When something becomes so important to you that it drives your behavior and commands your emotions, you are worshipping it.― J.D. Greear
Performance measurement and the use of related metrics is pivotal to managing the successful development of any business enterprise. However, for the metric to be of value it must provide insight into some aspect of relevant performance. Neither Profits Per Equity Partner (“PPEP”) nor Profits Per Partner (“PPP”) pass this fundamental test.
This is a four part series focusing on a variety of issues related to this measure. Fair warning: I believe the legal industry’s focus on PPEP/PPP is destructive. If you have a vested interest in perpetuating this preoccupation, you may want to log off now.
The outline for our conversation:
1.Where did we go so wrong – A Brief History of PPP
2.The downside of using the metric
3. The upside of PPP (Yes, there might be one)
4. Alternative and more valid measures of quality
The popularity this metric has gained is astounding, it has become the legal industry’s singular measuring stick for assessing individual firm progress, and comparing one firm with another. There could hardly be a worse measure, firms are destroyed as a result of becoming a slave to it .
The extent to which PPEP has invaded the psyche of law firm leaders is reflected in a couple of examples.
1. Mayer Brown. Following a year in which the firm’s revenue grew by 11% to $1.1 billion and PPEP exceeded $1 million, the firm became concerned enough by its PPEP ranking to fire or demote 45 partners. In an interview of Mayer Brown’s Doug Kramer (Director of Global Communications at the time) Kramer told Larry Bodine, “We badly want to keep our best talent and attract the best talent, and PPP is a key metric that the marketplace looks at. So when we’re 51st compared with other firms that we’re just as good as, we had to take decisive action.”
2. Weil Gotshal. Last year, as reported by Ashby Jones and Joe Polazzolo of the Wall Street Journal, the prestigious firm took extraordinary steps in what appears to be in part a dramatic reaction to an off-year in PPP. The firm finished 2012 with reported revenues of $1.23 billion and PPP of $2.23 million. The problem was that $2.23 was a decline from its previous year’s number. The firm decided to issue a wake up call, and trim the ranks. Last summer Weil announced the lay-off 170 attorneys and staff, at the same time reducing the compensation of numerous partners.
Thankfully, a handful of firms have distanced themselves from the destructive metric. In 2010 Orrick issued the following press release:
Orrick, Herrington & Sutcliffe announced today that it will no longer use or report, internally or publicly, the metric of Profit Per Equity Partner. The firm believes the fundamental changes taking place in both the business of law and in the relationship between law firms and its clients have made the metric no longer constructive or informative for the firm or the industry.
While I applaud Orrick’s decision, I do quibble with the impression that the metric was ever constructive or informative for the industry or the firm. It is a manipulated number that communicates almost nothing of real profitability, firm stability, or opportunity, while somewhere along the line it was endowed as representative of all of this.
In the next post we will look at How We Went So Wrong – A Brief History of PPP.
Between now and then let me hear from you. In your view has PPP served you or the profession well, and if so how?