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June 28, 2007

MONSTERS OF THE MIDWAY

First, it was the University of Chicago football team.  Then it was the Chicago Bears.  Now it’s Kirkland & Ellis.  All Monsters of the Midway.

As we continue our LawBall trip through - with all deference and due respect to my life-style guru Jimmy Buffett - Legalritaville, our focus now turns to the East North Central division of the U.S.  The division includes the states of Indiana, Illinois, Ohio, Michigan, and Wisconsin and consists of 35 firms from the 2007 AmLaw 200 (2006 operating information) – 18 based in Chicago, 2 in Cincinnati, 4 in Cleveland, 2 in Columbus, 3 in Detroit, 3 in Indianapolis, and 3 in Milwaukee.  None of the East North Central division’s firms played LawBall any better than Kirkland & Ellis – and when the focus is put on the key financial operating performance metrics of margin, asset turnover (revenue per lawyer), return on assets (ROA or profit per lawyer), financial leverage, and return on equity (ROE or profit per partner), Kirkland & Ellis’ performance was so dominating within the division that it looked to be playing in another league.

The firms in the 5 states of the East North Central division are:

  • Indiana (3):  Baker & Daniels; Barnes & Thornburg; and, Ice Miller.
  • Illinois (18):  Baker & McKenzie; Bell, Boyd & Lloyd; Chapman and Cutler; Gardner Carton & Douglas; Hinshaw & Culbertson; Jenner & Block; Katten Muchin Rosenman; Kirkland & Ellis; Lord, Bisselll & Brook; Mayer, Brown, Rowe & Maw; McDermott Will & Emery; Schiff Hardin; Seyfarth Shaw; Sidley Austin; Sonnenschein Nath & Rosenthal; Vedder, Price, Kaufman & Kammholz; Wildman, Harrold, Allen & Dixon; and, Winston & Strawn.
  • Ohio (8):  Baker & Hostetler; Dinsmore & Shohl; Frost Brown Todd; Jones Day; Porter Wright Morris & Arthur; Squire, Sanders & Dempsey; Thompson Hine; and, Vorys, Sater, Seymour and Pease.
  • Michigan (3):  Dykema Gossett; Honigman Miller Schwartz and Cohn; and, Miller, Canfield, Paddock and Stone.
  • Wisconsin (3):  Foley & Lardner; Michael Best & Friedrich; and Quarles & Brady.

In a change in format from the prior postings that looked at the West South Central (The Eyes of Texas and The Eyes of Texas [Corrected Attachment]) and New England (New England’s Other Green Monster) divisions, because of the number of firms in the East North Central division and the resulting size of the analytic tables, I’ve placed my observations before the tables, and I’ve placed the tables at the end of this posting - a table that contains the 2006 financial operating performance metrics for each of the firms in the East North Central division, as well as a table that shows the firms’ relative ranking (1 – 35) within each performance metric.  By clicking on the tables you can open a larger version.  I’ve also attached the tables as a *.pdf document in the right-hand margin under the category “Posting Attachments” as “Legal Industry East North Central Division Metrics 2006.”

Several observations:

  • Kirkland & Ellis was the clear financial operating performance leader in the East North Central division in 2006.  It ranked 8th in margin and 1st in each of the other key financial operating performance metric categories:  asset turnover, ROA, financial leverage, and ROE.  Kirkland & Ellis played great “offense” (asset turnover) and good “defense” (it’s margin); and, the combination of those 2 metrics yielded the 1st place ranking in ROA.  Combine that with great “special teams” play - a 1st place ranking in leverage – and you have a 1st place ranking in ROE that was 1.61 times as much as the 2nd place ROE finisher.
  • When summing up the firms’ rankings in each of the key metric categories, Kirkland & Ellis’ performance was reminiscent of Secretariat’s 31-length victory at the 1973 Belmont Stakes – there was no one else in the picture as the leader thundered down the backstretch.  Kirkland & Ellis scored a 12.  Finishing out the top 5 were 4 other Chicago firms - McDermott Will & Emery with a 27; Sidley & Austin with a 41; Winston & Strawn with a 45; and, Mayer, Brown, Rowe & Maw with a 46.  (Those totals are not included in the tables for space reasons but are included for all of the firms in the *.pdf attachment).
  • Each of the 5 firms that finished 1 – 5 in the summed total of the key metric categories also achieved an ROE greater than did the aggregate AmLaw 200, and their rankings in the ROE metric category mirrored their ranking in the summed total.  A 6th Chicago-based firm, Katten Muchin Rosenman, also achieved a ROE greater than the aggregate AmLaw 200’s.
  • When summing up the firms’ rankings in all of the metric categories, Kirkland & Ellis again ranked 1st, with a score of 53.  Finishing out the top 5 again were 4 other Chicago firms - McDermott Will & Emery with a 65; Sidley & Austin with an 81; Baker & McKenzie with an 85; and, Mayer, Brown, Rowe & Maw with an 88. (Again those scores are included only in the *.pdf attachment).
  • As clearly as Kirkland & Ellis’ performance ranked it 1st as the financial operating performance leader in the East North Central in 2006, McDermott Will & Emery’s performance ranked it 2nd.  It actually ranked 5th in margin, ahead of Kirkland & Ellis’ 8th; and, it ranked 2nd to Kirkland & Ellis’ 1st in asset turnover, ROA, and ROE.  But McDermott Will & Emery lost a great deal of ground in the rankings to Kirkland & Ellis when it ranked 16th in leverage to Kirkland & Ellis’ 1st.
  • Eight (8) of East North Central’s 35 firms achieved an ROA that exceeded the ROA achieved by the aggregate AmLaw 200.  Those firms were the top 5 ranked firms in the summed total of the key metric categories – Kirkland & Ellis; McDermott Will & Emery; Sidley & Austin; Winston & Strawn; and Mayer, Brown, Rowe & Maw – and Vedder, Price, Kaufman & Kammholz; Jenner & Block; and, Honigman Miller Schwartz and Cohn.
  • Thirteen (13) of the East North Central division’s 35 firms achieved a financial leverage higher than the aggregate AmLaw 200 leverage, led by Kirkland & Ellis’ 5.2075 leverage.  Frankly, I was surprised that Kirkland & Ellis managed to achieve both a relatively high margin (8th out of 35) and a 1st place ranking in leverage.  Combine those rankings with a 1st place ranking in asset turnover, and you get a very powerful relative performance within the division.  Three (3) of the remaining 4 firms that were ranked in the top 5 key metric categories summed total were among those that exceeded the aggregate AmLaw 200 leverage; McDermott Will & Emery was the lone top 5-ranked firm that did not.
  • Mayer Brown, which made news earlier this year with its decision to de-equitize 45 partners, ranked 19th in margin and 12th in leverage, indicating perhaps the performance issues it seeks to address are more margin than leverage related when compared to its division peers.  Jenner & Block, which recently made news with its decision to de-equitize between 15 and 20 of its partners, ranked 31st in leverage, indicating perhaps leverage indeed is its performance issue when compared to its division peers.  But, as I’ve said before, we don’t know anything about either firm’s business model or base of business requirements – is it a more complex problem-solving business where more “specialized generalists” are required who can solve problems across multi-discipline lines in ever-changing circumstances or is it a more standardized/specialized one where specialists can easily recognize patterns and apply familiar tools so that they do not need to “reinvent the wheel.”  The former should result generally in a lower leverage structure than the latter since complex problem-solving requires greater experience and often is less efficient to execute, but also should result generally in higher asset turnover and higher margins; while the latter involves pattern recognition that increases efficiency and should result generally in higher leverage, lower margins, and lower asset turnover.

The *.pdf attachment also has easy to view individual tables that reflect the firms’ individual rankings in margin, asset turnover, ROA, financial leverage, and ROE versus both the East North Central division in the aggregate and the AmLaw 200 in the aggregate.

The Tables:

June 25, 2007

NEW ENGLAND’S OTHER GREEN MONSTER

If the truth be known, I’ve been a card-carrying member of the Red Sox Nation since I first started playing Little League baseball in Plainville, Massachusetts in the mid-1950s.  My Dad took me to Fenway for the first time in 1958, where (if memory serves me correctly) I saw Bill Monbouquette pitch his first game in the Majors and Frank Malzone hit a grand slam into the net above the Green Monster as the Sox beat Al Kaline and the Tigers.   And, when it comes to looking at how LawBall is played in the New England division of “Lawville,” there indeed is another “Green Monster” in Boston - 10 out of the division’s 11 firms are Boston-based; and, the top financial operating performances in the division in 2006 were turned in by Boston- based firms. 

The Boston-based firms are:  Bingham McCutchen; Ropes & Gray; Goodwin Procter; Edwards Angell Palmer & Dodge; Fish & Richardson; Mintz, Levin, Cohn, Ferris, Glovsky and Popeo; Foley Hoag; Choate, Hall & Stewart; Brown Rudnick Berlack Israels; and Goulston & Storrs.  The only non-Boston-based firm in the New England division is Day, Berry & Howard, which is based in Hartford, Connecticut.  Below is a table that contains the 2006 financial operating performance metrics for each of the firms in the New England division, as well as a table that shows the firms’ relative ranking (1 – 11) within each performance metric.  By clicking on the tables you can open a larger version.  I’ve also attached the tables as a *.pdf document in the right-hand margin under the category “Posting Attachments” as “Legal Industry New England Division Metrics 2006.”

Several observations:

  • Goodwin Procter and Ropes & Gray were the clear financial operating performance leaders in the New England division in 2006.  Goodwin Procter ranked 1st in return on equity (ROE or profit per partner), it’s only 1st place ranking in any individual performance metric.  But, it also ranked 2nd in margin (it played good “defense”), which when combined with its 4th place ranking in asset turnover (revenue per lawyer – it played “offense” nearly as well) resulted in a 2nd place ranking in return on assets (ROA or profit per lawyer); and, its lowest ranking was 6th in costs per lawyer.  Ropes & Gray ranked 3rd in ROE, but had 1st place rankings in profit, asset turnover, and ROA.  However, it ranked 8th in costs per lawyer and 9th in leverage (while Goodwin Procter played better “special teams” with its leverage ranking 4th).  When summing up the firms’ rankings in all of the metric categories, Goodwin Procter used its consistent relative ranking in all categories to rank 1st with a score of 24, while Ropes & Gray ranked 2nd with a score of 29 (those totals are not included in the above table for space reasons but are included for all of the firms in the *.pdf attachment).  Bingham McCutchen ranked 3rd with a score of 40.  When looking at the firms’ rankings only in the key metric categories of margin, asset turnover, ROA, leverage, and ROE, Goodwin Procter again ranked 1st with a score of 13, while Ropes & Gray was 2nd with a score of 18.   Choate, Hall & Stewart parlayed its advantages in margin and ROA to ease past Bingham McCutchen into a 3rd place ranking with a score of 21 to Bingham’s 25 (again those scores are included only in the *.pdf attachment).
  • Those 4 firms (Goodwin Procter; Ropes & Gray; Bingham McCutchen; and, Choate, Hall & Stewart) each had a ROE that exceeded both $1 million and the ROE of the aggregate AmLaw 200.
  • Three (3) of those 4 firms, plus Goulston & Storrs, achieved an ROA that exceeded the ROA achieved by the aggregate AmLaw 200.  Bingham McCutchen's 11th place ranking (last) in margin hurt it, and the firm finished 8th in ROA.
  • Five (5) of the New England division’s 11 firms achieved a financial leverage higher than the aggregate AmLaw 200 leverage; and, leader Bingham McCutchen’s 5.9783 leverage, when multiplied times its ROA of $204,242 (8th place ranking), catapulted it to a ROE of $1,221,014 – good for a 2nd place ranking in ROE.

The *.pdf attachment also has easy to view individual tables that reflect the firms’ individual rankings in margin, asset turnover, ROA, financial leverage, and ROE versus both the New England division in the aggregate and the AmLaw 200 in the aggregate.

THE EYES OF TEXAS (CORRECTED ATTACHMENT)

Dunce In preparing the posting to be published later today, I discovered a glitch in the “Posting Attachment” entitled “Legal Industry West South Central Division Metrics 2006” in the “simple and rudimentary but still effective” relative comparison of financial operating performances derived from calculating the sum of the firms’ individual rankings in all of the metric categories.  The calculation simply was not picking up the ranking for either Gross Revenues or Profits – my bad.  I’ve now replaced it with a corrected attachment entitled “Legal Industry West South Central Division Metrics 2006 (Corrected).”  With the corrections, V&E’s rankings in all metric categories added up to 25, which rated it 1st, and Baker Botts’ individual rankings added up to 26, which rated it 2nd.  The next closest firm was Fulbright & Jaworski, whose score was 38.  Thompson & Knight, which previously had been 3rd, now is ranked 4th after the corrections with a score of 46.  None of the rankings that resulted from the sum of only the key metric categories of margin, asset turnover, ROA, leverage, and ROE were affected.  Please accept my apology for the goof!

June 21, 2007

THOSE COTTON PICKIN’ BUSINESS MODELS AGAIN

In several prior postings, most notably What’s This Garbage About Business Models?, Toward a Brave New Business Model, O Strategy, Where Art Thou?, and One if by Land and Two if by Sea, I’ve written about the competitive pressures bearing on U.S. law firms to cast aside their business models and to develop new ones – in the words of Gary Hamel (whom I’ve quoted a number of times before) to “reconceive existing business models in ways that create new value for customers, rude surprises for competitors, and new wealth for investors.”  From time to time I’ve also quoted from Cisco General Counsel Mark Chandler’s remarks made at the Northwestern School of Law’s 34th Annual Securities Regulation Institute (a link is in the margin under the heading “Articles of Interest”), including his comment that the law firm business model “looks like the last vestige of the medieval guild system to survive into the 21st century.”  Although a number of you may be tired of this clarion call to fix those cotton pickin’ business models again, another voice from the client side of the ledger has been heard from, and I believe his comments are worth repeating here as well.

In “Sun Shines on Select Law Firms” published today at Law.com’s In-House Counsel, Sun Microsystems Inc. General Counsel Michael Dillon has a number of interesting quotes:

The traditional law firm billable-hours model is "disjointed" from business reality, he said. Pressure to bill more hours works at cross-purposes with corporate departments that are "maniacally" trying to cut costs, he said. The race to meet New York associate salary standards "just exacerbates the problem," he said.

"I don't care how bright the associate is, they're not worth what they're paying them, and if I have to absorb that cost, it's not optimal," he said. "I'd rather pay a very seasoned attorney who has more experience."

Where attorneys at large firms used to get work based on their firm's reputation, Dillon said it's easy these days to search the Internet or query colleagues about the experience, manner and background of any attorney.

According to the In-House Counsel article, Sun worked with about 400 different outside law firms 5 years ago.  Sun now has designated 9 firms to handle all its routine work, such as intellectual property advice, sales contracts, licensing and transactions. The article notes that the firms on the list include:

  • San Francisco firms Sedgwick, Detert, Moran & Arnold; Fenwick & West; and Hanson, Bridgett, Marcus, Vlahos & Rudy.
  • National firms Kirkland & Ellis and DLA Piper.
  • Memphis-based Baker, Donelson, Bearman, Caldwell & Berkowitz.
  • Washington, D.C.-based Crowell & Moring and Hogan & Hartson.
  • Denver-based Holme Roberts & Owen.

The article notes as well the company still employs several more firms than those on its "preferred partners" list for specialty work, such as patent prosecution.  Also according to the article, firms not on the list that have represented Sun in major litigation or transactions in the last year included Day Casebeer Madrid & Batchelder; Skadden, Arps, Slate, Meagher & Flom; and Wilson Sonsini Goodrich & Rosati.

Although cost-cutting and organizational motivations played a part in this “paring-down process,” the article notes they apparently weren’t determinative.

Sun's process of selecting its firms was essentially a beauty contest. To prune its patent prosecution firms, for example, the company sent out bid packages outlining its financial and legal needs, and then invited some firms to an online reverse auction where they could anonymously underbid one another to win Sun work. For its "preferred partners" list, the company used bid proposals and interviews.

Cost was not the chief criterion, however, Dillon said. "We don't necessarily take the firms that are the lower price," he said. "[Higher bidders] may have more technical experience that you need."

Yet a willingness to propose creative fee arrangements, such as flat fees, was rewarded, he said. 

"We had some firms who didn't even want to have those discussions" about bids and alternative fees, he said. "I think it's a good litmus test. If they won't, then they're probably the type of firm that we don't need to do business with."

Hmmm.  Some of Dillon’s comments sound eerily similar to Chandler’s, including one where Chandler noted, “From the law firm think perspective, ‘sales’ too often means a one to one relationship with a lawyer who bills by the hour. As a client, I can tell you what I want to buy is access to information, strategy, and negotiation, and, in the case of litigation, to courtroom skill as well.”

I repeat an admonition I’ve made before: The moat around the legal industry castle that long has existed and has protected it from outside influence and intervention – limited or no access to legal information without the payment of a substantial toll in the form of legal fees billed by the hour - now has a drawbridge across it.  Technology already has improved document production and retention in the legal industry.  It also has made the process of doing legal research faster.  More importantly, technology now enables many to access “the law” who couldn’t before - and they can do so without lawyers. With its ability to change the paradigm surrounding access to and distribution of all types of information, not just legal information, technology likely will fill up the moat with concrete and be an enabler that facilitates “upsetting the apple cart” with respect to legal industry business models.  The legal industry needs to reposition itself within the information value chain in ways that will enable it to compete successfully for the future by being a more valuable player in and contributor to the economic value that can be created by the strategic integration of knowledge.

I closed one of my earlier postings about business models with a quote from William Jennings Bryan who once said, “Destiny is no matter of chance. It is a matter of choice. It is not a thing to be waited for, it is a thing to be achieved.”  Those firms that begin competing for the future today begin the journey toward achieving success tomorrow.  For those firms that wait, no one knows for sure when the time bomb that is their decaying business model in this discontinuous world will explode.

June 19, 2007

THE EYES OF TEXAS

The eyes of Texas are upon you,
All the live long day.
The eyes of Texas are upon you,
You cannot get away.
Do not think you can escape them,
At night, or early in the morn'.
The eyes of Texas are upon you,
'Till Gabriel blows his horn!

As we pick up with a LawBall-type look at the metrics from, as I introduced in Different Strokes for Different Folks, a geographic perspective for the firms in The American Lawyer’s 2007 AmLaw Survey (2006 operating information) that’s certainly the case in the West South Central division as 12 out of the 13 law firms in this division are Texas-based:  Fulbright & Jaworski; Vinson & Elkins; Baker Botts; Andrews Kurth; Haynes and Boone; Locke Liddell & Sapp; Thompson & Knight; Bracewell & Giuliani; Jenkens & Gilchrist (which ceased its legal practice on March 31, 2007); Gardere Wynne Sewell; Winstead; and, Jackson Walker.  The sole non-Texas based holdout is Adams and Reese - based in New Orleans, Louisiana.

Below is a table that contains the 2006 financial operating performance metrics for each of the firms in the West South Central division, as well as a table that shows the firms’ ranking (1 – 13) within each metric category.  The tables may be difficult to read within the blog, so by clicking on the tables you should be able to open a larger version; and, I’ve attached a copy as a *.pdf document in the right-hand margin under the category “Posting Attachments” as “Legal Industry West South Central Division Metrics 2006.”

Several observations:

  • From a financial operating perspective, Vinson & Elkins and Baker Botts were head and shoulders above the other firms in the West South Central in 2006.  Both firms played LawBall extremely well.  Both were ranked either 1st or 2nd in the key “offensive” metric of asset turnover (revenue per lawyer) and the key “defensive” metric of margin.  When their asset turnover and margin metrics are multiplied together to yield the firms’ return on assets (ROA or profit per lawyer) - a good measure of the efficiency with which a business allocates its resources as it eliminates the effects of financial leverage on operating results – the two firms again were ranked 1st and 2nd.  And, with good “special teams” play with V&E ranking 5th in leverage and Baker Botts 3rd, the two firms ranked 1st and 2nd in return on equity (ROE or profit per partner) as well.   Two other ways, both admittedly simple and rudimentary but still effective, to gauge the firms’ relative financial operating performances are:
    • To sum up the firms’ rankings in all of the metric categories.  In this instance, Baker Botts’ rankings in all metric categories added up to 20, which rated 1st, and V&E’s added up to 21, which rated 2nd.  The next closest firm was Thompson & Knight, whose score was 33.
    • To sum up the firms’ rankings only in the key metric categories of margin, asset turnover, ROA, leverage, and ROE.  In this instance, both V&E and Baker Botts’ aggregate rankings added up to 10 and a co-1st place rating.  The next closest firm was Locke Liddell with 27.  (In an effort to conserve space, these latter two rating measurements are not included here but are included for all of the firms in the *.pdf attachment.)
  • Not surprisingly since the West South Central division had the highest margin of all the divisions within the AmLaw 200 at 41.25%, 7 of the firms in the division had margins that exceeded the aggregate AmLaw 200 margin, and 5 of those 7 firms had margins that exceeded the aggregate West South Central margin.
  • Only 2 firms, V&E and Baker Botts, had an asset turnover that exceeded the aggregate AmLaw 200 asset turnover.
  • Four firms, V&E, Baker Botts, Fulbright & Jaworski, and Gardere Wynne Sewell achieved a higher ROA than did the AmLaw 200 in the aggregate.
  • No firm achieved a financial leverage equal to or higher than the aggregate AmLaw 200 leverage.
  • Only 2 firms, V&E and Baker Botts, achieved a higher ROE than did the AmLaw 200 in the aggregate.

The *.pdf attachment also has easy to view individual tables that reflect the firms’ rankings in margin, asset turnover, ROA, financial leverage, and ROE versus both the West South Central division in the aggregate and the AmLaw 200 in the aggregate.

June 17, 2007

DIFFERENT STROKES FOR DIFFERENT FOLKS

Although I’m sure more than a few in the general populace might disagree, lawyers really are “Everyday People”; and, as Sly and The Family Stone so eloquently put it to music,

Different strokes for different folks
And so on, and so on and scooby-dooby-doo.

With that in mind, and with The American Lawyer’s 2007 AmLaw Survey results still fresh, I thought it might be fun to take a quick LawBall-type look at the metrics from a geographic perspective to see how those different strokes for different folks played out in 2006 for the “LawWorld.”  I’m not going to give any detailed analysis in this posting on the various geographic metrics, although I will make a few general observations.  Over the next few weeks, though, I expect to take a closer look within the geographic divisions at the firms themselves.

To group the firms without any personal bias toward geography, I turned to the U.S. Census Bureau’s map for regions and divisions.  The Census Bureau divides the U.S. into 4 regions:  the Northeast, Midwest, South, and West.  It then further divides the regions into divisions.  For purposes of this geographic glimpse at the metrics, I’ve used the Census Bureau’s divisions.  A copy of the map in *.pdf format is attached in the right-hand margin under the category “Posting Attachments” as “U.S. Census Bureau Regions and Divisions Map.”    Below is a table that lists the divisions within which are 2007 AmLaw Survey law firms (with the number of 2007 AmLaw Survey law firms within the divisions in parentheses), the states within the divisions, the divisions' largest law firm by gross revenue (Skadden, Arps, Slate, Meagher & Flom; Baker & McKenzie; Greenberg Traurig; Latham & Watkins; Fulbright & Jaworski; Bingham McCutchen; Bryan Cave; Snell & Wilmer; and, Baker, Donelson, Bearman, Caldwell & Berkowitz), and the largest firms' gross revenues.

Next is a table that contains the divisions’ financial operating performance metrics, as well as a table that shows the rankings (1 – 9) of each division within each metric.  The tables may be difficult to read within the blog, so by clicking on the tables you should be able to open a larger version; and, I’ve attached a copy as a *.pdf document in the right-hand margin under the category “Posting Attachments” as “Legal Industry Regional Metrics 2006.”

A few simple observations:

  • Surprisingly to me, the West South Central region had the highest margin at 41.25%.  However, its 5th place ranking in asset turnover relegated it to 3rd place in return on assets (ROA or profit per lawyer), and its 7th place in leverage then resulted in its 6th place ranking in return on equity (ROE or profit per partner).
  • Although 4th in gross revenues, profit, and margin, the Pacific rode its 2nd place ranking in asset turnover to a 2nd place ranking in ROA and its 2nd place in both ROA and financial leverage to a 2nd place ranking in ROE.
  • Only 2 divisions achieved a higher ROA than did the AmLaw 200 in the aggregate:  the Middle Atlantic and the Pacific.
  • Only 2 divisions achieved a higher ROE than did the AmLaw 200 in the aggregate:  the Middle Atlantic and the Pacific.
  • The Middle Atlantic finished first in all categories except for costs per lawyer, where it finished 9th, and margin, where it finished 2nd.

The *.pdf attachment has easy to view individual tables that reflect the divisions’ rankings in margin, asset turnover, ROA, financial leverage, and ROE versus the AmLaw 200 in the aggregate.

Enjoy looking at and thinking about these geographic metrics!  And, to all the fathers who happen to read this posting, “Happy Father’s Day”!

June 15, 2007

METRICS! WE DON’T NEED NO STINKIN’ METRICS (PART III)

When I first wrote about the financial operating performance metrics that make up LawBall in Metrics! We Don’t Need No Stinkin’ Metrics and Metrics!  We Don’t Need No Stinkin’ Metrics (Part II), I did so with illustrations for 2 real firms, both Texas-based, which I called “Firm A” and “Firm B.”  The information as to lawyers, partners, revenue, and profit in those illustrations was from The American Lawyer and The Texas Lawyer for operating years 1991 and 1996 and The American Lawyer for the operating year 2005. With the recent release of the AmLaw 2007 survey (2006 operating information), I thought it might be interesting to update the information for Firm A and Firm B and to see how the firms faired in 2006 in comparison both to one another and to the 6 firms that each finished 1st in at least one of the LawBall metric categories as I mentioned in the immediately preceding posting.  Since the tabular presentation of the information is long and narrow, I’m placing it to the side of this narrative in hopes that it will make it easier to follow.  But, since the tables still may be difficult to read within the blog, clicking on the tables should open a larger version; and, I’ve attached a copy as a *.pdf document in the right-hand margin under the category “Posting Attachments” as “Legal Industry Metrics Example 2006 Updated Information.”   

When we last left Firms A and B, Firm B had narrowed its return on equity (ROE or profit per partner) gap with Firm A from 1991 to 1996, primarily on the strength of improving its margin.  But over the ensuing 9 years, Firm A left Firm B in the figurative dust even though Firm B’s revenue had grown at a higher 9-year compounded annual growth rate (CAGR) through 2005 than, and its financial leverage had grown to exceed, Firm A’s.  By “drilling down” into the margin, asset turnover, and financial leverage components of ROE, some of the reasons for this relative financial performance disparity surfaced, including Firm B’s deteriorating margin and its faster lawyer (or asset) growth rate (which contributed to Firm B’s slower growth in asset turnover). 

We also saw a similar pattern with respect to return on assets (ROA or profit per lawyer).  ROA is a good measure of the efficiency with which a business allocates its resources, as it eliminates the effects of financial leverage on operating results.  Just as with ROE, Firm B narrowed the ROA gap from 1991 to 1996.  But by 2005 Firm A’s ROA also had left Firm B in the figurative dust.  Firm A’s profit growth and its asset turnover growth both exceeded Firm B’s CAGR.  Firm A’s 9-year CAGR for cost per lawyer was lower than Firm B’s; and, Firm B’s 9-year CAGR for its cost per lawyer even exceeded its asset turnover (revenue per lawyer) CAGR.   As result, Firm A’s ROA grew from 1.4232 times that of Firm B in 1996 to 2.0957 times in 2005.  The relative disparity between the firms’ 2005 ROE (2.0192) was slightly less than that of the firms’ 2005 ROA due to Firm B’s relative financial leverage improvement during that 9-year period.

How did the 2 firms do in 2006?  Firm B narrowed the ROE gap slightly and closed the ROA gap a little more.  Firm B’s 1-year CAGRs (from 2005 to 2006) for its revenue, profit, and asset turnover were 5.94%, 6.38%, and 8.70%, respectively.  Firm B’s costs per lawyer grew at a 1-year CAGR of 8.46%, which was just a hair below its asset turnover CAGR and lead to a slight margin improvement.  Firm A’s 1-year CAGRs for its revenue, profit, and asset turnover were 4.31%, -1.64%, and 2.10%, respectively.  Firm A’s costs per lawyer grew at a 1-year CAGR of 7.44%, which was a troubling 5.34% higher than its asset turnover CAGR and lead to a margin decrease from 47.84% to 45.11%.  Firm B’s ROA grew at a 1-year CAGR of 9.15%, while Firm A’s ROA fell -3.73% as a result of its margin decrease. Firm B’s ROE grew at a 1-year CAGR of 6.38%, compared to Firm A’s 5.29%, with the narrow change in ROE compared to ROA being driven by Firm A’s 9.37% increase in its financial leverage while Firm B’s leverage decreased -2.54%.  A disturbing point for both firms from their 10-year CAGRs:  their cost per lawyer grew at a faster rate than did their asset turnover (revenues per lawyer).  For Firm A, the “negative spread” was -.39%, while for Firm B it was a more significant -2.02%.

The illustration’s “what if” examples show if Firm B had managed its growth in lawyers to the same 10-year CAGR as Firm A, while still achieving the financial leverage it actually achieved, the improvement in its asset turnover would’ve led to a 2006 ROE that was $98,106 better than it achieved; or if Firm B had managed its margin so its actual decline over the 10-year period had been only to the average margin it experienced from 1991 to 1996, it would’ve led to an ROE that was $108,414 better than it achieved; or if Firm B had managed it costs per lawyer so that it’s 10-year CAGR had been Firm A’s 5.29% instead of its own 7.50%, it would’ve led to an ROE that was $126,177 better than it achieved.

For those of you with savant-type mathematical leanings, I thought you might enjoy a comparison of Firms A and B’s metrics to that of Skadden, Arps, Slate, Meagher & Flom; Wachtell, Lipton, Rosen & Katz; Wilson Elser Moskowitz Edelman & Dicker; Gordon & Rees; Stevens & Lee; and Wiley Rein, as well as to the aggregate top 200 metrics that were included in my last posting.  Here’s the comparison:

(A copy of the comparison is included in the *.pdf attachment.)  While Firm A’s metrics compare favorably to the aggregate top 200 in costs per lawyer, margin, asset turnover, ROA, and ROE and lag only in leverage, Firm B’s metrics compare favorably only in costs per lawyer and lag behind in margin, asset turnover, ROA, leverage, and ROE.  In my prior assessment of Firm B based on its performance through 2005, I said that my “best guess” was that the requirements necessary to service Firm B’s business became much more standardized and took less complex problem solving.  But, instead of managing its mix of assets and pricing to reflect that change, Firm B focused on raising its rates as high as it could.  It probably lost business as a result, while at the same time growing its number of lawyers.  It likely got lulled into a false sense of security because its revenue and profit both grew; it didn’t actively manage its business through the ROE component operating levers; and it didn’t realize that its costs per lawyer were growing at a faster rate than its revenue per lawyer or that its ROA was anemic.  Its performance in 2006 hasn’t changed my “guess.”

June 12, 2007

WHAT’S GOOD FOR THE GOOSE IS GOOD FOR THE GANDER . . . AND MAYBE EVEN BETTER, PART 2

In an earlier posting, I provided a LawBall-type look at 5 firms from The American Lawyer’s 2006 (2005 operating information) AmLaw 200 survey.  Each firm was chosen because it ranked number 1 in at least 1 of the LawBall financial operating metrics.  With the recent release of the AmLaw 2007 survey (2006 operating information), I thought it might be interesting to take a similar look at the 2006 operating results.  Set forth below is a table that contains the 2006 operating results, as well as for comparative purposes the table that contains the 2005 operating results.  Since I know the tables likely are difficult to read within the blog, clicking on the tables should open a larger version.  Also, I’ve attached a copy as a *.pdf document in the right-hand margin under the category “Posting Attachments” as “Top 200 Operating Lever Leaders 2006.”  As I’m sure you’ll quickly note, all five of the firms that ranked 1st in at least one LawBall-metric category did so again this year:  Skadden, Arps, Slate, Meagher & Flom; Wachtell, Lipton, Rosen & Katz; Wilson Elser Moskowitz Edelman & Dicker; Gordon & Rees; and, Stevens & Lee.  There also is a newcomer – Wiley Rein, which nudged out Wachtell Lipton for 1st in return on equity (ROE or profit per partner).

For each firm, the LawBall financial operating metrics are included in the top portion of the appropriate year’s table.  The firm’s ranking in each category is included in the bottom portion of the table.  For a firm that finished 1st in one category, you can compare it’s overall performance with that of another firm that finished 1st in a different category.  And, you can compare the firms’ performances between 2006 and 2005.  For example, although it ranked 2nd in ROE in 2006, Wachtell Lipton again ranked 1st in asset turnover (revenue per lawyer) and return on assets (ROA or profit per lawyer).  In addition, in the middle of each table are the financial operating performance metrics for the aggregate top 200 so that you can compare the firms in the select group that ranked 1st in a least 1 category to the performance of the entire AmLaw 200 as a whole.

The point I made in the earlier posting – and that I’m going to repeat here - is I believe the single biggest investment lawyers make is the investment they make in their law firm.  This especially holds true for the “equity stakeholders” in the firm.  The investment isn’t necessarily cash; in fact for most lawyers significantly all of the “investment” is the blood, sweat, and tears they “spend” that is converted to intellectual capital in the business.  But the form of the investment doesn’t diminish the nature of its impact or its significance to the “investor.”  As such, I believe that lawyers should emulate the examples set by Warren Buffett, Peter Lynch, and other extremely successful investors:  learn the “story” about the business in which you invest and then keep current on the story.  That means understanding the firm’s business model, operating history, and long-term prospects.  It means understanding the competition and learning how and why they may be successful where you are not.  That’s the real benefit and value of “playing LawBall” – it’s about learning, and staying current with, the story of the firm’s business of practicing law.  It’s about looking at the business with a panoramic view that spans multiple years, not just an annual snapshot.  It’s about actively managing the business to improve the firm’s financial operating performance, including asking questions like:

•    How and why did ROE change over time?
•    What happened in the 3 ROE components (margin, asset turnover, and leverage) that contributed to the change?  Why?
•    How and why did ROA change over time?  What happened with its components, margin and asset turnover, and why?
•    What happened to our competition over that same period of time?  Why?

And, since managing and operating the business of practicing law this way is not the norm, it means resisting what Buffett calls the “institutional imperative” - the lemming-like tendency of corporate management to imitate the behavior of other managers, no matter how silly or irrational that behavior might be.  For, as Buffett said in his 1989 Chairman’s Letter to Berkshire Hathaway’s stockholders, “[R]ationality frequently wilts when the institutional imperative comes into play.”

So, as I said in the prior posting about the 2005 financial operating metrics, take some time to think about the data – and particularly what it could show you if you had 5 years of data to compare for each of the firms.  What would it tell you about the firms’ business models?  What would it tell you about their trends?  How would your firm compare?  Which firm’s performance more closely mirrors that of your firm?  What changes to your business model would you make based on seeing what the competition is doing?  How surprised are you that Wachtell Lipton was 52ndh in gross revenue, 20th in profit, 168th in leverage, and 200th in costs per lawyer – and still finished 2nd in ROE on the strength of its margin (3rd) and asset turnover (1st), which gave it 1st in return on assets (ROA)?  What do you take away from Wiley Rein’s 2006 ROE performance, which vaulted it from 93rd in 2005 to 1st in 2006 and pushed Wachtell Lipton to 2nd in 2006 or, say, from Gordon & Rees’ 2006 performance - 9.84% margin (200th), profit (200th), ROA (200th), leverage (1st), and ROE (153rd), which mirrored its 2005 performance?

June 11, 2007

IT MUST BE CHICAGO’S WATER

Is Mayer Brown Playing LawBall? and Is Mayer Brown Playing LawBall – A Postscript).  Now, apparently it’s Chicago-based Jenner & Block that is going to “de-equitize between 15 and 20 of its equity partners according to recent reports.  It must be something in Chicago’s water.

My initial reaction to this new de-equitization news was “Why?”  Does it signal a change by Jenner & Block to move toward a brave new business model?  Do its business base requirements indicate the firm’s asset mix is out of balance?  Or, is it engaged simply in denominator management to improve profit per partner (return on equity or ROE) – indicating, I fear, that “de-equitization” has become the “management fix du jour” for the legal industry much as “re-engineering,” “restructuring,” and “downsizing” became the management fixes du jour for non-legal industry businesses in times past?

I thought it might be interesting to take a quick LawBall look at Jenner & Block.  Here’s the LawBall comparative look at the firm in 1996, 2005, and 2006 based on lawyer, partner, revenue, and profit information published by The American Lawyer in its 1997 (1996 operating information) AmLaw 100, 2006 (2005 operating information) AmLaw 100 and AmLaw 200, and 2007 (2006 operating information) AmLaw 100 and AmLaw 200, as well as a look at what may be its “competitive peer groups” – the 2006 AmLaw 100 and AmLaw 200.

 

We don’t know anything about Jenner & Block’s business model or its base of business requirements – is it a more complex problem-solving business where more “specialized generalists” are required who can solve problems across multi-discipline lines in ever-changing circumstances or is it a more standardized/specialized firm where specialists can easily recognize patterns and apply familiar tools so that they do not need to “reinvent the wheel”?  The former clearly should result in a lower leverage structure than the latter since complex problem-solving requires greater experience and generally is less efficient to execute, but it also should result in higher asset turnover and higher margins.  The latter involves pattern recognition that generally increases efficiency and should result in higher leverage, lower margins, and lower asset turnover.

But through LawBall we understand that a firm’s financial operating performance is the result of efficiently allocating its resources and actively managing the relationship among its income statement and the left and right sides of its balance sheet – the firm’s asset turnover, margin, and leverage - and that financial performance is not about just one year, it’s about multi-year trends based on prior performance.  What does LawBall suggest about Jenner & Block?  Compared to the 2007 AmLaw 100 and 200, Jenner &Block clearly lags in ROE - $762,162 to $1,210,125 and $1,012,375, respectively.  Its 44.06% margin is higher (vs. 38.09% and 37.65%, respectively), and its $760,095 asset turnover is mixed (vs. $778,642 and $720,808, respectively).  Jenner & Block clearly appears to be under-leveraged when compared to its peers (2.2757 vs. 4.0806 and 3.7302, respectively).

But is that really the answer?  Let’s look at a couple of other metrics that caught my attention.  First, let’s look at Jenner & Block’s return on assets (ROA, which is profit per lawyer).  I’ve said before ROA is a good measure of the efficiency with which a business allocates its resources, as it eliminates the effects of financial leverage on operating results.  I also believe it is a better indicator of the financial health of the firm since it measures the profit across all of the firm’s intellectual capital and not just that which is distributed to its ownership intellectual capital.  Jenner & Block’s 2006 ROA was $334,917 compared to $296,552 and $271,403, respectively, for its peers.  And, Jenner & Block’s 2006 cost per lawyer also was better than its peers - $425,178 to $482,090 and $449,405, respectively.  But one troubling aspect – the firm’s cost per lawyer compounded annual growth rate (CAGR) exceeded its asset turnover CAGR both for the 10-year period (5.86% to 5.34%) and the 1-year period (7.46% to 3.90%).  This fact also was captured in Jenner & Block’s margin decline from 46.75% in 1996 to 44.06% in 2006.

Let’s take a look at the different effects on 2006 that de-equitization would’ve had versus improved cost control.  Let’s assume that Jenner & Block de-equitized 20 partners, all remain at the firm, and each such partner’s share of the 2006 profits was $500,000 on the one hand; and, on the other hand for comparative purposes, let’s assume instead that the firm had managed its costs per lawyer so that it’s margin had remained at 46.75% instead of declining through 2006.  For those of you who may be puzzled, don’t forget that “profit” means that all costs, including non-equity partner compensation, have been paid and what remains is profit to be distributed to the equity partners (a dividend, if you will).  By de-equitizing the 20 partners, what they were paid as “profit” now becomes a cost.  Here’s what the 2 cases would’ve have looked like (all other things remaining the same):

Jenner_block_comparison

Interesting.  More ROE improvement would’ve resulted from improved cost control as opposed to this particular de-equitization (ROE of $808,705 to $793,939).  Improved cost control also would’ve resulted in better ROA improvement than the de-equitization (ROA of $355,369 to $311,164) and cost per lawyer improvement (costs per lawyer of $404,726 to $448,931).  Obviously, if some of the de-equitized lawyers left the firm, then both revenue and costs would be affected.

We know management of any business model requires that it support its strategy by, among other things, uniquely blending the firm’s competencies, assets, and processes.  And, when that model begins to decay, as all business models do, it means avoiding the temptation to pour human energy and capital into improving the efficiency of the operating model and, instead, inventing new business concepts or dramatically reinventing those that the business already has. My educated (some undoubtedly will claim “semi-educated” and other “uneducated”) guess is what Jenner & Block is trying to do is something that is not likely to be achieved simply by de-equitizing a handful of partners.   If the firm has the right professional asset mix to service the business base sought by the strategy inherent in its business model, then its asset turnover (revenue per lawyer) likely is missing the mark by a wide margin.   On the other hand, if the firm has the business it seeks by execution of its strategy, then its professional asset mix likely is way out of whack and probably will need more than gentle fine-tuning.

As I did with my prior Mayer Brown postscript posting, I’ll close with several competitive strategy questions from Gary Hammel and C.K. Prahalad in Competing for the Future and then with a paraphrase from fictional President Andrew Shepherd in the movie The American President:

•    Does senior management have a clear and broadly shared understanding of how the legal industry may be different 10 years in the future?  What is it?
•    Is this point of view about the future clearly reflected in the firm’s short-term priorities?  How?
•    Is the firm pursuing growth and new business development with as much passion as it is pursuing operational efficiency and downsizing?  How?

Andrew_shepherd_2 LawBall isn't easy. LawBall is advanced business. You've gotta want it bad, 'cause it's gonna put up a fight.

June 07, 2007

ONE IF BY LAND, AND TWO IF BY SEA?

Every once in a while several independent events occur that illustrate a point.  That happened over the past 6 weeks when Bill Gratsch posted a blog entry at Blawg’s Blog entitled Law Firms:  Competition and Globalization; Bruce MacEwen posted a blog entry at Adam Smith, Esq. entitled Publicly Traded Law Firms in the US?  Georgetown Law Symposium; and, The Wall Street Journal’s Law Blog posted a blog entry entitled Thompson & Knight Drilling into a New Biz.  In his thought provoking piece, Bill Gratsch wrote about the affect of globalization upon competition for U.S. law firms.  Bruce MacEwen’s posting mentioned his prior writings on the “Clementi” reforms scheduled to take effect next year in the United Kingdom that, among other things, will permit diversified multidisciplinary firms.  And, the Law Blog posting mentioned Dallas-based Thompson & Knight’s formation of an energy consulting company - a subsidiary known as Thompson & Knight Global Energy Services, LLC – a development Thompson & Knight itself announced on March 1, 2007.  What do the separate events described in these 3 postings have in common?  Each is further evidence of the competitive pressures bearing on the U.S. legal industry to cast aside its business model and to develop a new one.

In 2 not too distant postings, Toward a Brave New Business Model and O Strategy, Where Art Thou?, I wrote about these pressures; and, in the latter, I also wrote about the information value chain and the risks to the legal industry’s current positioning as a knowledge-based industry in that value chain and asked:

What different activities can law firms perform, or in what different ways can law firms perform their activities, in order to be a more valuable player in and contributor to the economic value that can be created by the strategic integration of knowledge?

Bill Gratsch in his recent posting noted, “[O]ne growing reality of globalization is that whole industries are consolidating.”  In that regard, Bill also wrote:

Every time a U.S.-based company is acquired by a foreign entity, the U.S.-based law firm that did the bulk of that company's legal work faces a real competitive challenge. To compete for the work going forward, the U.S.-based attorneys may need to jump on a plane and head to Mexico, France, Germany, Australia, Japan, India or China to make their case. Not a simple matter.

Even more disconcerting, what if the Mexican, French, English, etcetera law firms and legal consultancies already serving these international corporations come to the U.S. and bid on work the acquired company is now re-bidding at the direction of its new parent? Not only do those foreign firms potentially have the same longstanding legal and personal relationships with the parent company executives that U.S.-based law firms have long enjoyed with the now-acquired local companies, but they may be able to leverage lower cost offshore legal resources than the U.S. firms. Most especially in transactional work.

Will that competitive pressure on U.S. firms from globalization do anything but increase if the Clementi reforms mentioned by Bruce MacEwen take hold?  Will multidiscipline firms be better at the strategic integration of knowledge and be better suited to provide support for improved client decision-making than U.S. law firms; and, will they then be able to leverage that advantage to gain a more competitive foothold and positioning within the information value chain?  And, what if those multidiscipline firms are backed by public capital?

To meet these pressures and to compete for the future, U.S. law firms simply will have to change their business model – of which, as I’ve noted before, Cisco’s general counsel Mark Chandler has said, “It looks like the last vestige of the medieval guild system to survive into the 21st century.”  Thompson & Knight’s formation of its energy services consulting subsidiary is a response to this pressure, whether intended or not.  Thompson & Knight’s managing partner, Pete Riley, was quoted as saying, “We are very pleased to establish this new business that reinforces our longstanding commitment to helping our clients with their strategic issues.”  Riley further noted, “We believe there is great interest among the firm's clients in leveraging complementary and integrated services, particularly given the growth perspectives of the energy industry.”

I know nothing about the factors that led to Thompson & Knight’s decision to create its consulting subsidiary, nor do I know any of the specifics about the organizational structure that was used.  However, I have had personal experience with a Texas-based law firm’s efforts to provide multidiscipline, complementary, and integrated services before - with a firm in the late 1980s and early 1990s that attempted to meet the needs of clients in dealing with the then financial institution crisis and the real estate industry collapse by providing financial consulting and workout consulting services through an affiliated company.  Simply creating a structure to do such and still be in compliance with the then rules under the Texas Disciplinary Rules of Professional Conduct was nightmarish enough.  But the clashes between the culture and the management style, substance, and direction of the business entity, on the one hand, and of the law firm, on the other, were tantamount to nuclear war.  I wish Thompson & Knight the best in its endeavor and hope that they are successful.  Despite my experience some 15+ years ago, I believe that the multidiscipline approach to the distribution of legal knowledge well may be one of the keys to the legal industry’s ability to reposition itself within the information value chain in ways that will enable it to compete successfully for the future.

June 04, 2007

A MERGER MADE IN . . .?

In Mergers, Metrics, and Other Musings, I noted that Hildebrandt International, Inc. had reported 58 mergers and acquisitions involving U.S. law firms were completed in 2006, vs. 49 in 2005 and 48 in 2004, and the company expected “to see merger activity continue at an active pace” in 2007.  I also mentioned a McKinsey & Company article in which the authors said, “[I]t is typically not the buyer but the seller who captures most of the shareholder value created,” and believed this result is due to the fact that “Most companies routinely overestimate the value of synergies they can capture from acquisitions.”

In discussing a way for law firm M&A candidates to avoid the “synergy trap,” I noted further,

Right away one thing comes to mind – LawBall-type analysis, including a pro-forma of the post-closing firm, to facilitate the “due diligence” review.  Certainly, numbers aren’t the entire story to a successful M&A transaction; the transition and integration of the people, technology, and processes (including the typical law firm hot spots – culture and management) in the post-closing firm are critical.  But LawBall analysis, as with financial operating performance, can lead one to ask critical questions that facilitate a deeper understanding of the strengths and weakness of both the pre- and the post-merger businesses.

I then used 2 examples to illustrate: the merger of Kirkpatrick & Lockhart Nicholson Graham and Preston Gates & Ellis, a merger announced in late 2006 and effective on January 1, 2007 creating K&L Gates, using The American Lawyer’s 2006 (2005 operating results) AmLaw 200; and the announced but subsequently called off merger between Dewey Ballantine and Orrick Herrington & Sutcliffe, using the 2006 AmLaw 200 and the 1997 AmLaw 100.

I thought it might be interesting, with release last week of the 2007 AmLaw 200 (2006 operating results), to take a look at the 2005 and 2006 individual firm operating results and a 2006 pro forma for the recently announced (and pending) merger between Texas (Dallas and Houston)-based Locke Liddell & Sapp and Chicago-based Lord, Bissell & Brook, with the new firm apparently to be named Locke Lord Bissell & Liddell.  Using data published in the 2006 AmLaw 200 and the 2007 AmLaw 200, below in LawBall format are:

  • The 2005 and 2006 individual financial operating results for both firms.
  • The annual compounded growth rates from 2005 to 2006 for both firms.
  • A 2006 pro forma for the new firm.
  • A comparison of each firm’s actual 2006 operating results to the pro forma.

Revenues, profits, asset turnover (revenues per lawyer), return on equity (ROE or profit per partner), return on assets (ROA or profit per lawyer), and cost per lawyer growth from 2005 to 2006 all favored Locke Liddell.  Profit, ROE, and ROA for Locke Liddell all grew significantly, while the same metrics declined for Lord Bissell.  Locke Liddell’s margin improved from 31.25% to 35.59%; Lord Bissell’s margin fell from 37.62% to 32.80%.  Cost per lawyer declined for Locke Liddell, while cost per lawyer grew for Lord Bissell.  Only in the metric of financial leverage did Lord Bissell improve while Locke Liddell declined; but Locke Liddell’s financial leverage in 2006 still remained higher than Lord Bissell’s.  This 1-year snapshot is interesting – but as I’ve said before, I’d like to see the panoramic view (a 5-year comparison) before I reached any significant conclusions about the relative financial health or direction of the 2 firms pre-merger.

Not surprisingly, after looking at the 2005 and 2006 individual firm financial operating metrics, the pro forma post-merger changes in margin, asset turnover, financial leverage, ROE, and ROA all favor Lord Bissell – that is, on a pro forma basis Locke Lord would’ve performed better in 2006 than Lord Bissell performed alone, while Locke Lord would’ve performed worse than Locke Liddell alone.  Only does pro forma post-merger cost per lawyer favor Locke Liddell.

Was this kind of analysis used before the agreement to merge was reached?  If not, would it have changed anyone’s opinion if it were used?  As a member of either firm I would’ve wanted to see this analysis long before I voted so I could ask the financial questions that this analysis poses and get comfortable with the answers and the transition/integration plan.  Obviously, we don’t know what, if any, post-merger operating changes are planned by the new firm.  Taking a cue from the McKinsey article, though, I hope the firms simply aren’t assuming  “synergies” will overcome the financial operating differences.  It’ll be interesting so see how things progress from this point to and beyond the merger – and only time will tell whether this merger will prove to be one made in heaven - or hatched in hell.

Recommended Books

  • Robert C. Higgins: Analysis for Financial Management (Irwin Series in Finance)

    Robert C. Higgins: Analysis for Financial Management (Irwin Series in Finance)

  • Gary Hamel and C.K. Prahalad: Competing for the Future

    Gary Hamel and C.K. Prahalad: Competing for the Future

  • Thomas A. Stewart: Intellectual Capital

    Thomas A. Stewart: Intellectual Capital

  • Gary Hamel: Leading the Revolution

    Gary Hamel: Leading the Revolution

  • Michael Lewis: Moneyball: The Art of Winning an Unfair Game

    Michael Lewis: Moneyball: The Art of Winning an Unfair Game

  • Eliyahu M. Goldratt: The Goal

    Eliyahu M. Goldratt: The Goal