The Capitulation Of Merely 'Rich' Firms (And How To Bring In $3 Million In Profits Per Partner)

In-house columnist Mark Herrmann, a former Biglaw partner, crunches some numbers.

I predicted earlier this year “the imminent capitulation of many big firms.” I explained the many reasons why firms that generate a mere $1 million annually in profits per partner can’t compete with firms that generate $3 million. I then predicted that the merely rich firms would soon begin to capitulate; the firms wouldn’t close up shop, but they’d quietly stop paying the going rate to new associates, compress the pay scale for associates after the first year, stop trying to match market bonuses, increase financial demands on partners, and otherwise give up. The super-rich firms would hold the field alone.

Many of you responded to that column.

Some of you were incredulous: “Herrmann, you idiot! You’re predicting something that’s already happened! Although most firms do whatever’s necessary to match the ‘going rate’ for new associates (because that’s such a public number), many firms have already compressed pay scales, given up trying to match bonuses, and otherwise left the playing field. But the firms do this quietly, so folks never hear about it. Your columns aren’t too interesting when all you do is predict the past.”

Others of you agreed that the super-rich were now putting increasing pressure on the merely rich. In the words of one correspondent: “Why do you think one New York firm announced such generous bonuses at the end of 2014? Everyone knows that Above the Law gathers and publishes those numbers; the lavish 2014 bonuses effectively threw down the gauntlet to other firms, challenging them to match the scale or concede defeat.”

Others of you were less opinionated and more curious. One of you asked, for example, how the super-rich firms manage to achieve their super-richness: “How many hours, at what rates and with what leverage, must these firms extract to yield $3 million in profits per partner? I’ve done the arithmetic, and it seems basically impossible to achieve that level of profitability based on billable hours alone. Surely the super-rich firms are charging premiums, or success fees, or some such thing. They’re not achieving those levels of profitability based on billed hours alone, are they?”

I pride myself on being as curious as the next guy, so I poked around on your behalf. I learned (from someone who surely knows) the arithmetic. Here’s how you bring in $3 million per year in profits per partner: Charge an average hourly rate of $500 for associates, and have the associates bill 2200 hours per year. After accounting for the associate’s salary (call it an average of $200K), bonus (call it $40K), and overhead (call it $250K), each associate generates $560K in profit. Maintain leverage of 3.5 associates per partner. That 3.5 times $560K generates almost $2M in profit for each partner.

Have partners bill 1750 hours each at an average rate of $950 per hour. After accounting for overhead (maybe $350K each), each partner contributes another $1.3M to the bottom line. Add the $2M to the $1.3M, and you’re a $3M per year profits-per-partner firm.

Sponsored

Nothing to it, right?

(My insider also told me: “It goes without saying that you can’t maintain a super-rich firm unless you keep only high-performing individuals working in high-value practices. These firms must ruthlessly discard any practice or individual that can’t pull its weight.” But that’s hardly a secret.)

Finally, one of you begged to differ with my entire premise: “Firms don’t capitulate to the super-rich by giving up on the hopeless attempt to emulate them. Firms capitulate by trying to be (or act) super-rich in the first place.”

You might ask, as I did: “Huh?”

“Look, Herrmann: Folks in Boston try to prove that they live in the best city on earth by comparing Boston to New York. But they make their argument by assuming that Boston wants to be like New York in the first place: ‘Boston has only 6 theaters, and New York has 60. But I can’t go to 60 plays anyway, so Boston is just as good.’

Sponsored

“The Bostonian loses that argument; he can’t compete with New York on New York’s terms. Boston may well be a better city, but only because Boston does a great job of being Boston. Boston isn’t so good at being New York.

“It’s the same with the merely rich firms. There are a lot of things other than money that draw people to law firms: quality of work, quality of life, knowing that your partners won’t stab you in the back over issues of business origination, availability of mentors, the chance to handle cases that put less than $50 million in dispute, the ability not to toss one’s cookies when you review your own firm’s bills, the sense of stability that comes from knowing that you have very few partners who joined the firm laterally only because the firm offered a higher return on the partner’s book of business, whatever.

“I’m perfectly content working at a merely rich firm. I make about 20 times what my father ever earned in his life. I don’t feel impoverished because I’m not making 30 or 60 times what he earned. My firm isn’t super-rich, and that’s just fine. We’re not ‘capitulating’ to anyone; we’re just living the lives that we prefer.”

What’s my point?

First, I get more fan mail than you might think from writing my silly little column here at Above the Law.

Second, some of my readers are pretty smart.

Keep those cards and letters coming in.


Mark Herrmann is the Chief Counsel – Litigation and Global Chief Compliance Officer at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law and Inside Straight: Advice About Lawyering, In-House And Out, That Only The Internet Could Provide (affiliate links). You can reach him by email at inhouse@abovethelaw.com.