Are profits per partner the appropriate metric to measure law firm success? It’s been a long time since firms seriously looked at the question. I didn’t know my Skadden from my Sullivan back when American Lawyer founder Steve Brill first started shining a light on the black box of top American law firms back in 1987.
For as long as most of us can remember, PPP has been the definition of law firm financial success. And despite all of the pressure on the law firm business model over the past couple of years, PPP seems as resilient as ever. We can scream about the billable hour, we can change the nature of associate compensation, but there aren’t a lot of people giving us a better statistic than profits per partner to talk about when it comes to the success of the law firm business model.
That could be changing. This afternoon, Orrick, Herrington & Sutcliffe announced it would not be reporting PPP numbers next year.
What will replace it? We talked to Ralph Baxter, Chairman and CEO of Orrick, about what — if anything — can or should replace our fascination with PPP…
Orrick issued a press release which outlined the major reasons the firm is moving away from profits per partner:
Orrick, Herrington & Sutcliffe announced today that it will no longer use or report, internally or publicly, the metric of Profit Per Equity Partner. The firm believes the fundamental changes taking place in both the business of law and in the relationship between law firms and its clients have made the metric no longer constructive or informative for the firm or the industry.
When we spoke to Baxter, he said that Orrick has determined that PPP isn’t the best measure of law firm success, and so the firm no longer wants to play that game:
We’re no longer going to participate in the derby among law firms to compete with each other on that statistic. We don’t do this with any criticism of Am Law or any other media outlet. We don’t question the legitimacy of the reporting. But we’ve thought about it …. We don’t want to be a part of that competition.
Sources we spoke to emphasized that Orrick decided to make this announcement after the most recent Am Law PPP numbers came out. The firm doesn’t appear to be trying to duck anything.
Instead, Baxter said that Orrick wants to come up with new metrics to track the firm’s performance. Baxter outlined four metrics the firm is trying to develop that will be more descriptive than the single PPP number. Orrick wants to track its:
* Revenue growth
* Depth of client relationships
* Effectiveness in bringing together diverse resources
* Expense control
Baxter said that he wants Orrick to measure itself along the same lines as clients measure firms. Client service is important, and costs are important. These are factors that can’t be accounted for in PPP.
Don’t get him wrong; Orrick still cares about money:
[W]e’ll come to a number that’s a reliable in a year-on-year index in terms how we’re doing in the economic success of the firm. We’re not saying that it doesn’t matter to be profitable, it does. We’re not saying that it’s not important that our most senior partners are compensated in a way the matches the great law firms in the world. And they will be.
We will focus on that, but that’s not the measure of success.
Nor does it mean that Baxter wants to turn Orrick in the Wal-Mart of law firms:
Cost effective doesn’t mean cheap…
The most successful businesses in the world delivering the most expensive and scarce products and services in the world manage costs very carefully.
Baxter also believes that this information will give incoming associates and potential lateral hires a better measure of the firm:
[Profits per Partner] is inconsistent with our goal to be one firm where everybody matters, and inconsistent to our goal of reducing costs to our clients. To measure our success by how much income we allocate to some of us is not consistent to being one firm.
We’ve talked before about how high PPP didn’t really mean anything to associates on the ground. In fact, even before the recession fully took hold, some people warned incoming associates that a high PPP could be reflective of a firm who uses associates as replaceable cogs and discards them when they become too expensive. Certainly, last year’s profit numbers show that it is entirely possible to increase PPP while having a difficult economic year.
But will Orrick’s decision not to produce its profit numbers matter? Remember, back when Brill first started trying to get firms to be more transparent about their business models, virtually nobody helped him out. He had to produce PPP numbers without the benefit of firm support. I’m sure American Lawyer will come up with a profit number of Orrick next year, regardless of whether or not the firm willingly participates.
Baxter acknowledged that Am Law will do what it thinks is best. And he said that Orrick will still release it’s gross revenue numbers.
But we also talked to Baxter about the upcoming U.S. News Law Firm Rankings. Early indications are that U.S. News will try to measure many of the factors Baxter highlighted. Baxter is taking a wait-and-see approach to the new firm analyzer on the block:
I know they’re trying to [go beyond PPP]. But it is a daunting task. And it’ll be most daunting at the beginning.
Profits per partner isn’t going anywhere. But if firms are willing to dig a little bit deeper into their own business models — and share that information publicly — that’s got to be a good thing.