Career Development --> Law Firm Economics

Pumping Up Profits Per Partner

The new AmLaw 100 rankings have just been released, and the top firms continue to jockey for position. Financial data was not publicly discussed before law became big business. But now, the nation’s largest law firms are ranked in the legal press on the basis of gross revenues and other indicators such as revenues per lawyer and profits per partner. Annual profits per partner are often used as the measure for law firm success and financial health, and generally speaking, the higher the profits per partner, the easier it is to attract and keep top legal talent. Lawyers want to know that their firm is on solid financial ground, and are curious whether they could earn more elsewhere. Thus, law firms have employed a number of strategies to bolster their profits per partner number—some say even artificially so. Strategies range from decreasing the number of equity partners to taking stringent measures to increase revenues and decrease costs.

Many factors have an affect on profits per partner. One factor is that the market for hourly rates varies between different regions of the country. For example, law firms in the Northwest often cannot charge their clients the same rates as are accepted in the Northeast. The size of the firm, types of practice and clients, attorney and staff compensation, rates, and local cost of living, all make a difference in the bottom line. Therefore, the profits per partner number is not necessarily dispositive when assessing the success and financial health of a firm. But, when comparing big firms in the larger metropolitan areas, it is often considered the final word.

The AmLaw’s Profits per partner calculations are based on the number of equity partners only. Consequently, law firms can raise their profit per partner number simply by restricting its equity partner ranks. Firms have employed such tactics as extending the partnership track and raising the bar for admission, for instance admitting only rainmakers to equity partnership, and demoting lesser producing partners to non-equity status. Of the firms included in this year’s AmLaw 100, the total number of equity partners rose by just 2.8%, while the non-equity ranks grew by 13.4%. In addition, the number of firms with non-equity partner status increased from 52 in 2001 to 76 in 2002.

The typical lawyer’s career track changed dramatically about 20 years ago. Until then, it was usual for a lawyer to join a firm after law school, work hard as an associate for five to seven years and then, in most cases, be admitted to the equity partnership, staying until death or retirement. In the late 1980’s, the partnership track for large firms was extended to nine or ten years, and other layers of attorneys were added between the associate and equity partner ranks. Now, there are all sorts of categories of law firm lawyers, including senior counsel, of counsel, special counsel, etc., with the title and criteria for each set by the particular firm. It is now common for law firms to have at least two tiers of partners: equity partners who share directly in the profits of the firm; and non-equity, income, or contract partners who, in most cases, receive a base salary plus bonuses.

In the effort to pump up profits per partner, law firms have become leaner and meaner. There has been pressure to raise billing rates and increase the number of hours billed by attorneys at all levels. Since there is a limit to the price that the market will bear and only 24 hours in the day, some firms have been experimenting with alternative billing methods such as premium billing, success bonuses, value billing, task billing, and hybrid hourly/contingency rates. In addition, law firms which previously had billed exclusively on an hourly basis have been selectively handling contingency cases, looking for a big win as a way to increase revenues.

Many law firms have been evaluating their clients and practice areas to determine those that have the best bottom line results. Slow and non-paying clients are discarded, and an effort is made to pursue those that pay the highest rates. Some firms have shed their estate planning, insurance, or municipal practices because those clients traditionally demand lower rates. Attorneys in those practice areas either move to other firms or start their own smaller shops with their existing clients, or they must retool for more profitable practice areas.

In an effort to become recession-proof, some firms are diversifying by expanding into new practice areas, going after clients in different industries, or adding offices in other geographic areas. Having learned the hard lessons of the dot-com boom and bust, firms now know not to put too many of their eggs in too few baskets—even if those baskets look leak-proof at the time.

Obviously, cutting costs is another way to boost profits per partner. Salaries are the largest expense of virtually all law firms. Thus, in this slow economy, law firms have been pushing out unproductive partners and laying off underutilized associates and staff. Salaries have been frozen and benefits cut. Lock-step raises and promotions have given way to merit-based advancement. To encourage greater productivity, associate bonuses have been tied to hours billed, and partnership compensation has been restructured to reward rainmaking, cross-selling, entrepreneurship, and productivity. Some firms publish productivity and compensation numbers for each attorney on a regular basis and distribute the reports to all partners, and sometimes even to all senior attorneys.

The office lease is usually the second largest expense. At the height of the ‘90’s boom, many optimistic firms overextended themselves by taking on more space than they needed and at high rates. In these times of contraction, however, some are having a difficult time finding subtenants to absorb the excess and law firms have had varying levels of success in renegotiating their leases. Those who are in the process of building out space are taking steps to reduce the square footage per lawyer as another way of economizing. Office space utilization trends include smaller libraries due to increased online research and equalizing the size of partner and associate offices. A few firms have moved their administrative personnel offsite to separate, less expensive office space.

Law firms have been examining their expenses in search of other ways of reducing costs. They are tightening up on billings and collections, scrutinizing travel and entertainment costs, and cutting perks such as parking and in-house meals. Video-conferencing has replaced some business and recruiting travel. And, the smart use of paralegals, technology, and practice forms lower the cost of doing business.

While taking steps to boost profits per partner is essential to a law firm’s economic survival, it has the added benefit of enhancing the firm’s ability to attract and retain the most successful attorneys.

Career Development --> Law Firm Economics Pumping Up Profits Per Partner The new AmLaw 100 rankings have just been released, and the top firms continue to jockey for position. Financial data was not publicly discussed before law became big business. But now, the nation’s largest law firms are ranked in the legal press on the basis of gross revenues and other indicators such as revenues per lawyer and profits per partner. Annual profits per partner are often used as the measure for law firm success and financial health, and generally speaking, the higher the profits per partner, the easier it is to attract and keep top legal talent. Lawyers want to know that their firm is on solid financial ground, and are curious whether they could earn more elsewhere. Thus, law firms have employed a number of strategies to bolster their profits per partner number—some say even artificially so. Strategies range from decreasing the number of equity partners to taking stringent measures to increase revenues and decrease costs. Many factors have an affect on profits per partner. One factor is that the market for hourly rates varies between different regions of the country. For example, law firms in the Northwest often cannot charge their clients the same rates as are accepted in the Northeast. The size of the firm, types of practice and clients, attorney and staff compensation, rates, and local cost of living, all make a difference in the bottom line. Therefore, the profits per partner number is not necessarily dispositive when assessing the success and financial health of a firm. But, when comparing big firms in the larger metropolitan areas, it is often considered the final word. The AmLaw’s Profits per partner calculations are based on the number of equity partners only. Consequently, law firms can raise their profit per partner number simply by restricting its equity partner ranks. Firms have employed such tactics as extending the partnership track and raising the bar for admission, for instance admitting only rainmakers to equity partnership, and demoting lesser producing partners to non-equity status. Of the firms included in this year’s AmLaw 100, the total number of equity partners rose by just 2.8%, while the non-equity ranks grew by 13.4%. In addition, the number of firms with non-equity partner status increased from 52 in 2001 to 76 in 2002. The typical lawyer’s career track changed dramatically about 20 years ago. Until then, it was usual for a lawyer to join a firm after law school, work hard as an associate for five to seven years and then, in most cases, be admitted to the equity partnership, staying until death or retirement. In the late 1980’s, the partnership track for large firms was extended to nine or ten years, and other layers of attorneys were added between the associate and equity partner ranks. Now, there are all sorts of categories of law firm lawyers, including senior counsel, of counsel, special counsel, etc., with the title and criteria for each set by the particular firm. It is now common for law firms to have at least two tiers of partners: equity partners who share directly in the profits of the firm; and non-equity, income, or contract partners who, in most cases, receive a base salary plus bonuses. In the effort to pump up profits per partner, law firms have become leaner and meaner. There has been pressure to raise billing rates and increase the number of hours billed by attorneys at all levels. Since there is a limit to the price that the market will bear and only 24 hours in the day, some firms have been experimenting with alternative billing methods such as premium billing, success bonuses, value billing, task billing, and hybrid hourly/contingency rates. In addition, law firms which previously had billed exclusively on an hourly basis have been selectively handling contingency cases, looking for a big win as a way to increase revenues. Many law firms have been evaluating their clients and practice areas to determine those that have the best bottom line results. Slow and non-paying clients are discarded, and an effort is made to pursue those that pay the highest rates. Some firms have shed their estate planning, insurance, or municipal practices because those clients traditionally demand lower rates. Attorneys in those practice areas either move to other firms or start their own smaller shops with their existing clients, or they must retool for more profitable practice areas. In an effort to become recession-proof, some firms are diversifying by expanding into new practice areas, going after clients in different industries, or adding offices in other geographic areas. Having learned the hard lessons of the dot-com boom and bust, firms now know not to put too many of their eggs in too few baskets—even if those baskets look leak-proof at the time. Obviously, cutting costs is another way to boost profits per partner. Salaries are the largest expense of virtually all law firms. Thus, in this slow economy, law firms have been pushing out unproductive partners and laying off underutilized associates and staff. Salaries have been frozen and benefits cut. Lock-step raises and promotions have given way to merit-based advancement. To encourage greater productivity, associate bonuses have been tied to hours billed, and partnership compensation has been restructured to reward rainmaking, cross-selling, entrepreneurship, and productivity. Some firms publish productivity and compensation numbers for each attorney on a regular basis and distribute the reports to all partners, and sometimes even to all senior attorneys. The office lease is usually the second largest expense. At the height of the ‘90’s boom, many optimistic firms overextended themselves by taking on more space than they needed and at high rates. In these times of contraction, however, some are having a difficult time finding subtenants to absorb the excess and law firms have had varying levels of success in renegotiating their leases. Those who are in the process of building out space are taking steps to reduce the square footage per lawyer as another way of economizing. Office space utilization trends include smaller libraries due to increased online research and equalizing the size of partner and associate offices. A few firms have moved their administrative personnel offsite to separate, less expensive office space. Law firms have been examining their expenses in search of other ways of reducing costs. They are tightening up on billings and collections, scrutinizing travel and entertainment costs, and cutting perks such as parking and in-house meals. Video-conferencing has replaced some business and recruiting travel. And, the smart use of paralegals, technology, and practice forms lower the cost of doing business. While taking steps to boost profits per partner is essential to a law firm’s economic survival, it has the added benefit of enhancing the firm’s ability to attract and retain the most successful attorneys.	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