Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at what it means when law firms meaningfully grow or shrink their roster of equity partners. Sign up to receive this column in your Inbox on Thursday mornings.
The path to equity partnership—Big Law’s most lucrative position—has become a harrowing route, and things only got bleaker last year.
Ninety-eight of the largest firms had 21,075 partners last year, the most recent AmLaw data show. That is 44 fewer than the 21,119 those firms had in 2021. The data excludes two of the 100 largest firms that grew partnership ranks through significant mergers.
The shrinkage is a continuation of a long-term trend. Firms have been pulling up the ladder, limiting the number of lawyers who receive the bulk of their compensation through owning shares in the operation.
By shrinking their most lucrative positions, many firms are making themselves look more profitable. This is because of the industry’s use of a popular—and controversial—metric, profits per equity partner.
In this metric, firms take their total profit number and divide it by the number of partners. The resulting figure shows profits per equity partner, or PPP. It is a popular metric for success because it shows which firm’s partners cash in the biggest checks at the end of the year.
But equity partner headcount might be a better metric for measuring success—particularly in Big Law’s free agent era.
Now, analytics pros might scoff at the suggestion that a so-called “counting stat” could be considered vital.
But here’s why there is beauty in its simplicity:
It is increasingly rare to see firms meaningfully grow their equity partnership. It signals that law firm management is confident about its future. It implies success in the lateral partner market. It can be a boost to associate and non-equity partner morale. It is usually an indicator that a firm is experiencing healthy revenue growth.
And, it is obvious when the figure has been “gamed,” which itself says a lot about a firm.
A steady increase in the size of an equity partnership, simply put, is a reliable measure of a healthy firm.
Firms that are bucking the trend and growing their partnership ranks are likely doing so purposefully. They’re investing in their future—either by internal promotions or through lateral partner hiring.
Last year, 19 firms grew their equity partner tier by 5% or more, according to the latest AmLaw data. (That excludes Taft Stettinius & Hollister and ArentFox Schiff, which grew via mergers.)
These 19 firms grew revenue on average by 4.3%—a healthy clip, considering the 100 largest firms collectively managed 2.7% revenue growth.
Growing the equity tier did affect that pesky, controversial profits per equity partner metric. The 19 “Biggest Growers” saw their PPP dip 8.1%, compared to a 3.7% fall for the AmLaw 100. The 19 also saw a larger decline in revenue per lawyer: down 3.1%.
On the flip side, there were 16 firms that shrunk their equity partner tier by 5% or more. Their revenue growth, 1.1% on average, trailed the broader group. So did their headcount growth of 1.2%. That helped their “per lawyer” stats outperform. Revenue per lawyer was flat and PPP grew by 2.2% on average.
As was the case last year, when I performed a similar analysis, a major difference between the Biggest Growers and Biggest Shrinkers was their relative ranking by PPP.
The Biggest Growers have significantly higher PPP to begin with—giving them more leeway to add equity partners.
The Biggest Growers ranked on average No. 43 when ranked by PPP in 2021. The Biggest Shrinkers ranked No. 55 on average.
Law firm financials leave a lot of room for interpretation. But it’s fairly safe to assume that a law firm willing to report significant equity partner growth is doing it because they’ve got a good story to tell. That’s why it is one of the most important metrics worth tracking.
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That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.
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