The mirage of law firm profits

Cite this Article
Larry Ribstein, The mirage of law firm profits, Truth on the Market (August 21, 2011),

The WSJ reports that “[m]ore than half of the country’s top 50 law firms may have overstated a key measure of profitability” — profits per partner – – that AmLaw uses to rank law firms. This is according to an analysis by Citi Private Bank Law Firm Group, the leading lender to law firms.

Citi says 22% of the top 50 overstated 2010 PPP by more than 20%, another 16% by 10% – 20%, and another 15% by 5% to 10%.  Recall that AmLaw reported that PPP of the AmLaw 100 rose 8.4% in 2010, supposedly indicating that law firms were pulling out of their financial bust tailspin,

Of course the unreliability of PPP, which depends on who is a partner and what are profits, and which isn’t reported publicly other than by AmLaw, is not exactly news.  As AmLaw editor’s tells the WSJ, revenue per lawyer “is actually a better metric for gauging firm health.”

As the WSJ notes, profits per partner is “often used by lawyers and law-school students to judge the success of a firm.” So after law students are misled about their chances of being employed by a large firm, the firms mislead them about their profitability.

Hey, it’s the good thing the legal profession is regulated.

Now maybe one can see why lawyers hate the idea of publicly traded law firms.  Imagine if law firms faced the scrutiny of public securities markets.  I don’t actually think that law firms are deliberately lying.  The problem is that they persist in using an easily manipulable number instead of a more reliable metric.

But since I think big law has already died I see this as rearranging the deck chairs on the Titanic after it has sunk.