Biglaw, Boutique Law Firms, Partner Issues, Partner Profits, Small Law Firms

Reinventing The Law Business: Year-Over-Year Growth Comparisons – Dumb And Dumberer

Managing partner Bruce Stachenfeld warns against putting too much stock in year-over-year comparisons.

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Bruce Stachenfeld

Bruce Stachenfeld

Earlier this week, Apple’s earnings came out. The company made “only” $50.56 billion, and compared to last year this is lower – omygosh! As I write this, the stock is down by about 8 percent. Apparently this is a “bad” thing?

A recent American Lawyer article has negative spin in pointing that there are signs of a slowdown in the Am Law 100 because “growth” has slowed from last year. It says that total gross revenue for the Am Law 100 “inched up” 2.7 percent to (only?) $83.1 billion and net income increased 3.3% to $32.8 billion. The article says that that “represents a significant slowing across the market compared with the previous year, when revenue grew 4.6% and net income [grew] 7.5%.”

The article – and others now being published – looks at which firms had good or bad years based on their year-over-year growth or non-growth. Indeed, Quinn Emanuel had an “off year” because its profits per partner dropped by 10 percent to $4.4 million. When I read this, I immediately started a fund at Duval & Stachenfeld to raise money for the Quinn Emanuel partners. Four point four million in profits per partner is close to the best any law firm has ever done in the history of the world (with I think only one law firm even doing better, other than Quinn itself last year). I congratulate Quinn on an incredible year. Is Am Law serious that this is an “off” year?

And to be fair to Am Law, they do mention that over the past years Quinn has enjoyed “meteoric” growth.

My question for consideration is why we have this pre-occupation with year-over-year “growth” as the most critical metric for businesses, and law firms, when we know intellectually that it is statistically certain that the one thing that will never happen is that earnings or profits will “grow” in a slow and steady upward trend on an annualized basis. It not only rarely happens, I don’t think it “ever” happens.

So if we know that steady upward year-over-year growth is like a unicorn, why is it that the media, and hence ourselves, measure ourselves against this metric?  Why do we do this?

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Well, of course growth in profits and earnings is “good,” so it makes sense for us to keep seeking this as a goal — and of course I have no beef with that. And if you are the managing partner – or any partner – you can point to “growth” as a measure of your success.

Also, long-term growth or decline (over, say, a five- or ten-year period) is certainly valuable – but artificially whacking up the analysis every year by comparison  to the prior year and making determinations that the business is doing “good” or “bad” based on that one year comparison seems to me to be “dumb and dumberer.”

I wonder – why doesn’t Am Law publish the last five years trend for its law firms instead of only comparison to the prior year?

My answer to the question as to “why” we put such emphasis on year-over-year comparison is very simplistic. I think it is just that we all (i.e., people) fell into this pattern long ago and we just think this way for no particular reason except that is what we have always done. And the media, always seeking to say something interesting to capture the attention of readers, leads the way by “spinning” year-over-year growth as a good thing and year-over-year shrinkage as a bad thing. Readers don’t really have the time to deeply evaluate what they read on a consistent basis, so we all fall for this media bias.

Consider – we get depressed in the United States when we have the highest standard of living mankind has ever seen in hundreds of thousands of years because one year is “worse” than last year. If our economy expanded 10 percent one year (in an incredible boom) and then fell 3 percent the next year (a modest drop), our country would freak out. Investors get upset with Apple for “only” earning more money than any corporation has ever earned in history. And we find we are concerned about poor Quinn Emanuel for having what I think is the second-best annual earnings of any law firm in world history.

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Or consider a firm that hits a major one-time contingency fee one year. Should it be proud that its earnings rose that year or be upset that they fall the next year when there is no such contingency fee?  Of course not – and no one would make this argument because it is so obvious as a one-time event. But it is no different when a firm’s clients are more – or less – active in any given year, which means profitability rises or falls commensurately. A single year doesn’t mean anything is particularly wrong or right.

Ultimately, if we measure our success against an idiosyncratic and unreliable measuring stick, expectation of continued year over year growth, we are bound to be incorrectly disappointed, or incorrectly uplifted, and possibly make decisions based on our belief that there is something “wrong” when things are possibly just fine or based on the belief that things are “good” when they are really not good at all.

Indeed, falling earnings for a law firm when its client base and brand are strengthening, or it is investing for the future, may mean the firm us doing just fine. Commensurately, rising earnings based on a single client having a one-time growth spurt may mask defects in the firm.

So – to all of you managing partners – and all of you partners in law firms – and all of you attorneys employed by law firms – and all of you administrative personnel employed by law firms – I say that there is nothing “wrong” with celebrating year-over-year growth if you want a reason to have a party now and then; however, don’t mislead yourselves in falling for such growth or shrinkage as telling the whole story or even a large part of the story. You may be on the last stage of growth for a firm that is about to fall apart, or you may be shrinking in revenues while investing prudently and intelligently for the future.

To conclude, there is no reason to look at year-over-year growth as anything more than a mere metric for comparison purposes. Growth or shrinkage can be a useful metric for sure, but it should be looked at as a trend over longer time increments – five years – or even ten years – as a part (but never the whole) analysis of how your law firm is really doing economically.

Earlier: The 2016 Am Law 100: Trouble Ahead?

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 more than 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.

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