Profits Per Partner

Bruce Stachenfeld

This is a continuation of the article I published in ATL two weeks ago. My previous article gave my view that the profitability metric of “Profits Per Partner” becomes in effect a master (rather than a servant) and is destructive and a root cause of some serious problems for Biglaw. In this article, I put forth a different way of doing business.

A long time ago, we at Duval & Stachenfeld decided that we would not make partnership decisions in our law firm based on a “numbers game.” Instead, we would look at the quality of the associates, and if they were qualified, we would make them partners irrespective of the effect that had on our firm economics. We have stuck to that view rigorously.

Over time we came to some realizations:

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Bruce Stachenfeld

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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According to the latest Am Law 100 rankings, Wachtell Lipton had profits per partner of nearly $5 million in 2013.

Meditate on that for a moment. Breathe in through your nose. Breathe out through your mouth.

Five million bucks per year.

Breathe in through your nose. Breathe out through your mouth.

I lost the slidy-thing from my slide ruler so I have to do this in my head, but I think that’s about $100,000 per week per equity partner. A little less than a newbie associate makes in a whole year outside of the major metropolitan areas.

Imagine all the things you can buy with that kind of money. A mansion that looks somewhat familiar every time you visit it. Luxury vehicles for your nanny. Dream trips for your spouse. The finest private schools for your kids. An iPhone for your son so he can talk to you every day. A high-end camera your wife can take to your daughter’s soccer game so you can watch her play through live streaming video. Oh, the joy that kind of money you can bring your family. It’s not Powerball, but it’s most certainly a lottery win per year.

How much do Canadian law partners earn?

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Last month, when we covered BuckleySandler’s midyear bonuses, we included a shout-out to Cahill Gordon. Cahill has paid out generous summer bonuses to its associates dating back to 2010, and we wondered whether the firm would continue the streak.

The answer: yes. Cahill just announced its latest summer bonuses. The timing is good, since rising 2Ls will soon be picking which firms to interview with during on-campus recruiting. (Note Cahill Gordon’s nice rise in the latest Vault 100 rankings, which are widely consulted by law students during the OCI process.)

How big are the Cahill midyear bonuses this time around?

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Ed. note: Please welcome Steve Dykstra, our newest columnist, who will be covering the Canadian legal market.

I am a Canadian-trained lawyer and legal recruiter. I recruit throughout North America so I really get to study the legal systems on both sides of the border. I thought it would be fun and interesting to highlight some of the differences between the American and Canadian systems — hence the column’s title, “The View From Up North”.

As this is my first column, I want to provide a bit of an overview. In coming weeks, I’ll focus more narrowly on specific topics.

Sound good?

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Complaining about profits per partner as a metric is a favorite pastime of Biglaw partners. Sometimes it can look like sour grapes by partners at firms that don’t excel in the PPP department.

But, to be fair, there certainly are things to complain about when it comes to profits per partner. For example, PPP is an average that can sometimes conceal a great deal of variability. It tells you exactly what its name suggests — average profits per partner, i.e., total profits divided by the number of partners – but it doesn’t tell you what the average partner takes home in a year.

To get a better sense of compensation for an average partner, we’d need to know the “spread,” i.e., the ratio between the compensation of the highest-paid partner and that of the lowest-paid partner. Thankfully, there is (some) information on that.

How do partner compensation spreads look these days at leading law firms?

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The current discussion regarding the decision by Dentons not to report its average profits per partner (“PPP”) to the American Lawyer is interesting. While I was at Greenberg Traurig, then-CEO Cesar Alvarez used to have a pithy statement on the whole PPP issue, along the lines of: The only thing partners really care about is “profits per me.” There is a lot of wisdom in that statement. In my experience it is true for existing Biglaw partners, potential laterals, and those (fool?) hardy associates aspiring to partnership.

At the same time, the popularity of the American Lawyer’s various charts and rankings can’t be denied. And PPP is one of the catchier columns on those charts. It is used as a proxy for determining everything from firm prestige, to strength of client relationships, to how well a firm is managed.

Savvy associates can and do use it to determine associate quality of life at a particular firm. Your firm has a blazing PPP and no big contingency windfalls feeding the flames? Good chance you are looking at a never-ending flow of “interesting work,” coupled with the partnership prospects of a diminutive drone buzzing around hoping to get noticed by the queen bee. In contrast, you might enjoy a better lifestyle if employed as associate #614 by a Biglaw 2.0 monolith, but you also run the distinct risk of making partner only to realize that the financial gulf between you and the “real” partners is a broad one….

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* In defense of its PPP metric, the editor-in-chief of the American Lawyer revealed a shocking statistic about Dentons: the firm’s PPP was likely down about 20 percent year over year. [Am Law Daily]

* A judge dismissed many of defunct firm Heller Erhman’s remaining unfinished business claims in the case against its former partners. Dewey know some partners who are thrilled? [WSJ Law Blog]

* From 2012 to 2013, NLJ 350 firms saw the rise of “other” attorneys — staff attorneys, of counsel, and lawyers who were neither associates nor partners. We’re living in lean times. [National Law Journal]

* “No one predicted there would be this kind of huge drop in applications.” Apparently law school deans thought prospective students would be thrilled about their lack of job prospects. [Hartford Business Journal]

* Shelly Sterling has asked a judge to rule that she can sell the Los Angeles Clippers over her husband Donald Sterling’s protests. We’re very eagerly awaiting their impending divorce train wreck. [Bloomberg]

[A] focus on profit undermines the differences between the practice of law being a profession rather than solely a business. It is easy to anticipate the assertion that we choose not to report aggregate annual average profit numbers because they are not as high as some other firms. But that assertion simply assumes that the way things have been done in the past is the way they should be done in the future.

– Global chief executive officer Elliott Portnoy and global chair Joe Andrew of Dentons, explaining in a letter to the American Lawyer the reasons why the firm will no longer report its average profits per equity partner.

(Dentons, a verein that recently merged with two firms, had PPP of $625,000 in 2013, which put the firm in 96th place on the Am Law 100 when ranked by PPP.)

Ed. note: This is the latest installment in a series of posts on lateral partner moves from Lateral Link’s team of expert contributors. Michael Allen is Managing Principal at Lateral Link, focusing exclusively on partner placements with Am Law 200 clients.

Alliteration aficionados are bemoaning the tongue-twisting fusion of Squire Sanders and Patton Boggs into Squire Patton Boggs. I prefer the feudal-esque Squire Boggs, but then again, I was not on the naming committee. Aside from this rebranding exercise, Squire Patton Boggs makes it clear that mergers (or acquisitions) are easier to execute in principal than reality.

Many of the firms in the Am Law 200 are the result of previous mergers including WilmerHale and DLA Piper. Most of these mergers were consummated before the recession, and since then, the parity between Am Law 200 firms has been dwindling.

The race for supremacy in the legal market has created a system with far less parity than before and consequently, a greater degree of difficulty for mergers. For example, the spread of Profits Per Partner in 2003 is right-skewed — and this will likely always be the case — but overall, there is little variance in spread of PPP in 2003 when compared to the spread in 2014…

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