The mirage of law firm profits

Larry Ribstein —  21 August 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.

Larry Ribstein

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Professor of Law, University of Illinois College of Law

2 responses to The mirage of law firm profits

  1. 

    *sigh*

    is it possible for any legal institution anywhere be honest when rankings are involved?

  2. 

    A young father reluctantly very concludes that it is time for him to sit down with his pre-teen son and discuss with him the basics of human reproduction. “Dad,” says the young man, “I don’t want to hear about it.” “But you must”, said the father. “No I won’t” said the youngster. “You know, Dad, “continued the youngster, “first I found out that there was no tooth fairy. Second, I found out there was no Easter bunny. Then, I found out there was no Santa Claus. If you’re going to tell me that grown-ups don’t have sex, there is no point in continuing.”

    The common lack of reliability of publicly reported law firm profitability is of the same genus. The whole process ought to simply be cast in to the trash heap, as I have I often said before. See, for example http://kowalskiandassociatesblog.com/2010/05/19/should-law-firms-continue-to-report-publicly-on-profits-per-partner/