This is Part 3 of 4 focusing on the downside (lunacy?) of the power we have seeded to a single metric — Profits Per Partner. Check here for Parts 1 and 2.
No businessperson will argue the value of metrics when it comes to monitoring development, progress and accountability. Effective measures provide insight as to an organization’s:
a) Pursuit of stated goals; or,
b) Movement towards a position of risk
The issue? PPP does neither of these things. Often the behaviors exhibited in the shadow of this metric can be destructive in many ways.
Leaders of law firms who encourage and perpetuate a chase for a relative position in the PPP race frequently engage in a variety of initiatives that may move the PPP dial, but at the same time, eat away at the fabric of the firm.
- Demotion of partners. This move which typically has no relationship with the quality of the effected lawyers, serves the perverse purpose of decreasing the denominator in the PPP calculation. Often, it also serves to humiliate and disenfranchise long term dedicated and productive members of the firm
- Stretching of the partnership track. Again, frequently the most talented young lawyers in a firm are asked to wait longer for a deserved promotion in the name of an arithmetic calculation. Are these young lawyer’s dedication to the firm enhanced by the delay?
- Creation of the multi-tier partnership. This may enable firms to include a portion of “partners” in the denominator and exclude others. (Are we seriously trying to fool those who do not share an equity position into believing they are partners?)
- Reduction in force . This move, which sometimes decreases a firm’s ability to effectively serve clients, enhances the numerator at the cost of displacing lives and creating the impresion of ruthlessness.
- Ever-escalating billing rates. These increases often decrease the cost effectiveness of service, and open a door of vulnerability to competitors
- Demanding extraordinary productivity levels from junior lawyers. These demands often result in an unhealthy environment and encourage padding of time to.
I like this quote from Chris Catapano, of BridgeSphere, in this article,
“An overemphasis on this year’s PPP sacrifices profitability in the future. It happens a lot. We try to borrow from the future in order to make today more profitable. Instead, economics dictate that we can’t “borrow” from the future. We can only steal. An over-emphasis on boosting PPP today steals from the health and stability of the law firm in the future.”
Manipulation of Results
Some firms have chosen to boost their relative score by manipulating the stated value of their profitability. Some of the steps taken include:
- Pushing expenses into the next year.
- Encouraging clients to prepay.
- Capitalize costs instead of expensing them. This is particularly popular for firms that are on a serious lateral hiring binge and have significant start-up expense associated with the effort — search firm fees, collection lag from start dates to collection, space expansion and the like.
- Selling receivables. Finley Kumble – just prior to failing in dramatic fashion — developed this unique approach to increasing income in a cash based entity.
You will note that all of the above “push” today’s profit challenges to tomorrow, creating more pressure on future reporting periods – not to mention creating a false impression of today’s position.
Some firms are really aggressive (or unprincipled), and just flat knowingly report false information to American Lawyer. You wouldn’t think this could happen in a profession grounded in the ethics of right and wrong. According to this Wall Street Journal article, Citibank estimated that as many as half of the AMLAW top 50 firms may have overstated their performance.
It is bad enough to chase a metric that provides little insight into real value; but to be chasing a comparative measure that has questionable accuracy seems even crazier.
In closing this post, here are two of my favorite quotes on the subject:
“It is my belief that PEP is not merely an inappropriate star by which to navigate, it is in fact a dangerous and undesirable metric for the legal profession to follow.” Guy Beringer former Head of Allen & Overy
“From an economic and financial perspective, PEP is a consummately manipulable figure, even more slithery than a public corporation’s quarterly earnings releases, but the hyping of which (as with quarterly earnings) can lead to a variety of antisocial behaviors with toxic unintended consequences.” Bruce MacEwen of Adam Smith Esq.
In the final post in this series – coming next week — we will suggest some alternative and constructive metrics for law firms to consider.
In the meantime, I would love to hear your thoughts on the subject.