When the media looks at law firms their focus invariably seems to go to three statistics – gross revenues, lawyer headcount and profit per equity partner. While total revenue and the number of professionals give some indication of the relative size of a firm, as statistics they are not very good management tools. Profit per equity partner was invented as the law firm equivalent of earnings per share in the corporate world. The problem of course is that there are so many ways of “gaming” the system to produce a figure that favorably reflects fact.
The truth is that there is no single metric that magically measures the success of a law firm. But there are some overlooked measurements that can add a great deal of understanding to a firm’s financial reporting. Here are three examples:
Revenue Per Equity Partner (RPEP). As a single metric RPEP is among the most telling about how a law firm manages its ownership base and the leveraging of non-owners. Of all metrics, RPEP has the closest correlation to Profits Per Equity Partner and, over time, provides a valuable trend indicator for a firm’s financial direction. The average RPEP for the AmLaw 200 is slightly over $3 million and ranges from a low of $725,000 to over $6 million for the Wall Street firms. RPEP provides a great benchmark for looking at laterals; if their book of portable business is less than the average RPEP for your firm, they may fill up an empty office but are unlikely to have a positive impact on long-term profitability. In short, a lateral whose book of business is not at least at the level of the firm’s average RPEP is probably not worth the risk.
Overhead Per Partner. It is easy to be deceived by the concept of overhead. When spread over all timekeepers it can produce ridiculous results (like the belief by many law firms that they lose money with young associates). I find that overhead per equity partner is a better comparative, both from year to year and with other firms. It removes artificial fluctuations based on lawyer headcount and highlights the core costs of a firm’s operation. Overhead, for this purpose, is total expenses minus all personnel costs and, typically, overhead per equity partner is in the $150,000 to $175,000 range. An amount over $200,000 is cause for a deep dive into expense structures.
Revenue Per Lawyer. This is the old standard and the legal industry’s equivalent to same store sales in retailing. It is useless as a comparative statistic between law firms – a firm that is highly profitable because it is heavily leveraged will look worse in a comparison with a heavily over-partnered firm. However, it is a great year-to-year comparison within a firm as to the inherent growth of its revenue base. The average RPL for the AmLaw 200 grew from $520,000 to $746,000 over the past ten years, an average annual increase of 4.4%.