Biglaw, Law Firm Mergers, Partner Issues, Partner Profits, Rankings

Are The Am Law 100 Rankings Unfair? Let’s Whine About Vereins

Should vereins be counted as single entities for purposes of the Am Law 100 rankings, and did vereins get unfairly slammed in the latest Am Law 100?

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The arrival last week of the latest Am Law 100 rankings brought a hot-button subject back to the headlines: vereins.

As The Economist concisely explains, a verein is “a Swiss partnership that lets [law firms] maintain separate national or regional profit pools under a single brand.” For purposes of preparing its influential Am Law 100 rankings, the American Lawyer treats a verein as a single firm — a decision that some at non-verein firms object to.

Let’s hear some of the complaints — and then, interestingly enough, a defense of the vereins’ financial performance in 2013, which might have been better than Am Law suggested….

We’ll start with the complaints against the vereins (before proceeding to the complaints coming from the vereins). Here’s part of a message that one Am Law 100 CFO sent to the American Lawyer (and later shared with us):

So vereins are financially separated, locally independent, a matter of convenience and does not imply any partnership together, yet AmLaw recognizes and reports them as one entity, while reporting my firm’s numbers based on shared revenues and profits. This current reporting creates the inaccurate picture of the verein-structured firms as a truly global organization.

I have been in BigLaw since 1988 and understand the AmLaw numbers as well as anyone and I can tell you that this verein reporting is a bogus statistic. I wonder where DLA Piper would stand if you reported actual revenues in the US partnership used to distribute US partner profits.

Based on the Am Law rationale, shouldn’t my firm include/recognize the revenue from our extensive network of foreign associates that we send/receive work to/from as we don’t share this revenue or profit?

Good question. If you can’t beat ’em, join ’em — through use of a verein structure.

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Counting vereins as single entities creates other problems too — problems that might actually harm the vereins. As you may recall, ALM editor in chief Aric Press criticized the financial performance of the vereins in his analysis of the Am Law 100:

[T]he Giant Alternatives — the six globetrotting firms organized as Swiss verein confederations — lagged behind the overall market. Their average RPL fell by 4.7 percent; their PPP was off by 8.2 percent. At the same time, they increased their head count by an average of 31 percent. To offer some perspective, the average verein firm added 695 lawyers last year, a number bigger than the total head count of 47 Am Law 100 firms. Put another way, these six firms hold roughly 19 percent of the lawyers in The Am Law 100 and account for less than 14 percent of the revenue [compared to the Super-Rich Firms, with 18 percent of the lawyers and 26 percent of the revenue].

But is it truly fair and accurate to say that the vereins suffered last year in terms of revenue and profit? From The Economist (emphasis added):

The vereins protest that the headline numbers are unfair. Four of the six actually increased their PPP in 2013; the other two, Norton Rose Fulbright and Dentons, were born just last year in mergers between highly profitable American operations and foreign firms that were far less lucrative, and which therefore dragged down the combined average. Peter Martyr, the head of Norton Rose Fulbright, says that each of its constituent parts performed better in 2013 than 2012.

Let’s unpack this a bit. For the two vereins created in 2013 — Norton Rose Fulbright, created from Norton Rose and Fulbright & Jaworski, and Dentons, created from SNR Denton, Fraser Milner Casgrain, and Salans — Am Law compared the combined firms’ PPP in 2013 with the predecessor firms’ figures in 2012. Here’s the problem. Take Norton Rose Fulbright. The 300 or so partners at Fulbright enjoyed much higher PPP than the 700 or so partners at Norton Rose. When the two combined in a verein, (1) the average PPP of the combined firm dropped sharply, and (2) Norton Rose Fulbright’s weight in the verein average increased dramatically, dragging down the other vereins. Similar things happened at Dentons (although to smaller effect).

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Check out this table, prepared by Dan Rosenheck of The Economist, which provides a sense of what happened here (click to enlarge):

In short, as one defender of the vereins put it to us, “AmLaw’s methodology here is sophomoric and shoddy, and the fact that they based the thesis of their writeup on an obviously flawed apples-to-oranges comparison is more so.” The verein firms actually enjoyed stronger financial performance in 2013 compared to 2012, but Am Law came up with a narrative of decline because of a failure to accurately account for the transactions that created two of the big vereins in 2013.

So, readers, what do you think? Should vereins be treated as single entities for purposes of the Am Law 100? And did vereins get a bad rap in the latest rankings?

When it vereins, it pours [The Economist via Morning Docket]

Earlier: The 2014 Am Law 100: ‘The Super Rich Get Richer’
Be Afraid, Be Verein Afraid

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