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Some say it’s ruined the profession. Others say it’s lost all meaning as a measure of success.

While profits per partner — or PPP — still stands as a sort of shorthand for a law firm’s status, firm leaders and consultants contend that you can’t really know the true financial health of a firm without going below the surface of the reported numbers.

“If I were a lateral partner,” says Morrison & Foerster Chairman Keith Wetmore, “I’d like to look at the balance sheet, the firm’s capitalization, how much debt recourse and non-recourse obligations there are, what I am going to get paid, what it would take to make more.” He’d also want to know what scenarios would lead to lesser compensation and the range of compensation at the firm.

“There will always be lateral candidates that we never hear from or who we have to talk in the door,” Wetmore says. “Once they get in they ask the right questions and they generally get over it.”

The American Lawyer magazine, which each June publishes a list of the country’s top-grossing law firms, provides several different metrics, such as PPP, revenue per lawyer, average compensation of all partners. But editors at the magazine know numbers can’t tell the whole story — and can even mislead.

“Law firm leaders are sophisticated actors,” says Aric Press, editor in chief of The American Lawyer. “There are a host of ways to present themselves — sometimes they present themselves in the most accurate way and sometimes in the most favorable way, and occasionally the two go hand in hand. But not always.”

While the financial figures the magazine reports are imperfect, Press says they are “the best numbers available.”

One of the numbers that isn’t available — and one that firms keep close to the chest — is debt load. Brobeck, Phleger & Harrison soared up the AmLaw charts in the late 1990s, hitting the $1 million mark in per-partner earnings in 2000. But three years later it collapsed under the weight of more than $80 million in debt.

“The zero-debt firms are very healthy regardless of their profits-per-partner,” says consultant Steve Barrett of Law Firm Strategies in Rancho Palos Verdes, Calif. “I’d argue all PPP should be adjusted downward by the amount per equity partner of the firm’s long-term debt.”

Apples to Oranges

While all the available yardsticks have their shortcomings, the profits-per-partner figure has the most detractors. Many firms have de-equitized partners or created nonequity tiers for junior partners in order to juice the numbers. If one firm has only equity partners and another has tiers, legal experts say, comparing the profitability of the two is like comparing apples to oranges.

“I think at this point profits-per-partner has become virtually meaningless because of the different ways firms count equity partners,” says Ralph Savarese, of the Santa Ynez, Calif.-based consulting firm McMorrow Savarese. “There is so much wiggle room as to what equity partner is in the surveys that it allows people to be creative in how they count people as equity partner.”

Nor, of course, does the average profits-per-partner figure provide a picture of the pay spread between newly minted partners and top rainmakers.

“You can have firms with quite different profits-per-partner but that doesn’t say how the money is distributed, whether there is a large or narrow gap between the top and bottom of the firm,” Cooley Godward Chairman Stephen Neal says.

“We tend to look at the compensation-for-all-partners number,” says Neal, whose firm has relatively few nonequity partners. “It eliminates any possible confusion over equity and non-equity numbers.”

But MoFo’s Wetmore says average-partner-compensation figures aren’t much better than PPP because they punish firms that keep less lucrative practice areas.

Wetmore questions what he sees as a shortsighted focus on partner income, noting that the performance of other industries isn’t based on how much money their senior executives earn.

“Is Colgate or Johnson & Johnson better run depending on the average compensation of those labeled as senior vice presidents and above?” he says. To continue to obsess on how much the average partner makes “is increasingly anachronistic.”

Gold Standard

While there’s a lot of focus on the firms pushing PPP above the magical million-dollar mark, most firm managers and legal experts agree that revenue per lawyer is becoming more of a gold standard.

That’s true even at The American Lawyer. “We think RPL is the most accurate reflection of the health and progress of a firm,” AmLaw’s Press says.

RPL is what the magazine used to rank its “A-List” of 20 U.S. law firms in the September issue.

Press says some firms complained that New York firms get an edge, because their higher billing rates push RPL higher. “That’s true,” Press says. But the RPL is “a proxy for who gets the best work and sustains attractiveness to clients.”

Savarese, who was managing partner of Howrey Simon Arnold & White for many years, argues that it would be more useful for The American Lawyer to group firms according to their market.

AmLaw’s top 100 and top 200 implicitly encourage comparisons between all those firms, Savarese says, as if the 100th firm is in competition with the first.

This has, he says, “a corrosive and debilitating effect.” To some extent law firms have been “tyrannized to believe that if they are doing it right then they should be like Wachtell [, Lipton, Rosen & Katz], or if they open in New York then they’d be at $2 million” profits-per-partner.

Law firm consultant Lisa Smith, in the Washington, D.C., office of Hildebrandt International, says metrics like revenue per lawyer, billable hours, billing rates, expenses and profits show trends within a firm but may not reveal if one firm is doing better than another.

“You are not comparing apples to apples,” she says. “Because the way firms define equity partners, their leverage model, expense structure, the way they dispense compensation, the age or performance or experience mix of partners, can all be different.”

But, she says, AmLaw’s numbers can give a sense of who is doing particularly well and reveals trends over time.

Others blame publication of the numbers for turning what was once a collegial profession into a cutthroat drive for dollars.

“The quest for higher profits has left a trail of carnage in its wake at many firms that have historically been known as great places to work,” says recruiter Bill Nason, of Watanabe Nason & Seltzer in San Diego. He cited the slower and steeper ascent to partnership, aggressive increases in billing rates and billable hour requirements, the creation of nonequity classes of partners and the de-equitizing of partners.

The AmLaw 100 scorecard, which measures firm performance so publicly, “has compelled law firms to take these actions for their survival,” Nason says.

The American Lawyer is an affiliate of the New Jersey Law Journal.

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