Why law firms should not be ranked based on profits-per-partner

Almost every month comes a new ranking of international law firms. These rankings are increasingly based on profits-per-partner, which range from $2.000.000 for the most profitable ones (NY M&A firms) to less than $400.000 for the least profitable ones. These rankings are a real nuisance and in my view should be avoided or abolished.

There are several reasons for this. First, they compare apples and pears. Almost by definition, firms with large M&A operations in NY or London will be much more profitable than firms with a strong focus on regulatory work in DC or in Brussels. This does not say anything about the quality of the firms, however, as even a moderately successful NY firm will tend to do better than highly successful DC firms. The same is true if you compare London and Brussels.

Second, these rankings do not say anything about the quality of the work. Indeed, M&A and other transactional work will often be very dull and repetitive. Hundreds of freshly graduated lawyers will end up spending weeks in data rooms doing uninteresting due diligence work or filling in forms to be submitted to the authorities for control. By contrast, sophisticated legal work, such as appellate litigation or the drafting of complex contracts, will require much better legal skills though it will not necessarily translate into huge pay offs and thus good standing in the rankings.

Third, profit-per-partner based rankings distort the priorities of lawyers. Great lawyers will sometimes end up being de-equitized or shown the door because they are not as profitable as other not-so-great lawyers involved in more profitable activities. Entire practice groups will be eliminated because they no longer belong to the strategic priorities of the firm (essentially making more money). Senior lawyers who would like to slow down their practice (and willing to accept less pay for less work) will lose their standing in the firm as they are no longer performing up to the standards of the market.

Fourth, surveys show there is a correlation between the performance of law firms in these rankings and their level of prestige for prospective applicants. The most profitable firms will often be the most prestigious even if the quality of the assignments given to lawyers is rather low (because the work is, for instance, repetitive or does not require much intellect). Money and prestige are two different things. Many outstanding lawyers will choose to become law professors or judges because of the prestige attached to these functions. Similarly, the prestige of law firms should be based on the quality of the lawyers, of the work performed, etc., not only on profitability.

Fifth, when the profitability of a given firm declines (for instance, from $1.000.000 to 900.000) this sometimes creates panic. Legal magazines write stories saying that something must be wrong in the firm. Managing partners become defensive, when they are not sacked, and promise that the following year will be better. Groups of partners leave to other firms where profits have not declined but increased even if this means betraying long-time friends, etc.

Finally, more profits-per-partner not only depends on revenues, but also on leverage (associates per partner). Firms with a high-level of leverage will typically do better than those with a low-level of leverage. High leverage could be objected on moral grounds as it means a high degree of human exploitation, but more fundamentally it should be a source of concern for clients as their work is more likely to be done by juniors than by seniors. The clients will often pay for the training of young associates.

At the end of the day, these rankings do not offer much in terms of valuable information to clients, young law graduates, etc. as they are based on one narrow factor. By contrast, they seem to be the perfect recipe for misery as many lawyers will feel insecure in their jobs, they will have to work longer hours, etc. Of course, some will argue that such rankings force firms to be efficient. This is inaccurate as your profitability depends on factors, such as location and type of work, which firms may not be in a position to influence. Moreover, we are in an industry where efficiency will not translate in lower prices, but increased profits. Yes, you have read well, the provision of legal services is not a competitive market. I will get back to this in a later posting.

Damien