The American Lawyer publishes its annual “profits per partner†on the top 100 law firms in the United States. Because law firms are privately held, the disclosure of the revenues and financial health is not required. However, the firms do provide the information for the publication because, well, looking robust is good for business. The problem is that “profits per partner†can vary, depending upon how one defines a partner. The definition for the publication is that the figure should include equity partners, those who receive no more than one-half of their compensation in a fixed figure amount. If you decrease the number of partners to divide into net income, well, your profit per partner does increase. In fact, the amazing performance of the law firms, in terms of increased profits, caught the eye of Citi Private Bank Law Firm Group (a division of Citigroup). This group’s look at the data concluded that profits were overstated by more than 20% by 22% of the top 50, and all by definition of who is a partner.
The most interesting part of a Wall Street Journal piece on the Citi study is the response of the law firms and legal experts. “Even an honest calculation isn’t easy because the firms are using revenue projections and have partners moving in and out,†offered David Wilkins, who directs Harvard Law School’s program on the legal profession. Oh, you dear, innocent man. Welcome to the world of financial reporting. This stuff is not for the fainthearted, but the lawyers among you have experience in disclosure. Put in a footnote or two explaining who’s a partner and who’s not. Add a note or two on fluidity of partners. And put in your disclaimer on forward looking numbers. It’s not that there are wide variations in what the number is; the problem is the lack of disclosure on individual calculations. And here’s a bit of advice: “Profit per lawyer†would be a better indicator of financial performance, efficiency, and net results. Heck, you might come up with a figure that could actually help the firm strategically. You can’t fix what you don’t measure. And if your measurements are meaningless, you may be going downhill.
Vanessa O’Connell, “Law Firms Profits Called Inflated,†Wall Street Journal, August 22, 2011, p. B1.
