Firms Wary Of Orrick's Stance On Profits Per Partner

By Leigh Kamping-Carder

Law360, New York (May 18, 2010) -- Orrick Herrington & Sutcliffe LLP has opted to stop tracking or reporting its profits per partner, but legal industry watchers say the lack of an easy alternative and the allure of bragging rights will keep the metric in place for at least several years.

Profits per partner has long been considered the gold standard for measuring a law firm's success, as well as a key tool in recruiting top legal talent.

But on May 12, Orrick said it would stop using the metric to set goals, outline a budget, or size up its ranking against competitors, dismissing the metric as obsolete in an industry undergoing a seismic shift.

Although the firm's move to get ahead of the pack may be smart — and has generated favorable press — consultants don't anticipate a stampede of law firms will follow suit, they said.

“I wouldn't see firms moving away from that measure in its entirety in the short term,” said Margaret Grisdela, an author, blogger and president of consulting firm Legal Expert Connections Inc. “It's more a reflection of a longer-term trend that reflects a number of industry dynamics.”

A small list of firms may announce similar changes in the next year, but it will probably take five or 10 years for the industry to re-evaluate the best metrics, she said. Other consultants estimated that major change would take a couple of or several years.

For one thing, PPP is an accepted and widespread measure, and it's comparable — or at least seen as comparable — across firms, Grisdela said.

“It's a hard measure, and it's easily understood, so I don't think it's going away in the near term for that reason,” she said.

But unlike publicly traded companies, law firms are not required to disclose the figure, and naturally, some firms have never reported PPP, either out of a preference for privacy or a sense that disclosing sky-high profits would be unseemly, consultants said.

In a rational world, firms would either keep their financial numbers private or would disclose information according to a uniform and regulated set of accounting guidelines, backed up by an accountant's certification, said Jerry Kowalski, founder of legal consulting firm Kowalski & Associates.

As it stands, however, the number is open to manipulation. Firms can adjust the number of partners they report, shifting between equity, nonequity and counsel status, and altering counts of staff lawyers or temporary lawyers, experts said.

“I think one of the most misleading of all public financial figures of law firms is in fact PPP,” said Gary Klein, founder of legal recruiting firm Klein Landau & Romm Inc. “Many firm chairs believe that every other firm fudges the numbers, and they might be correct about that, because it's too indefinite.”

The weaknesses of the profits per partner model “hit home” during the recession, when law firms in the midst of unprecedented layoffs also posted excellent PPP results, said Toni Whittier of Whittier Legal Consulting. And for lateral hires, the number is now just one of a variety of different ways to size up a firm, she said.

Still, rejecting profits per partner as a standard measure would likely entail coming up with a new, more comprehensive model for measuring a law firm's progress, which could be light years away, consultants said.

One easy metric that could replace profits per partner would be revenues per lawyer, a figure that would take into account gross revenues, minus expenses, divided by the number of full-time lawyers at a firm, consultants said.

“Revenues per lawyer is the ultimate go-to number when you're looking at a law firm,” Klein said.

But considering the changes in the legal industry, additional metrics like revenue growth, operational efficiency, the number of lateral hires, major representations, evaluations of the success of alternative fees and staffing changes and, especially, client satisfaction could all eventually come into play, consultants said.

“Is it as easy as latching on to one number? No,” Whittier said. “Does it give you a better idea of how one firm compares to another firm? Yes.”

But how will firms assign numerical values to these “soft” measures? So far, it's not clear. Whittier sees a lot of firms wrestling with how to measure client satisfaction; others have formed committees to study methods for quantifying efficiency, she said. Even Orrick is still working out a law firm equivalent of “earnings per share.”

“Law firms are used to looking at certain numbers, and obviously there's going to be adjustments in determining alternatives to what they've been looking at for a long time,” Whittier said.

Besides, reporting profits per partner serves another function: letting top 100 firms boast about their rankings — much like a couple of golfers talking up their golf games, Kowalski said. It's questionable whether firms would willingly give up the chance to brag.

“Given the nature of the unique economic entities that law firms are, and the unique egos that drive law firms, it's quite unlikely in my view that they will stop doing that,” he said.

If it does nothing else, Orrick's move will at least generate discussion and push firms forward, Whittier said.

“What's going to turn the tide is some other strong leaders in the bar to stand up and say, once again, 'Ralph Baxter is right, we're going to follow suit,'” Kowalski said of Orrick's CEO and chairman. “And it will happen.”