We love to re-spond to popular demand. Every year, when we put together The Lawyer UK 100 Annual Report – a piece of research that has become the definitive benchmark of fees and profits in the legal profession – we get the same refrain. How can you compare firms which have completely different equity structures?
Partners from firms with all, or mostly all, equity partners complain that they are not being judged fairly. These firms are constantly frustrated at what they see as manipulation of the figures. Partly, this is based on a philosophical objection. If non-equity partners have ‘partner’ on their business cards, then why judge a firm’s success on the earnings of only a small segment of them?
Within a City culture of league tables, there is always a temptation for some firms to manage their businesses in a way that will produce headline profit per equity partner (PEP) numbers. Look at the number of de-equitisation programmes firms have been carrying out. In most cases this means turfing out unproductive partners entirely, but it’s fuelled by hiking average PEP to competitive levels.
PEP figures have come to dominate the way law firms are analysed, though there are serious flaws in taking such a simplistic approach. But how do you solve it?
Well, we’ve done it. After consulting with many managing partners and finance directors, we’ve hit upon the first-ever workable method of comparison. This has never been attempted before, but we’ve calculated a figure for the top 30 firms in the UK that indicates average earnings for all partners, not just equity partners.
The difference is astonishing (turn to page 14 for the feature). At a stroke, some firms with high PEP figures plummet down the table. Profit margins are exploded.
But a warning: the all-partner earnings figure should not be seen as a substitute for PEP. In our view, PEP remains a key indicator. Equity partners own the business and put in the capital to fund it. They are the ones taking the risk, so PEP is still a vital measurement. And we take no value judgements about two-tier partnerships. A centralised management culture such as that at DLA Piper simply does not suit a sprawling, all-equity partnership model, for example.
However, the all-partner compensation figure will, we think, become another key indicator and should be read in conjunction with any discussion of profitability.
You’ll never look at partner profits in the same way again.