Reinventing The Law Business: Profits Per Partner -- A Good Servant But A Bad Master

Has the focus on "Profits Per Partner" gone too far? This managing partner thinks so.

This is the first of a four-article series focusing on the following matters:

  • First Article – Profits Per Partner: A Good Servant But A Bad Master
  • Second Article – A Profits-Per-Partner Emancipation Plan
  • Third Article – Beyond Profits Per Partner – Embracing Volatility
  • Fourth Article – How to Embrace Volatility as a Law Firm

Those of us running law firms have two sets of clients:

  • Clients – parties that hire us for legal work.
  • Lawyers – parties that do the legal work for the clients.

One without the other is pointless, obviously – they are yin and yang. However, despite this almost symbiotic relationship, most law firms are set up to attract great clients a lot more than they are set up to attract great lawyers. That is how law firms define “marketing.” The other function is called “recruiting.”

Indeed, let me ask you — in your firm, which is cooler: to be on the marketing committee, or to be on the recruiting committee? Which one is more likely to result in success at your firm, including money, power, fame, a big office, etc.?

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There is no comparison almost anywhere. Marketing to clients trumps recruiting every which way, for probably just about every single law firm. And this has made sense for a long time because, historically, it has been a lot harder to find clients than it has been to find lawyers. But I think this is changing — right under our noses.

David Maister, in his groundbreaking work, Managing the Professional Service Firm (affiliate link), argued (twenty years ago) that with the retirement of the baby boomers our profession is going to be shrinking in terms of its talent pool, yet at the same time the demand for certain types of professional services will be growing fairly dramatically. This thinking would likely imply an increase in the demand for services due to the general expansion (worldwide) of the so-called “knowledge economy” and the generally increasing sophistication of business and legal issues that require cutting-edge legal skills. At the same time it is very likely that the supply of lawyers with these skills that are available to law firms will shrink due to the previously mentioned retirement of baby boomers, the diminishing number of people attending/graduating from law school each year, the increasing draw from in-house positions, the expanding opportunities for lawyers to obtain non-lawyer jobs in the business world, and the general ongoing withdrawal of lawyers from the work force to raise children. Of course I do not have a crystal ball; however, it would not be surprising to see us all looking around and suddenly there is no one to do the work!

All of this combines to make it possible that what our profession faces is not overcapacity (and a profession in trouble, as some have said), but a potential witch’s brew of undercapacity and severe talent shortage. If what I am saying turns out to be correct, then if one wants to grow a high-quality law firm, it becomes a lot more important to find great lawyers than to find great clients. (I sure hope my clients aren’t reading this…)

So if we are at the beginning of a talent shortage that is going to get worse and worse, then you would think that the mission of all law firms should be to figure out how to attract, train, and retain talent. If all this is so, then why are large law firms doing the exact opposite with their most talented people? Why is it still an “up or out” decision at most major firms? Why are so many major law firms terminating or de-equitizing many so-called “non-productive partners,” when many of them are perfectly “productive” but just not productive “enough”? Why is “leverage” still a magic buzzword for major law firms?

The answer is very simple. It’s this “Profits Per Partner” thing.

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Mathematically, Profits Per Partner (“PPP”) means total firm profits divided by the number of equity partners. Profits Per Partner of course has a completely valid purpose, as it truly does evaluate (in the simplest of terms) how profitable a firm is for its owners, i.e., the partners. There is nothing inherently wrong with a law firm reviewing carefully its Profits Per Partner and trying to increase PPP. It makes sense, and to the extent this measurement is used as a “servant” to determine if the firm really is doing better, I have no quarrel with it.

The problem is that Profits Per Partner has evolved from servant to master! In this respect, using this metric as a comparison between law firms of their competitive success has become a disaster for major law firms. The “tables” are published each year as part the American Lawyer’s Am Law 100 rankings, and the major law firms understandably want to rise on the PPP table.

The problem develops because it is very difficult to compare law firms and determine which law firm is “better.” Accordingly, a loose concept that says that the one that makes the most money must be the best has some logic to it, because that law firm theoretically has the strongest branding and pricing power. So this profitability metric of Profits Per Partner takes on an aura of impartiality and logic. And what lawyer wouldn’t want to go to the most profitable law firm if she could?

In any case, whether anyone likes it or not, this metric is the only metric there really is! Let’s say you are a partner at a “top” law firm and you call a headhunter and say, “Get me out of here – I will only consider a “top twenty” law firm.” The headhunter says “fine,” and the call ends. So what are they talking about here? Possibly they wouldn’t want to admit it, but they are talking about the twenty law firms with the “top” Profits Per Partner, aren’t they?

This is only the tip of a very dangerous iceberg. What if a major law firm’s Profits Per Partner falls in a given year? Yikes – that means the firm is doing “worse,” right? Even if the firm made a brilliant investment in its future that lowered Profits Per Partner for a year or so, as far as the legal world sees it, the firm’s Profits Per Partner have fallen! And the headhunters sense weakness. They now start calling in droves to lure away the rainmakers, and if they can pry one loose then it is like a run on a bank and the entire firm could fail. So a major law firm is trapped in one way or another doing everything it can so that its PPP number rises every year, just to remain competitive.

Finally, it is even worse for one of those second-tier firms trying to move up in weight class to be thought of as a top-tier firm. These firms are hugely vulnerable if things go wrong. I suspect that the next time legal work shrinks, some of these almost-top-tier firms may find themselves in some serious trouble.

Since all major law firms now have high Profits Per Partner forced upon them, this encourages two types of behavior:

First – outright lying, which allegedly went on at Dewey & LeBoeuf, or perhaps fudging the numbers by maybe not counting certain partners, etc.

Second – engaging in self-destructive behavior to “artificially” raise the Profits Per Partner number so the firm doesn’t have to lie about its numbers. This would include things like:

  • Firing partners to shrink the denominator;
  • De-equitizing partners to shrink the denominator;
  • Not promoting otherwise worthy associates to partnership to keep the denominator from getting larger;
  • Giving compensation guarantees to attract rainmakers to increase the numerator; and
  • Pursuing a short-term mindset in firm management to “manage” the Profits Per Partner number each year, as opposed to investing for the intermediate and long-term outlook.

Ultimately, focusing on Profits Per Partner is sort of like a public company running itself around managing quarterly earnings. And that is what has happened in the legal profession. Instead of Profits Per Partner being a perfectly useful tool (a servant), it has taken over the field (as the master).

Two weeks ago I wrote an Ode to Major Law Firms, and I am very respectful of their powerful business model; however, this Profits Per Partner “thing” is like a virus eating away at the model.

We think we have a better way at Duval & Stachenfeld, and it centers around our “Profits Per Partner Emancipation Plan,” which I will discuss in my next article. In this next article I will explain how we at D&S avoid the Profits Per Partner trap. In the remaining articles of this series, I will put forth a theory that goes beyond Profits Per Partner, which I call Embracing Volatility.


Bruce Stachenfeld is the managing partner of Duval & Stachenfeld LLP, which is an approximately 70-lawyer law firm based in midtown Manhattan. The firm is known as “The Pure Play in Real Estate Law” because all of its practice areas are focused around real estate. With over 50 full-time real estate lawyers, the firm is one of the largest real estate law practices in New York City. You can contact Bruce by email at thehedgehoglawyer@gmail.com.