward trend of the constituent firms till the time of the merger. However in the very first year after the merger, the trend noticeably reverses – with performance index rising from 1.20 to 1.23 (see figure 8). One would expect the merged firm would have access to revenue and cost synergies; this seems to have materialized as we see the combined firm’s revenues, RPL and profit margins have all increased from 2017 to 2018. In this situation, the trajectory of performance indices provide a unique insights into the events preceding the merger and the operational effects immediately after the combination.
Analyzing performance indices of individual firms provides unique insights. This index captures the overall performance of a firm in a single number, which when tracked over time describes the firm’s trend. A firm’s trajectory is a nice visual representation of its performance. Comparisons to others firms shows interesting divergence or convergence in performance. In case of mergers, the trajectories of constituent firms and the combined firms help us deeply understand the financial consequences of the combination.
Madhav Srinivasan is the Chief Financial Officer at Hunton Andrews Kurth LLP, leading the global finance and pricing competencies. Madhav is an ALM Intelligence Fellow and also an adjunct faculty at Columbia Law School in New York and University of Texas at Austin School of Law.
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