Dentons, The American Lawyer row, and why PEP is not “meaningless”

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Dentons response to American Lawyer posting regarding PPP - .PDF file.

The Lawyer editor Catrin Griffiths explains why profitability is still a valid metric when examining law firm performance.

Dentons’ decision to stop disclosing its average PEP (profit per equity partner), expressed in a letter to The American Lawyer, has sparked a storm.

To summarise, Dentons global CEO Elliot Portnoy and global chair Joe Andrew first declared their intention not to disclose PEP (termed PPP in the US), arguing that to decline to give the figure is “in the best interests of our firm, our clients and the profession as a whole”.

That was followed by a defence of PEP by The American Lawyer, which in turn initiated another letter from Dentons. The American Lawyer reacted to that letter saying that PPP was by no means the only metric it measured: “Still, for a company like ours that covers the business of law and is committed to the transparency of such information, PPP is a pretty important indicator to track.”

The sceptics – of whom there are many – will immediately assume that Dentons’ disdain for PEP is based on simple embarrassment; firstly, that their partners out-earn some of their clients, and secondly that they under-perform in relation to their competitors. According to its UK LLP accounts, the average profit per LLP member was £175,000 in 2010/11, £262,000 in 2011/12 and £241,000 in 2012/13. The most recent figure would have put it 84th in The Lawyer UK200 PEP table between Freeth Cartwright and Ashfords.

On that basis, non-disclosure of PEP except in LLP filings may well be in the firm’s best interest in terms of its brand, since it could distract attention from its forward movement elsewhere. Dentons’ various mergers with Salans and Canadian firm Fraser Milner Casgrain (FMC) shows the momentum of the last few years. In broad terms, its international growth will allow it to operate in that segment of the global projects and energy market that is also occupied by Baker & McKenzie, DLA Piper and Norton Rose Fulbright. It has certainly become one of the dominant western practices in the Africa market.

When it comes to best interest of the clients, Dentons is on much shakier ground. The fact that lawyers might out-earn their clients is not an argument for a cover-up. Very few clients kick up a fuss about lawyers’ fees based on PEP rankings; they grumble about fees in relation to the service offered and the budget available to pay them.

Furthermore, there’s a sleight of hand in the penultimate paragraph of Dentons’ second letter: the firm says it has had a positive response from clients on the matter as “it is clear that service, not rankings by profitability is where they want our focus to remain”. But the two are not opposed. Tables such as The AmLaw200 or The Lawyer UK200 measure how firms run their business; what they bill for their services, whether total billings have grown, and how they convert that into profit. They don’t purport to measure client service.  

Dentons’ third point, that financial transparency is not in the best interest of the profession as a whole, is highly questionable. The rising number of law firm failures and their human impact demonstrates that more transparency on law firm financials – and open questioning of law firm performance both internally and externally – the better, before crisis point is reached. Dentons’ move is perhaps born of the firm’s exasperation at the US legal market, where PEP has become a sign of virility. In the US there is no statutory duty to report figures. As a result, it’s an open secret that some firms rig the calculations in order to keep the PEP figure high, despite the best efforts by the US legal media to publish accurate data.  

Thankfully, the argument doesn’t obtain in a UK context. Here, 175 out of the top 200 UK law firms are active LLPs, so arguments around the principles of disclosure are irrelevant.  (Furthermore, the emergence of new corporate structures such as those employed Parabis and Slater & Gordon do not conform to traditional partnership models.) Most firms in the UK see PEP as a crude shorthand to express the performance of the previous year, and matter-of-factly release it with the first cut of their financials. We report those figures in news stories before embarking on a more fine-grained analysis in The Lawyer UK200.

It becomes a little tiresome to have to re-run this every time the PEP debate periodically surfaces, but far as The Lawyer is concerned PEP is certainly not the only metric we care about. We look at EPP (earnings per all partners), equity spread from top to bottom, revenue per lawyer, debt levels, property and staff costs, size of equity partnership and lock-up, to take just a few examples.

For us, PEP is best read in the context of several years and against a comparator group of firms. Any firm can have a poor year; it’s whether it has a coherent vision and execution strategy over a defined period rather than a one-off dip. However, you can’t run a well-functioning business without attending to profit, and PEP tables (in conjunction with other metrics) culturally instil margin discipline. PEP is also helpful in signalling a longer-term decline and allowing a partnership to take action. Furthermore, PEP taken with the revenue per lawyer (RPL) figure, is one way of segmenting firms that are undertaking high-value work and efficient in resourcing it.

Dentons’s second letter on the topic was distributed to legal media outlets last night (12 June 2014). Intemperate in tone (“let’s hope that The American Lawyer’s researchers understand math and logic better than their editors”), it contained a furious reaction to The American Lawyer’s comment that it was going to “suspend any question of an ulterior motive here—that Dentons didn’t report its latest global PPP figure because, by our estimates, that number would have shown an overall PPP decline year over year of 20 percent, the worst showing in the Am Law 100.”

The firm retorted: “If you take the legacy firms that make up Dentons and how have either been forced to report their PPP for statutory reasons or who reported data for fiscal years that ended before we made the decision not to report, they are both up year over year.” The Lawyer does not have figures for the US business over the last few years, but as detailed above, Dentons UK LLP does not reveal a consistently rising level of profit per member over a three-year period.

Dentons argues that The American Lawyer’s methodology is “absurd”, since it did not exist in its current form in 2012. (The American Lawyer has subsequently responded that its 2013 number for Dentons took the legacy firms of Salans, FMC and SNR Denton into account.)

While it’s entirely valid to point out that Dentons is an organisation undergoing structural change and whose figures require close reading, its argument is not that comparisons are complex. Its argument is that year-on-year comparisons are “impossible”.

How, then, might a firm benchmark the success of any merger?

We are living in a knottier world of cross-border partnerships and Vereins where quick comparisons are not easily fashioned. It’s certainly furnishes an argument for nuance, but it should not rule out transparency. So the questions for Dentons are these: what business metrics does the firm value? And how does it measure its own strategic outcomes and investment?

The numbers

Dentons’ LLP figures
Dentons UKMEA LLP (formerly SNR Denton UK LLP)   
Year Turnover (£m) Net profit (£m) Margin (%) LLP members Profit per LLP member (£k) Entitlement of highest-paid member (£k)
2012/13 142.83 27.73 19.4 115 241 564
2011/12 144.75 30.97 21.4 118 262 683
2010/11 151.34 22 14.5 126 175 755
             
Salans FMC SNR Denton Europe LLP (formerly Salans LLP)
Year Turnover (€m) Net profit (€m) Margin (%) LLP members Profit per LLP member (€k) Entitlement of highest-paid member (€k)
2012 220.35 59.64 27 182 328 1,436
2011 216.43 62.54 28.9 189 331 1,362
2010 208.02 51.39 24.7 174 295 1,210
             
* 2013 accounts not yet filed        
             
Salans FMC SNR Denton Europe LLP (formerly Salans LLP) – CONVERTED INTO £ USING AVERAGE EXCHANGE RATES
Year Turnover (£m) Net profit (£m) Margin (%) LLP members Profit per LLP member (£k) Entitlement of highest-paid member (£k)
2012 178.75 48.38 27 182 266 1,165
2011 187.82 54.27 28.9 189 287 1,182
2010 178.54 44.11 24.7 174 254 1,039
SNR Denton pre-merger
SNR Denton (as reported to The Lawyer; consolidated global accounts)
Year Turnover ($m) PEP ($k) Partners Equity partners
2012 710.5 784 289 198
2011 719.4 700 NA NA
         
SNR Denton (as reported to The Lawyer; consolidated global accounts – CONVERTED INTO £ USING AVERAGE EXCHANGE RATES)
Year Turnover (£m) PEP (£k) Partners Equity partners
2012 448.3 495 289 198
2011 448.57 436 NA NA
         
Source: The Lawyer