Biglaw, Lateral Moves, Money, Partner Issues, Partner Profits

Partner Profit Reports: K&L Gates Swing Wide Open

K&L Gates offers very detailed financial disclosures. What is motivating their opening of the kimono?

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As we mentioned this morning, preliminary reports suggest that profits and revenue at large law firms were up in 2012. As we noted yesterday, some firms — e.g., litigation powerhouse Quinn Emanuel — enjoyed double-digit increases in gross revenue and net profit.

Of course, these firm financial reports, reported to and compiled by the American Lawyer magazine, are not as detailed as they could be. They certainly aren’t as detailed as the quarterly and annual reports filed by publicly traded companies, even though a fair number of Biglaw firms have revenues and profits that exceed those of public companies.

And they probably never will be, at least as long as U.S. law firms are private partnerships rather than publicly traded companies. But at least one firm is opening the door a crack and letting more light in….

That firm, not surprisingly, is K&L Gates, led by Peter Kalis, chairman and global managing partner. Longtime readers of ATL know that Kalis isn’t your ordinary managing partner. How many managing partners like to quote Charlie Sheen and cite My Cousin Vinny as their favorite movie?

Yesterday Kalis sent around a firm-wide email announcing the firm’s financial results. From his message (reprinted in full on the next page):

Although our firm’s financial performance is fully transparent to our partners, we wish to extend that transparency to all of our lawyers, including associates, and to include categories of information that industry publications have ignored. We also appreciate that such transparency afforded to over 2,000 people around the world will likely not stay within our firm family. Accordingly, the News Advisory found at the link below will also be distributed to industry and other media outlets and posted on our web site.

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“We also appreciate that such transparency afforded to over 2,000 people around the world will likely not stay within our firm family.” Exactly. So instead of fighting the trend towards transparency, K&L Gates has decided to embrace it:

In the News Advisory, we not only have enlarged the scope of financial information beyond what other law firms and industry publications provide but also have substantially altered the presentation of our financial results to bring it more in line with the standards and format used in other industries. We have taken these steps because, with greatest respect to the hard-working reporters and editors who each year compile and present financial data on major U.S. law firms, it’s unfortunately the case that law firm financial reporting has become clouded with confusing, irrelevant and at times false information.

Kalis then cites the debacle of Dewey & LeBoeuf, whose misstated financials “remained undetected and unchecked over multiple years by publications in the U.S. and the U.K.” And he points out that it’s hard to tell which firms are being truly honest and which firms aren’t:

Published finances of U.S. law firms are based on data secretly supplied by law firms or other sources with little or no public accountability. We don’t know which law firms cooperated by dutifully filling out surveys, which ones did not cooperate but whose results are nonetheless presented as equally authoritative, or what the methods and sources are for determining financial results when firms do not cooperate.

After getting in a dig at what he calls the “Faux Firm 100” — ouch, I hope Am Law’s feelings aren’t hurt — Kalis provides his bill of particulars:

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Publications make no effort to adjust metrics to account for different business models of different law firms and seek instead to exploit these apples-to-oranges comparisons in order to create story lines for their magazines. Metrics expressed as averages, for example, have been rendered increasingly irrelevant in an era of radically different law firm business models and geographic footprints as well as equally divergent approaches to sharing equity ownership. Yet such problematic metrics remain central to the magazines’ approach to financial coverage of the legal industry and thus drive unfortunate and destructive behaviors within law firms.

For more on this subject, check out Bruce MacEwen’s excellent post on Adam Smith Esq., We Can Do Better. As MacEwen notes, “We are the profession that excels at disclosure, but we don’t apply that liberating discipline to ourselves.” He proceeds to explain why it doesn’t make sense to use the same metrics to evaluate all firms, considering that different firms have different strategies.

(Speaking of Bruce MacEwen and Peter Kalis, if you’re a law firm partner and would like to meet them here in NYC this coming Tuesday, read this post and request an invite to our event if you’d like.)

Kalis’s message concludes:

These and other shortcomings in the present system reflect faulty design, not lack of effort or professionalism of those who execute their reportorial and editorial missions each year. Nevertheless, until the design is improved, we believe that neither the industry nor this firm is served by contributing to the incomplete and misleading presentations of financial data relating to major law firms.

Please find our 2012 Financial Results at the this link: http://www.klgates.com/files/Upload/2012_Firm_Financials.htm.

In terms of the substance of the financial results, as opposed to the fact of their disclosure, here are some highlights from the WSJ Law Blog:

K&L Gates LLP posted its 2012 and 2011 results on its website Thursday in an unusually detailed accounting that included information on the firm’s bank debt (none), its retirement-plan obligations (0.3% of revenue) and a breakdown of firm revenues by region.

Zero bank debt, and limited retirement-plan obligations. This reinforces the themes sounded last September in Peter Kalis’s vigorous defense of his firm against negative rumors.

The firm, which has roots in Pittsburgh but has grown to more than 2,000 lawyers world-wide through a series of mergers, reported revenue of $1.06 billion, a slight decline from 2011. In 2012, K&L Gates netted $320.5 million in profit and had profit per partner of $899,960 for the firm’s roughly 250 full equity partners, according to the results.

As noted by Am Law, that’s roughly similar to 2011, when profit per partner for “full” equity partners was $890,000. If you take into account all equity partners, average profits per partner grew by 1.6 percent, from $627,000 in 2011 to $637,000 in 2012.

Here’s an interesting tidbit, noted by the WSJ:

K&L Gates also disclosed other internal numbers that most U.S. firms keep to themselves, such as the ratio of compensation earned by the highest-paid partner to the average pay for first-year equity partners: 7.9 to 1.

That’s about middle of the road. At traditional lockstep firms, the “compression ratio” generally hovers in the low to middle single-digits. At Dewey, whose demise contributed in part to K&L Gates’s desire to be more transparent, the compression ratio reached 25 to 1.

The media reaction to K&L Gates’s move towards transparency has been positive. Check out the coverage from Jennifer Smith of the WSJ Law Blog, Peter Lattman of DealBook, and Bruce MacEwen’s previously mentioned post on Adam Smith Esq.

Of course, not everyone’s on board. After K&L Gates posted its financials, we received a sarcastic text message requesting another puff piece on Peter the Great. (In terms of prior puff pieces, presumably this person was thinking of this interview and this praise of Kalis’s candor.)

After the prefatory snark, this source — who asked to remain anonymous, citing a fear of retaliation from Kalis — made a few substantive points:

  • What would explain the net decline in 2012 of 162 in attorney head count? (The firm cites attrition in its press release.)
  • How much expense lurks behind the rather small increase ($21 million) in revenues outside the Americas?
  • For the “Compensation Compression Ratio,” defined as the “[r]atio of the compensation of the highest paid equity partner to the average of first-year equity partners’ compensation,” who counts as an first-year equity partner? Do incoming laterals count? (That would presumably have the effect of lowering the ratio.)
  • The firm’s numbers are prepared under no defined system of financial reporting.

That last point doesn’t trouble me that much. First, this is all relative, and I’m unaware of any large law firm that has offered a more detailed disclosure of its financials than K&L Gates. Has Cravath issued audited financial statements prepared by a Big Four firm pursuant to GAAP?

Second, according to the WSJ Law Blog, the numbers are being audited. The firm expects the audit process to conclude this spring.

It seems to me that K&L Gates’s disclosure, even if imperfect, is a step in the right direction. Just like in the law school context, the move towards greater transparency in Biglaw is happening, slowly but surely. Some might want the pace to pick up, but that might not be a realistic expectation, given the generally gradual pace of change in the legal profession. So let’s take what we can get, and hope for even more in the future.

(You can check out Peter Kalis’s full email, as well as links to additional coverage of the K&L Gates financials, on the next page.)

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