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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:

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