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?