An unhealthy obsession with PEP can ultimately kill a firm

Law firms dreaming of a return to the days of year-on-year profitability growth once the gloom of the recession has lifted should consider Usain Bolt, the men’s 100m world record holder.

Mark Brandon
Mark Brandon

While a range of physical variables govern how fast a man can run – mass, muscle power, aerodynamic profile – some scientists believe Bolt is as close to optimum as we will get. His record may never be broken.

Make him bigger and you would get extra power, but he would be heavier and less aerodynamic. Improvements to his gear can only go so far, and even on the perfect track with the maximum allowable wind assistance you could only get so much extra out of him, regardless of his determination.

As if to hammer the point home, it is worth noting that the women’s 100m world record has not been broken for 22 years.

And so to the top law firms. Last week’s publication of The Lawyer UK 200 Annual Report 2010, which focused on the cost-cutting undertaken by firms largely in an attempt to maintain profitability, ­highlights the fact that their ambition also has limits, whether they realise it or not.

Management looking to boost profitability has a range of options comprising many variables: increase billable hours or chargeout rates, or improve utilisation or leverage to boost income on the one hand; cut staff numbers, move to cheaper premises, outsource support functions or improve procurement on the other.

Prior to the recession the top firms maxed out every variable. Assistants and partners worked harder, while targets and chargeout rates were hiked. Income and profitability rose as a result.

Then the downturn hit. Revenue caved and many firms panicked, cutting fee-earners and cranking up ­utilisation for the remainder while ­implementing pay freezes, all to prop up profit per equity partner (PEP).

This is rather like putting an athlete with a cold on performance-enhancing drugs. You get maximum power out of a compromised machine, but you risk causing systemic damage in the process.

As with athletes, there are limitations to improvement in firms: lawyers can only work so many hours; fees are not infinitely scaleable; recruitment of the lawyers needed for growth cannot always be achieved. Tinker with one variable and it has an effect on others.

And again as with athletes, the more powerful the organism and the greater its output, the greater the risk that an injury will be catastrophic. If a firm or ­department is running at peak efficiency there are few places to turn if things go wrong.

In a post-recession climate of radical change to legal services, where client attitudes have reportedly changed forever and process advances are threatening ­traditional ’bespoke’ legal services, firms that continue to try to maximise a single variable without considering the impact on all the other variables run the risk of catastrophic failure.

The greatest risk is implosion: morale reaches a floor and a number of key lawyers leave at the same time, putting pressure on the remainder and risking a cascade effect, leading to a meltdown in a team or practice area.

If a large firm running at supposedly peak efficiency suffered multiple critical implosions, it could disintegrate in weeks, as each failure makes it more likely there will be another.
Ultimately, the firms that are best able to balance all the variables, understand their markets, resource their needs in an innovative manner and promote a positive view of themselves will survive.