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Some say it’s ruined the profession. Others say it’s lost all meaning as a measure of success. Yet per-partner profits — or PPP — still stand as a sort of shorthand for a law firm’s status. PPP remains a staple of The American Lawyer‘s annual list of the country’s top-grossing law firms. The data is devoured by law firm leaders, lawyers, consultants and recruiters looking for market intelligence. The magazine is gearing up to run its latest rankings in June, so American Lawyer Media reporters, including some at The Recorder, have been discussing the numbers recently with industry leaders. Most say that the metrics the magazine uses to rank firms — profits per equity partner, revenue per lawyer, average compensation of all partners — shed needed light on the relative performance of the nation’s largest law firms. But some also say the numbers are imprecise, and can be influenced by a host of variables. PPP is seen as especially open to manipulation. 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. When it comes to lateral hiring or merger discussions, they say, PPP figures offer a starting point. But a closer look at the firm’s financials is needed to bring the picture into focus. “If I were a lateral partner,” said 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. Wetmore, of course, has reason to downplay profit figures. Though it was the highest-grossing firm in the Bay Area last year, MoFo’s profits per equity partner were $740,000, placing it No. 5 in the region. For some laterals, that dulls the firm’s appeal. “There will always be lateral candidates that we never hear from or who we have to talk in the door,” Wetmore said. “Once they get in they ask the right questions and they generally get over it.” The American Lawyer, which first published a top 50 list in 1985, expanding it over the years to 75, 100 and 200, provides several different metrics. Editors at the magazine know numbers can’t tell the whole story — and can even mislead. “Law firm leaders are sophisticated actors,” said Aric Press, editor in chief of The American Lawyer, which is an affiliate of The Recorder and law.com. “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 said 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,” said law firm 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.” COMPARING 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 non-equity 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. Pillsbury Winthrop, for example, went from 170 equity partners in 1998 to 140 equity partners in 2003, which helped the firm boost PPP by 106 percent. The drop in equity partners is even more striking since the firm took on a huge number of new partners when it merged with Winthrop, Stimson, Putnam & Roberts in 2001. The firm has had non-equity tiers since the early 1990s. But after the merger, Pillsbury increased the number of partners in those tiers, dividing them into five levels. At the time Chairwoman Mary Cranston said one reason for the tiered structure is to guarantee income levels for younger partners. But it makes for tougher math. “I think at this point profits-per-partner has become virtually meaningless because of the different ways firms count equity partners,” said 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 said. “We tend to look at the compensation-for-all-partners number,” said Neal, whose firm has relatively few non-equity partners. “It eliminates any possible confusion over equity and non-equity numbers.” But Wetmore said 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 said. To continue to obsess on how much the average partner makes “is increasingly anachronistic.” EQUITY VS. NON-EQUITY But firms do pay close attention to PPP, which is in part why several firms in the Bay Area have relegated large numbers of partners to non-equity ranks. While Pillsbury has the largest non-equity class — half of its 287 partners — other firms are close behind. Forty-three percent of Orrick, Herrington & Sutcliffe’s 251 partners are non-equity, and 48 percent of Gray Cary Ware & Freidenrich’s 147 partners hold that status. Among the 10 highest grossing firms in the Bay Area, Wilson Sonsini Goodrich & Rosati is the only one without non-equity partners. Others have kept the number of non-equity partners low: Cooley has 13 non-equity partners, or 9 percent of its partnership, and Morrison & Foerster has 48, or 18 percent of its partnership. Wilson Sonsini Managing Partner Donna Petkanics said that over the years there’s been talk of adopting a non-equity tier to foster promotions. But it hasn’t happened. “We’ve held fast to our structure because we feel it’s important to have one set of partners with the same goals and incentives,” Petkanics said. “Creating different classes of partners can create an issue in consensus.” Other firm leaders say smart lateral candidates can usually see through the smoke. “Lateral partners talk about actual economic performance, about equity and non-equity partners, and get their bearings as to which firms are playing games and which are not,” said Orrick Chairman Ralph Baxter Jr. “If a firm is gaming it, then a lateral is not going to put stock in profits-per-partner.” 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 said. RPL is what the magazine used to rank its “A-List” of 20 U.S. law firms in the September issue. Press said some firms complained that New York firms get an edge, because their higher billing rates push RPL higher. “That’s true,” Press said. 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 said, as if the 100th firm is in competition with the first. This has, he said, “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, 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, said 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 said. “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 said 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,” said recruiter Bill Nason, of San Diego-based Watanabe Nason & Seltzer. He cited the slower and steeper ascent to partnership, aggressive increases in billing rates and billable hour requirements, the creation of non-equity 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 said. But Pillsbury’s Cranston said the marketplace in general has become more competitive — and law firms are no different. “I think it’s basic economics,” Cranston said. “The world is globalizing, and in order to understand that, law firms need more information.” Chart: Profits per Partner Chart: Revenue per Lawyer Chart: Total Partner Compensation

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