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July 31, 2007

THE DEVIL (OR MAYBE GEORGE STEINBRENNER) MADE LAW FIRMS DO IT

Oops – here comes another Dennis Miller-type rant.  And, frankly, it’s simply because I thought I’d heard it all.  First, I thought Armageddon must be upon us when I read in The New York Observer article Profits vs. Partners that Peter Zeughauser of The Zeughauser Group believes, with respect to law firm associate starting salaries,

[T]he next raise will be to $200,000 and could take place “as early as within the next six months. On the outside, 12 to 18 months. And a move to $250,000 after that.”

Then, if that wasn’t enough, after I’d been revived I read this morning at law.com, in an article from The National Law Journal entitled Firms Say Client Expectations Drive Up Associate Salaries (subscription required) that, “Law firms are blaming market demands for the latest round of associate salary raises . . .”  The apparent logic that it’s law firm clients’ fault that associate starting salaries are spiraling out of control can be found in these 2 sentences in the article:

First:

This summer's associate salary increases to $160,000 are a result of economic forces, say law firm leaders, that have required them to fall in line with competitors' pay in order to recruit top graduates from top schools.

And, then:

Those in law firm management admit that the raises make fledgling associates even less cost-efficient for law firms that hope they will stick around long enough to earn their keep. They also say, however, that their clients expect them to recruit law graduates from prestigious schools and those from the tops of their classes.

The topper for me, though, was this quote:

"What are firms to do?" said Rob Walters, a member of the executive committee at Houston-based Vinson & Elkins. "Associate salaries are out of whack."

What?!  That sounds eerily like, “The Devil made me do it.  What am I to do?”  Or, maybe, that “It’s all George Steinbrenner’s fault.  I just can’t help it.”  Well, gee, I guess I’d expect law firms to do what every other business does –  manage your business and get the  costs under control!  Outside of politicians and professional baseball team owners, I’m not sure I’ve seen another group of people less willing to be accountable for their own actions than law firms.  That’s just my opinion – I could be wrong.

July 30, 2007

A MERGER TOO CLOSE TO CALL

As forecast earlier in the year by Hildebrandt International, Inc. when it reported 58 mergers and acquisitions involving U.S. law firms were completed in 2006, vs. 49 in 2005 and 48 in 2004, law firm merger activity continues in 2007.  The most recent merger announcement was the proposed transaction between Kirkpatrick & Lockhart Preston Gates Ellis (aka K&L Gates) and Dallas-based Hughes & Luce.  K&L Gates, historically labeled a Pittsburgh-based firm, now calls itself an international firm without a headquarters office.

In prior postings where I’ve looked at other announced mergers (Mergers, Metrics, and Other Musings and A Merger Made in . . .?), I’ve discussed LawBall-type analysis as a way to help law firm M&A candidates avoid the “synergy trap” that arises when most companies routinely overestimate the value of synergies they can capture from acquisitions.  As I noted in those earlier postings, 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) into the post-closing firm are critical.  But a LawBall-type analysis 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.

Here, then, is a quick LawBall analysis of the proposed K&L Gates/Hughes & Luce merger.  Using data published in the 2006 AmLaw 200 and the 2007 AmLaw 200 and in the Texas Lawyer’s 2006 and 2007 Firm Finance Surveys, in LawBall format below at the end of the posting (and also included as a *.pdf attachment under Posting Attachments in the right-hand margin) 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 2006 operating results to the new firm’s pro forma.

One twist in the numbers from prior LawBall merger looks – K&L Gates itself is the product of a merger between Kirkpatrick & Lockhart Nicholson Graham and Preston Gates & Ellis announced late in 2006 and effective on January 1, 2007.  So, both the 2005 and 2006 numbers for K&L Gates are pro forma.

This prospective merger is too close to call from a relative financial health or financial direction pre-merger perspective alone.  On the one hand, growth in revenues, return on equity (ROE or profit per partner), and leverage from 2005 to 2006 all favored K&L Gates.  On the other hand, growth in profit, asset turnover (revenues per lawyer), return on assets (ROA or profit per lawyer), and cost per lawyer from 2005 to 2006 all favored Hughes & Luce.  Hughes & Luce’s 2006 margin was significantly better – 38.79% to 25.23% - than K&L Gates’; and, although Hughes & Luce’s 2006 asset turnover ($527,273) actually was lower than K&L Gates ($582,305), the large margin differential resulted in Hughes & Luce’s 2006 ROA ($204,545) also being quite a bit higher than K&L Gates’ ($146,914).  Leverage hugely favored K&L Gates (4.5506 to 2.8085), and this resulted in K&L Gates’ 2006 ROE ($668,539) being higher than Hughes & Luce’s ROE ($574.468).  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, on a post-merger pro forma basis the changes in margin, ROA, and cost per lawyer favored K&L Gates – that is, on a pro forma basis a combined K&L Gates Hughes Luce would’ve performed better in 2006 with respect to margin, ROA, and cost per lawyer than K&L Gates performed alone, while K&L Gates Hughes Luce would’ve performed worse than Hughes & Luce alone in those 3 metrics.  On a post-merger pro forma basis, the changes in asset turnover, leverage, and ROE all favored Hughes & Luce. The future success or failure of this announced merger likely lies with the firms’ post-merger transition and integration plan.

July 27, 2007

OVERCOMING PARADIGM BLINDNESS

While the doctrine of judicial precedent is a foundation of the U.S. common law system, it’s my been my observation over 30+ years that U.S. law firms all too often have extended adherence to precedent beyond the substance involved in the practice of law into the business of practicing law.  I previously mentioned this behavior in an earlier posting when I closed with the following quote from Rear Admiral Grace Murray Hopper:

I am now going to make you a gift that will stay with you the rest of your life. For the rest of your life, every time you say “We've always done it that way,” my ghost will appear and haunt you for twenty-four hours.

I didn’t realize it when I did the earlier posting, but this attitude of “we’ve always done it that way” is symptomatic of something that has been labeled “paradigm blindness,” which typically has been described as being the mode of thinking that:

The way we do it is the best because this is the way we've always done it.

Paradigm blindness also has been used to describe conduct in a number of settings, including the attitude of seeing the way you work as being “right” and building defenses to protect it instead of recognizing experimental evidence that should guide the way you work or the attitude of refusing to acknowledge experiences, facts and feelings that cannot be explained by old sets of assumptions.

Benchmarking has been called a powerful management tool that can facilitate the fight to overcome paradigm blindness.  Lots of definitions of “benchmarking” can be found; and the one at www.businessdictionary.com is that “benchmarking” is the:

Measurement of the quality of a firm's policies, products, programs, strategies, etc., and their comparison with standard measurements, or similar measurements of the best-in-class firms. The objectives of this exercise are (1) to determine what and where improvements are called for, (2) how other firms achieve their high performance levels, and (3) use this information to improve the firm's performance. 

Benchmarking can be an effective competitive tool that improves a firm’s operating effectiveness by:

  • Exposing the firm to new ideas and new ways of doing things.
  • Helping to overcome resistance to change by demonstrating that new ideas and ways of doing things work since they’re being used by others.

At morepartnerincome, Tom Collins recently touched on benchmarking when he referred to the article The Four Principles of Enduring Success by Christian Stadler in the July-August 2007 edition of the Harvard Business Review.  In his article, Stadler said:

When your company is doing well, revenue is pouring in, and your stock is rising, how do you know if you could be doing better? How can you tell which of your management practices are making the difference and which are merely doing no visible harm? Benchmarking is the obvious answer, but not by comparing poor companies with good ones. The way to get at this problem is to compare good companies with even better ones.

It is that very philosophy that led to my month-long LawBall tour through Legalritaville that just concluded and is why I included both at each “division stop” a ranking of the top firms in the division and at the end of the tour my own ranking of the AmLaw 200.  There are law firms out there that from a financial operations perspective clearly perform better than others, and the other firms can learn from and improve their own performance by benchmarking against these top-performing firms.

For those that did not catch the conclusion of the Legalritaville tour in Beauty is in the Eye of the Beholder, here again in order are my LawBall top 10 financial operating performance firms for 2006 from the 2007 AmLaw 200:  Wachtell, Lipton, Rosen & Katz; Wiley Rein; Sullivan & Cromwell; Cahill Gordon & Reindel; Irell & Manella; Cravath, Swaine & Moore; Simpson Thacher & Bartlett; Munger, Tolles & Olson; Gibson, Dunn & Crutcher; and, Quinn Emanuel Urquhrt Oliver & Hedges.  As I noted in that posting, when compared to the aggregate performance of the AmLaw 200, the aggregate relative financial operating performance of the LawBall Top 10 picks significantly exceeded that of the aggregate AmLaw 200 in every individual key metric category (margin, asset turnover, ROA, leverage, and ROE) except for leverage.  In other words, these 10 firms achieved superior performance with slightly less risk (more conservative leverage) than that of the aggregate AmLaw 200.   In addition, on average the LawBall Top 10 pick firms were moderately sized.  The average gross revenues and profit achieved by the LawBall Top 10 firms was $489,200,000 and $272,450,000, respectively.  Also on average, these firms had 379 lawyers, 111 of whom were partners.

What can other firms learn from benchmarking against these LawBall Top 10 firms?  How did the LawBall Top 10 in the aggregate achieve a margin (55.69%) that nearly was 20% higher than that achieved by the aggregate AmLaw 200 (37.65%)?  How did the LawBall Top 10 in the aggregate achieve an asset turnover or revenue per lawyer ($1,290,765) that was 1.79 times as great as the asset turnover achieved by the aggregate AmLaw 200 ($720,808)?  The resulting product achieved by multiplying margin times asset turnover is return on assets (or profit per lawyer) – and the different margin and asset turnover levels of performance achieved by the aggregate LawBall Top 10 versus the aggregate AmLaw 200 resulted in a ROA for the LawBall Top 10 ($718,865) that nearly was 2.65 times that achieved by the AmLaw 200 ($271,403).  And, despite a more conservative use of leverage (3.4237 for the aggregate LawBall Top 10 vs. 3.7302 for the aggregate AmLaw 200), the aggregate LawBall Top 10 return on equity (or profit per partner) of $2,461,156 was 2.43 times as great as the ROE of $1,012,375 achieved by the aggregate AmLaw 200.

I’ve said often that I prefer to analyze a business over a 5-year operating period – not just a 1-year period.  But, having said that, the rather stark differential in 2006 financial operating performance between the LawBall Top 10 firms and many of the others in the AmLaw 200 should make it clear that there is no room in the business of practicing law for paradigm blindness.  “This is the way we’ve always done it” just won’t cut it and must be overcome.  How did the firms in the LawBall Top 10 achieve their high performance?  What do they know, what do they do, and what policies, products, programs, and strategies (to name just a few things) do those firms possess that the other firms don’t know, don’t do, or don’t possess?   Perhaps some of the answers can be found in the 4 principles of enduring success that Stadler discovered in his benchmarking study discussed in his article:

  1. Exploit before you explore. In managing growth, the tension between leveraging existing assets and developing new ones is well known. Great companies have a clear priority: exploitation.  (The LawBall Top 10 firms seem to have figured this one out as they generate much more revenue from their assets than do the other AmLaw 200 firms.)
  2. Diversify your business portfolio. Great companies are adaptive. They diversify their supply bases, products, customers, and geographic markets.  (Might they also be doing a better job of matching their assets with the demand of their business – a concept envisioned by the professional asset capability matrix?)
  3. Remember your mistakes. Great companies do not fall into the same trap twice. Meaningful stories are passed on from one generation to the next from which successive generations draw clear object lessons.  (I know – getting lawyers to admit mistakes is tough!)
  4. Be conservative about change. Great companies go through radical change only at very select moments in their history, and they do so cautiously.  (As I’ve noted before, I think one of those select moments is facing the legal industry now.)

July 23, 2007

Oops! A Goof!

Oops - I goofed.  In my posting earlier today, Beauty is in the Eye of the Beholder, I made a typo in the bullet point paragraph where I discussed return on assets - and that goof could lead to some confusion.  Where I wrote "Return on assets (ROA or, in LawBall, profit per partner) . . ." (bold emphasis added) I meant, and should've written:  "Return on assets (ROA or, in LawBall, profit per lawyer) . . ." (underlined emphasis added).  I've now corrected the goof in the actual posting - and my sincere apology to anyone who's read the posting with the error and got confused.

And - my thanks to Kevin Funnell who politely pointed out my stupidity in an e-mail!

BEAUTY IS IN THE EYE OF THE BEHOLDER

David Hume, in his Essays, Moral and Political, wrote:

Beauty in things exists merely in the mind which contemplates them.

So, I believe, is beauty in the eye of the beholder when evaluating a business – even a business involved in the practice of law – whether one is evaluating the business for investment or simply as an operating entity.  Warren Buffett has offered that a stockholder and a business owner should look at ownership of the business in the same way and said, “I am a better investor because I am a businessman and a better businessman because I am an investor.”

The beholder’s view of beauty in business evaluation becomes relevant to today’s posting as the tour of Legalritaville has concluded and I’ve attached a *.pdf document that includes, among other things, an analytic table that shows the 2006 financial operating performance metrics for each of the firms in the 2007 AmLaw 200 and another table that shows the firms’ relative ranking (1 – 200) within each performance metric.  The attachment also includes analytic tables that show the firms’ relative ranking based on both the simple summation of the firms’ rankings in each individual key LawBall metric category and the simple summation of the firms’ rankings in all individual LawBall metric categories.  The *.pdf document is located in the right-hand margin under the category “Posting Attachments” as “AmLaw Top 200 Performance Statistics.”

Ever-mindful not only of the personal influence on business evaluation and how that might affect each individual reader’s view of the performance statistics, but also the oft-quoted bromide “There are 3 types of lies – lies, damn lies, and statistics,” I thought I’d include my own ranking of the Top 200 as an illustration of how each of us personally may place different levels of importance on separate performance metrics in evaluating a business.  Buffett and Peter Lynch (What’s Good for the Goose Is Good for the Gander . . . And Maybe Even Better) have provided insights into their investment philosophies over the years that have pointed to the personal nature of investing and, by extension of Buffett’s comment, business ownership.   These nuggets have included items whose actual application and implementation will differ from person to person such as:  stay within your “circle of competence”; find companies with simple and understandable businesses (that have consistent operating histories and favorable long-term prospects); determine your tolerance for risk, your objectives, and your attitude; look for and focus on companies with high profit margins and high earnings rates on equity capital without undue leverage, accounting gimmickry, and the like; and, understand the nature of the companies you own and the specific reasons for holding the stock.  From Buffett’s “An Owner’s Manual” also comes his personal view on the use of leverage:

We use debt sparingly and, when we do borrow, we attempt to structure our loans on a long-term fixed-rate basis. We will reject interesting opportunities rather than over-leverage our balance sheet. This conservatism has penalized our results but it is the only behavior that leaves us comfortable, considering our fiduciary obligations to policyholders, lenders and the many equity holders who have committed unusually large portions of their net worth to our care. (As one of the Indianapolis “500” winners said: “To finish first, you must first finish.”)

When evaluating a business for investment, purchase, or identifying operating performance issues – whether it’s engaged in the practice of law or some other business - I use the same metrics that I’ve incorporated into LawBall.  However, ultimately I place the most importance on these 3 metrics, in order of their importance to me:

  • Return on assets (ROA or, in LawBall, profit per lawyer) (when financial capital is involved as opposed to intellectual capital, I’ll use return on invested capital).  I believe ROA is a good measure of the efficiency with which a business allocates its resources and may be a better indicator of a firm’s financial health and performance than return on equity (ROE or, in LawBall, profit per partner) as it eliminates the potentially distorting effects of financial leverage on operating results.  ROA is the product achieved from multiplying asset turnover times margin.
  • Asset turnover (revenue per lawyer in LawBall) – the measure of revenue being generated by the business’ asset base (“offense” in LawBall).
  • Margin – the measure of how much of the revenue generated is kept as profit (“defense” in LawBall).

I subscribe to Buffett’s view on the conservative use of leverage.

The biggest differences between the business evaluation I typically perform and the one that I share with you today of the Top 200 is that normally I:

  • Analyze a business over a 5-year operating period – not just a 1-year period.
  • Know more factually about the actual business in which the individual companies are engaged.
  • Include an estimated value of the business for investment/purchase purposes.  Obviously, that’s not applicable here – and my view on the likelihood of U.S. law firms “going public” has been published previously (Public Ownership Ethics Issue a Red Herring).

Here in order are my LawBall top 10 financial operating performance firms for 2006 from the 2007 AmLaw 200:  Wachtell, Lipton, Rosen & Katz; Wiley Rein; Sullivan & Cromwell; Cahill Gordon & Reindel; Irell & Manella; Cravath, Swaine & Moore; Simpson Thacher & Bartlett; Munger, Tolles & Olson; Gibson, Dunn & Crutcher; and, Quinn Emanuel Urquhrt Oliver & Hedges.  Below are 2 tables for my top 10 - one contains the 2006 financial operating performance metrics for each of the firms, with my personal key metrics highlighted in blue, and the other contains the firms’ relative ranking among the AmLaw 200 (1 – 200) within each performance metric, again with my personal key metrics highlighted in blue.  By clicking on the tables you can open a larger version.  The *pdf attachment also includes a complete list of the firms ranked (1 - 200) according to my 3 personal key metrics.

Lawball_picks_performance_6

Several brief observations:

  • When compared to the aggregate performance of the AmLaw 200, the aggregate relative financial operating performance of the LawBall Top 10 picks significantly exceeded that of the aggregate AmLaw 200 in every individual key metric category (margin, asset turnover, ROA, leverage, and ROE) except for leverage.  In other words, these 10 firms achieved superior performance with slightly less risk (more conservative leverage) than that of the aggregate AmLaw 200.  What does that say about these 10 firms’ business models, particularly the firms’ strategy and the mix of the firms’ business demands and their assets (lawyers) to meet that demand as contemplated by the professional asset capability matrix?
  • On average, the LawBall Top 10 pick firms were moderately sized.  The average gross revenues and profit achieved by the 10 firms was $489,200,000 and $272,450,000, respectively.  Also on average, the LawBall Top 10 pick firms had 379 lawyers, 111 of whom were partners.
  • By comparison to the LawBall Top 10 picks, when summing up the AmLaw 200 rankings in each individual key metric category the top 10-ranked firms in order were:  Wiley Rein; Cravath, Swaine & Moore; Paul, Weiss, Rifkind, Wharton & Garrison; Simpson Thacher & Bartlett; Quinn Emanuel Urquhart Oliver & Hedges; Cahill Gordon & Reindel; Cleary Gottlieb & Hamilton; Millbank, Tweed, Hadley & McCloy; Sullivan & Cromwell; and, Schulte Roth & Zabel.
  • By comparison to the LawBall Top 10 picks, when summing up the AmLaw 200 rankings in all of the metric categories the top 10-ranked firms in order were:  Dechert; Latham & Watkins; Wiley Rein; Cleary Gottlieb Steen & Hamilton; Simpson Thacher & Bartlett; Kirkland & Ellis; Paul, Weiss, Rifkind, Wharton & Garrison; Skadden, Arps, Slate, Meagher & Flom; Sullivan & Cromwell; and, Gibson, Dunn & Crutcher.

The *.pdf attachment also has easy to view individual tables that reflect the firms’ individual rankings (1-200) in all of the key metric categories of margin, asset turnover, ROA, financial leverage, and ROE versus the AmLaw 200 in the aggregate.   I encourage you to go through the attachment, to see where your firm falls within the data, to see where other firms that interest you fall with in the data, to look at what you consider to be the “best” or “top” firms, to compare relative performances, and to add several more years of your firm’s data to the mix and analyze it in terms of trends.  Most of all, I encourage you to question what insight this data gives you as to business models employed in the legal industry.

In an effort to make it easier for you to navigate through the *.pdf attachment, here’s a listing (in order) of the tables in the document:

  • 2006 Financial Operations Performance – Listed in Order of the LawBall Picks (Just the Top 10).
  • 2006 Financial Operations Performance – Listed in Order of the LawBall Picks (1-200).
  • 2006 Financial Operations Ranking – Listed in Order of the LawBall Picks (1-200).
  • 2006 Financial Operations Performance – Listed in Order of Gross Revenues (the order of ranking chosen by The American Lawyer for its top 200).
  • 2006 Financial Operations Performance – Listed Alphabetically.
  • 2006 Financial Operations Ranking – Listed in Order of Gross Revenues.
  • 2006 Financial Operations Ranking – Listed in Order of Key Metrics Ranking.
  • 2006 Financial Operations Ranking – Listed in Order of All Metrics Ranking.
  • 2006 Financial Operations Ranking – Listed Alphabetically.
  • Margin Ranking.
  • Asset Turnover Ranking.
  • Return on Assets Ranking.
  • Financial Leverage Ranking.
  • Return on Equity Ranking.

Each table has a bookmark in the *.pdf document to make it easier for you to find the table.

July 18, 2007

MIDDLE ATLANTIC “TRUMPS” OTHER DIVISIONS

In the immortal words of Russell Casse (Randy Quaid’s character in Independence Day) as he  approached the alien space ship, “Hello, boys!  I’m back!”  And, although much less dramatic and without nearly the fanfare, I’m back also from my Florida trip.  Absolutely great margaritas and even better beaches!  Now that I am back, LawBall wraps up its journey through Legalritaville with its final stop - the Middle Atlantic division as shown on the U.S. Census Bureau’s Map of the Census Regions and Divisions of the United States.

As one might expect from a division that includes 2 states from the heart of Donald J. Trumpland, size influenced the simple ranking of the firms based on all of the LawBall metric categories, where Philadelphia-based Dechert ranked 1st; while leverage influenced the simple ranking of the firms based on LawBall’s key metric categories, where New York-based Cravath, Swaine & Moore ranked 1st.  And, when looking beyond the performance of the individual firms to the aggregate performance of the Middle Atlantic division in comparison to the aggregate performance of the AmLaw 200, the division (if you’ll please pardon the horrible pun – I’m still under the influence of the margaritas) simply “trumped” the other divisions.

According to the Census Bureau map, the Middle Atlantic division includes the states of New Jersey, New York, and Pennsylvania.  The division includes 58 firms from the 2007 AmLaw 200 (2006 operating information) – 40 in New York, 15 in Pennsylvania, and 3 in New Jersey.  The AmLaw 200 firms in the Middle Atlantic division’s 3 states are:

  • New Jersey (3):  Gibbons; Lowenstein Sandler; McCarter & English.
  • New York (40):  Boies, Schiller & Flexner; Brown Raysman Millstein Felder & Steiner; Cadwalader, Wickersham & Taft; Cahill Gordon & Reindel; Chadbourne & Parke; Cleary Gottlieb Steen & Hamilton; Cravath, Swaine & Moore; Curtis, Mallet-Prevost, Colt & Mosle; Davis Polk & Wardwell; Debevoise & Plimpton; Dewey Ballantine; Epstein Becker & Green; Fitzpatrick, Cella, Harper & Scinto; Fragomen, Del Rey, Bernsen & Loewy; Fried, Frank, Harris, Shriver & Jacobson; Hughes Hubbard & Reed; Jackson Lewis; Kasowitz, Benson, Torres & Friedman; Kaye Scholer; Kelley Drye & Warren; Kenyon & Kenyon; Kramer Levin Naftalis & Frankel; LeBoeuf, Lamb, Greene & MacRae; Nixon Peabody; Milbank, Tweed, Hadley & McCloy; Patterson Belknap Webb & Tyler; Paul, Weiss, Rifkind, Wharton & Garrison; Proskauer Rose; Schulte Roth & Zabel; Shearman & Sterling; Simpson Thacher & Bartlett; Skadden Arps, Slate, Meagher & Flom; Stroock & Stroock  Lavan; Sullivan & Cromwell; Thacher Proffitt & Wood; Wachtell, Lipton, Rosen & Katz; Weil, Gotshal & Manges; White & Case; Willkie Farr & Gallagher; and, Wilson Elser Moskowitz Edelman & Dicker.
  • Pennsylvania (15):  Ballard Spahr Andrews & Ingersoll; Blank Rome; Buchanan Ingersoll & Rooney; Cozen O’Connor; Dechert; Drinker Biddle & Reath; Duane Morris; Fox Rothschild; Kirkpatrick & Lockhart Preston Gates Ellis; Morgan, Lewis & Bockius; Pepper Hamilton; Reed Smith; Saul Lewis; Stevens & Lee; and, Wolf, Block, Schorr and Solis-Cohen.

As has become my custom, I’ve placed my observations before the analytic tables and have placed the tables at the end of this posting.  The tables include one that contains the 2006 financial operating performance metrics for each of the firms in the Middle Atlantic division and a second that shows the firms’ relative ranking (1 – 58) 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 Middle Atlantic Division Metrics 2006.”

Several observations:

  • When compared to the aggregate performance of the AmLaw 200, the aggregate relative financial operating performance of the Middle Atlantic division exceeded that of the aggregate AmLaw 200 in every individual key metric category.  Also,
    • Nearly ½ of the division’s firms, 25 (43%), exceeded the aggregate AmLaw 200’s margin of 37.65%.
    • 31 (53%) of the division’s firms exceeded the aggregate AmLaw 200’s asset turnover (revenue per lawyer) of $720,808.
    • 29 (50%) of the division’s firms exceeded the aggregate AmLaw 200’s return on assets (ROA or profit per lawyer) of $271,403.
    • 41 (71%) of the division’s firms exceeded the 3.7302 financial leverage achieved by the aggregate AmLaw 200.
    • 33 (57%) of the division’s firms achieved a return on equity (ROE or profit per partner) that exceeded the aggregate AmLaw 200’s ROE of $1,012,375.
  • When summing up the Middle Atlantic divisions’ firm rankings in each individual key metric category, the top 5-ranked firms all were New York City-based:  Cravath, Swaine & Moore (1st with 39 points); Paul, Weiss, Rifkind, Wharton & Garrison (2nd with 49 points); Sullivan & Cromwell (3rd with 57 points); Simpson Thacher & Bartlett (4th with 58 points); and, Cahill Gordon & Reindel (5th with 59 points).  It is interesting to note that Cravath garnered no individual key metric category 1st place rankings, and it’s highest ranking was 3rd place (both in asset turnover and ROE).  The highest ranking achieved in any key metric category by Paul, Weiss was 8th (in ROE).   Meanwhile, 6th place Wachtell, Lipton, Rosen & Katz (60 points) ranked 1st in 3 categories (asset turnover, ROA, and ROE) and 2nd in margin.  (Those totals are not included in the tables for space reasons but are included for all of the firms in the *.pdf attachment).
    • The juxtaposition of these 3 firms illustrates why ROA is a good measure of the efficiency with which a business allocates its resources and may be a better indicator of a firm’s financial health and performance than ROE, as it eliminates the potentially distorting effects of financial leverage on operating results – and why simple ranking systems epitomize the oft-quoted bromide, “There are 3 types of lies – lies, damn lies, and statistics.”  When eliminating the firms’ leverage ranking from the ranking points (Wachtell was 55th, Cravath 22nd, and Paul, Weiss 10th), Wachtell had 5 points (an average key metric category ranking of 1.25 when excluding leverage) and Cravath had 17 points (an average ranking of 4.25).  Both firms played really good “offense” and “defense” – as captured by Wachtell’s ROA of $1,585,492 (ranked 1st) and Cravath’s ROA of $646,552 (ranked 4th) (remember:  ROA = margin x asset turnover).  Paul, Weiss, on the other hand, scored 39 points (a 9.75 average ranking) when excluding leverage and achieved an ROA of $474,695) – a good performance, but not on par with Wachtell and Cravath’s relative performances within the division.  Wachtell’s ROA was 2.45 times that of Cravath and 3.34 times that of Paul, Weiss.  In fact, Wachtell’s ROA was 1.97 times that of the 2nd ranked ROA firm (Sullivan & Cromwell with an ROA of $804,348).
    • What was the effect of leverage – “special teams” play?  Besides it’s impact on the simple key metric category rankings as noted above, the firms’ relative ROE performances (remember:  ROE = ROA x leverage; it’s also margin x asset turnover x leverage) were:  Wachtell - $3,974,026 (1st place); Cravath - $3,017,241 (3rd place); and, Paul, Weiss - $2,495,413 (8th place).  Both Cravath and Paul, Weiss used leverage to improve their individual ROE ranking from their individual ROA ranking – and the relative ROE disparity between Wachtell and the firms also narrowed as a result of leverage:  Wachtell’s ROE was only 1.32 times that of Cravath and 1.59 times that of Paul, Weiss.  Another example of the leverage’s effect:  Boies, Schiller & Flexner ranked 19th with an ROA of $363,830 (Wachtell’s ROA was 4.36 times greater), but used it’s 1st place ranking in leverage (8.3929) to vault to a 2nd place ranking in ROE with an ROE of $3,053,571 (Wachtell’s ROE was 1.30 times greater).  Don’t forget, though, that leverage can be toxic – in good times it can be a rocket fuel boost to ROE, and in bad times it can be a firebomb accelerant as diminishing or slower-growing revenues lead to lesser amounts remaining for distribution as profit to partners.
  • When summing up the firms’ rankings in all of the metric categories, Dechert ranked 1st (115 points).  Paul, Weiss ranked 2nd here, too (117 points).  Simpson Thacher and Sullivan & Cromwell exchanged places, with Simpson Thacher ranking 3rd (118 points) and Sullivan & Cromwell 4th (120 points).  Cleary Gottlieb Steen & Hamilton ranked 5th (121 points).  Firm size likely had a hand in the ranking changes when moving from summing only the key metric categories to summing all of the metric categories.  Gross revenue and profit by their nature are pure size metrics – each simply measures the amount – and the larger the amount in each category the lower the relative score.  When looking at Dechert and Cleary Gottlieb – 2 firms that were not in the top 5 firms in the key metric category only rankings but moved to 1st and 5th, respectively, in the all metric category rankings – both firms ranked in the top 10 in both gross revenue and profit and replaced 2 firms that were not.  In addition, Deckert’s greater number of lawyers than Cravath – a lawyer to lawyer ratio of 2.21 to 1 – when paired with costs that bore a smaller relative differential – Deckert’s cost to Cravath’s cost ratio was 1.37 to 1 - contributed to Deckert’s having a significantly better cost per lawyer ranking (23 to 55) than Cravath.  The net ranking points “swing” among those 3 additional categories (39 points for Deckert and 83 for Cravath for a favorable 44 point swing for Deckert) was enough for Deckert to vault from 13th in the key metric only category ranking to 1st in the all metric category ranking and to knock Cravath from 1st in the key metric ranking to 6th in the all metric ranking.  With a lawyer to lawyer ratio of 3.45 to 1 and a cost to cost ratio of 4.36 to 1, Cleary Gottlieb did not have a cost per lawyer advantage when compared to Cahill Gordon (38th ranking to 17th), but its significant gross revenue and profit size advantage was enough for the net point swing among those 3 additional categories (50 points for Cleary Gottlieb and 74 for Cahill Gordon for a favorable 24 point swing for Clearly Gottlieb) to move it from 11th in the key metric only category ranking to 5th in the all metric ranking and to move Cahill Gordon from 5th in the key metric ranking to 8th in the all metric ranking.

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 the Middle Atlantic division in the aggregate and the AmLaw 200 in the aggregate.

Next up will be a posting that includes a 2006 Financial Operations Ranking of the complete AmLaw 200.

Here’re the tables:

July 10, 2007

LEGALRITAVILLE POTPOURRI

Due to The American Lawyer’s methodology of ranking the U.S. law firms by gross revenues, LawBall’s meandering journey through Legalritaville became even more so as 2 of the divisions (as shown on the U.S. Census Bureau map)  - the Mountain and the East South Central – contained just 2 AmLaw 200 firms each.  For convenience sake – my writing and your reading obviously more than travel on the U.S. Interstates – I decided to tour both divisions together.  In this segment of the tour, the “South rose again,” as Birmingham-based Bradley Arant Rose & White ranked 1st when looking at both the key LawBall metric categories and all LawBall metric categories.

The 2 divisions include the 8 Mountain division states of Arizona, Colorado, Idaho, New Mexico, Montana, Utah, Nevada, and Wyoming and the 4 East South Central division states of Alabama, Kentucky, Mississippi, and Tennessee.  The 2 divisions include only 4 firms from the 2007 AmLaw 200 (2006 operating information) – 1 each based in Birmingham, Phoenix, Denver, and Memphis.

The AmLaw 200 firms in the Mountain and the East South Central divisions’ 12 states are:

  • Alabama (1):  Bradley Arant Rose & White.
  • Arizona (1):  Snell & Wilmer.
  • Colorado (1):  Holland & Hart.
  • Tennessee (1):  Baker, Donelson, Bearman, Caldwell & Berkowitz.

Once again, I’ve put my observations before the analytic tables and have placed the tables at the end of this posting.  The tables include one that contains the 2006 financial operating performance metrics for each of the firms in the Mountain and East South Central divisions and a second that shows the firms’ relative ranking (1 – 4) 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 Mountain East South Central Divisions Metrics 2006.”

Several observations:

  • When compared to the aggregate performance of the AmLaw 200, the aggregate relative financial operating performance of the 2 divisions did not exceed that of the aggregate AmLaw 200 in any single key metric category.
    • Both Bradley Arant Rose & White (53.48%) and Holland & Hart (42.91%), though, achieved margins that exceeded the aggregate AmLaw 200’s margin of 37.65%.
    • No firm in the division exceeded either the aggregate AmLaw 200’s asset turnover (revenue per lawyer) of $720,808 or the aggregate AmLaw 200’s return on equity (ROE or profit per partner) of $1,012,375.
    • Only Bradley Arant ($284,722) achieved a return on assets (ROA or profit per lawyer) that exceeded the $271,403 ROA achieved by the aggregate AmLaw 200.
    • Only Snell & Wilmer (5.7917) exceeded the 3.7302 financial leverage achieved by the aggregate AmLaw 200.
  • When summing up the Mountain and East South Central divisions’ firm rankings in each of the key metric categories, Birmingham’s Bradley Arant finished 1st with 9 points, ahead of 2nd ranked Snell & Wilmer (12 points) of Phoenix by 3 points.  Bradley Arant garnered 1st place rankings in asset turnover (“offense”), margin (“defense”), and ROA; a 4th place ranking in leverage (“special teams”); and a 2nd place ranking in ROE.  Snell & Wilmer scored a 4th place ranking in margin; a 2nd place ranking in asset turnover, which resulted in a 4th place ranking in ROA; a 1st in leverage; and, a 1st in ROE.  As was the case in the West North Central division, Bradley Arant’s offensive (asset turnover) and defensive (margin) performances led to a large enough advantage in ROA performance (remember, ROA = asset turnover x margin) that the aggregate 7-point ratings advantage in those 3 key metric categories was too much for Snell & Wilmer’s 3-point leverage (special teams) and 1-point ROE ratings advantages to overcome.  Holland & Hart finished with 14 points, and Baker, Donelson, Bearman, Caldwell & Berkowitz finished with 15 points.  (Those totals are not included in the tables for space reasons but are included for all of the firms in the *.pdf attachment).
  • When summing up the firms’ rankings in all of the metric categories, Bradley Arant again finished 1st (16 points).  Holland & Hart and Snell & Wilmer exchanged places, as Holland & Hart finished 2nd with 20 points and Snell & Wilmer finished 3rd with 21 points.  Baker, Donelson again finished 4th with 23 points.

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 the consolidated Mountain and East South Central divisions in the aggregate and the AmLaw 200 in the aggregate.

Today’s posting is the last one for about a week, as I take some time off to attend a friend’s wedding and to enjoy some of Florida’s glorious beaches.   When I return, the Legalritaville tour will pick up with the Middle Atlantic division – the final division - that includes the states of New Jersey, New York, and Pennsylvania.  Then, instead of a movie that shows the tour’s highlights after its last stop in the Middle Atlantic, the highlights will be captured instead in a subsequent posting that includes a 2006 Financial Operations Ranking of the complete AmLaw 200.  A tantalizing thought, isn’t it?

Here’re the tables, while I go pack my SPF 70 sunblock and Tommy Bahama shirts:

July 09, 2007

LAND OF 10,000 LAKES SHOWS ‘EM IN MISSOURI

meandering journey through Legalritaville most recently landed it in the West North Central division, a 7-state area with AmLaw 200 firms concentrated in Missouri and Minnesota.  When the final LawBall tally was in, the competition was close but the Land of 10,000 Lakes showed ‘em in Missouri how the game is played.  In comparing the firms’ performance in the key metric categories of margin, asset turnover (revenue per lawyer), return on assets (ROA or profit per lawyer), leverage, and return on equity (ROE or profit per partner) by summing up each firm’s ranking in those categories, Minnesota firms garnered 3 of the top 4 slots; and, when also including the metric categories of gross revenues, profit, and costs per lawyer, Minnesota garnered each of the top 3 spots.

The division includes the 7 states of Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota and consists of 11 firms from the 2007 AmLaw 200 (2006 operating information) – 4 based in Kansas City, Missouri; 3 each in Minneapolis and St. Louis; and, 1 in Omaha.
The AmLaw 200 firms in the West North Central division’s 7 states are:

  • Missouri (7):  Blackwell Sanders Peper Martin; Bryan Cave; Husch & Eppenberger; Lathrop & Gage; Shook, Hardy & Bacon; Stinson Morrison Hecker; and Thompson Coburn.
  • Minnesota (3):  Dorsey & Whitney; Faegre & Benson; and Robins, Kaplan, Miller & Ciresi.
  • Nebraska (1):  Kutak Rock.

As has become the practice during our Legalritaville tour, I’ve put my observations before the analytic tables and have placed the tables at the end of this posting.  The tables include one that contains the 2006 financial operating performance metrics for each of the firms in the West North Central division and a second 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 West North Central Division Metrics 2006.”

Several observations:

  • Similar to the relative financial operating performance of its sister division in the Midwest, the East North Central, when compared to the aggregate performance of the AmLaw 200 the aggregate relative financial operating performance of the West North Central did not exceed that of the aggregate AmLaw 200 in any key metric category.
    • Five (5) firms in the division (45% of the division), though, did achieve margins that exceeded the aggregate AmLaw 200’s margin of 37.65%.  Those firms were Faegre & Benson (46.17%); Kutak Rock (42.71%); Thompson Coburn (42.40%); Robins, Kaplan, Miller & Ciresi (40.00%); and, Stinson Morrison Hecker (39.20%).
    • No firm in the division exceeded either the aggregate AmLaw 200’s asset turnover of $720,808 or the aggregate AmLaw 200’s ROE of $1,012,375.
    • One (1) firm in the division achieved an ROA that exceeded the $271,403 ROA achieved by the aggregate AmLaw 200.  That firm was Robins, Kaplan, Miller & Ciresi, who achieved a ROA of $285,714.
    • Two (2) firms in the division exceeded the 3.7302 leverage achieved by the aggregate AmLaw 200.  Those firms were Shook, Hardy & Bacon (5.0106) and Bryan Cave (4.0608).
  • When summing up the West North Central division’s firm rankings in each of the key metric categories, Minneapolis’ Robins, Kaplan, Miller & Ciresi finished 1st with 16 points, ahead of 2nd ranked Shook, Hardy & Bacon of Kansas City (22 points) by 6 points.  Robins, Kaplan garnered 1st place rankings in asset turnover (“offense”) and ROA, a 4th place ranking in margin (“defense”); an 8th place ranking in leverage (“special teams”); and a 2nd place ranking in ROE.  Shook, Hardy scored an 11th place ranking in margin and a 2nd place ranking in asset turnover, which resulted in a 7th place ranking in ROA; a 1st in leverage; and, a 1st in ROE.  In this instance, the offensive (asset turnover) and defensive (margin) performance of both firms resulted in an 8 point ratings advantage for Robins, Kaplan in those 2 categories combined and led to a 6-point advantage in ROA (remember, ROA = asset turnover x margin).  The aggregate 14-point ratings advantage in those 3 key metric categories was too much for Shook, Hardy’s 7-point leverage (special teams) and 1-point ROE ratings advantages to overcome.  The other 3 firms in the top 5 rankings were not far behind:  Minneapolis’ Dorsey & Whitney (25 points) and Faegre & Benson (26 points) and St. Louis’ Bryan Cave (27 points).  (Those totals are not included in the tables for space reasons but are included for all of the firms in the *.pdf attachment).
  • When summing up the firms’ rankings in all of the metric categories, Robins, Kaplan again finished 1st (36 points).  Then, Minneapolis’ Faegre & Benson (37 points) and Dorsey & Witney (38 points) finished 2nd and 3rd, respectively, followed by St. Louis’ Bryan Cave (39 points) and Kansas City’s Shook, Hardy (40 points).

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 West North Central division in the aggregate and the AmLaw 200 in the aggregate.

Here’re the tables:

July 06, 2007

THE WALL STREET JOURNAL FLUBS IT

No matter how hard I tried to keep my fingers from “tickling the plastic,” I couldn’t do it.  When I read the article “Partnership Is No Longer a Tenured Position” in today’s The Wall Street Journal, as well as its sister piece in the WSJ’s Law Blog entitled, “De-Equitization:  A Buzzword Sweeping Big Law Nation,” I tried to let it go – but I couldn’t.  I just did a slow burn.  What follows is one of my Dennis Miller-type rants.

The WSJ got it partially right – partnership no longer is a tenured position.  But, the WSJ completely flubbed it with the sub-title to the WSJ article, which read “More Law Firms Thin Ranks of Partners to Boost Profits, Attract, Keep High Earners,” and with the article’s quote:

Once rare, quiet and restricted to the most competitive firms, "de-equitization" has become one of the most popular buzzwords in law-firm management. As corporate firms across the country with ambitions to grow and boost profits have aggressively and publicly thinned their partner ranks, the word has stoked a new sense of vulnerability among lawyers.

Similar faux pas appeared in the remainder of the article and in the Law Blog piece, whether written as a quote from a lawyer or a consultant or as narrative written by the authors.  What irks me is that the WSJ missed a golden opportunity to expand the debate to what really matters in terms of addressing what may be wrong in a given firm’s business.  I’ve said it before, and I’ll repeat it again now:  Profit per partner is a metric only.  It does not determine the amount of profit (or “net operating income” as The American Lawyer prefers to call it) that the business generates.  It simply measures the amount of that profit made as if it were to be distributed on a per partner basis.  Profit per partner is a return on the “sweat equity” (or in some instances, actual financial equity) contributed to the firm by its partners.  As a metric used in human capital-intensive businesses, It is similar to the return on equity (ROE) metric as used in financial capital-intensive businesses:  ROE doesn’t generate the amount of the profit; it just tells one what the amount of profit made is as a return earned on the capital invested over the subject time period.

Whether the business is a law firm or is a maker of widgets, the amount of profit is determined by the amount of gross revenues that a firm generates from its assets and how much of those gross revenues it is able to keep and not spend on expenses.  It is a function of margin and asset turnover  - multiplying the two together gives you a product that is the firm’s return on assets (ROA).  Further multiplying ROA by the amount of financial leverage gives one the firm’s ROE.  ROA actually may be a better metric for determining the health of a firm since it eliminates the effect of leverage.  There lies the importance of margin, asset turnover (revenue per lawyer), and ROA (profit per lawyer) that LawBall emphasizes.  It is why, when one sees ROE or profit per partner cited as a metric, he or she must then de-compose the metric in order to see what caused the end result – changes in margin, asset turnover, or leverage?  And, what do those changes say about the firm’s business model?

I have no doubt that a number of the firms that have employed “de-equitization” have engaged in simple denominator management – and done so wrongly, thinking that it will “boost profits” instead of actually understanding that the answer to a firm’s performance lies in understanding what happened in the constituent components of margin, asset turnover, and leverage, all of which relate directly to the firm’s business model and which include the demands of its business base and the capabilities of its asset base.  By going along with the line of thought that equates the amount of profit with the number of partners and repeating it without question, as it did in its stories today, the WSJ just flat got it wrong, and it did the industry a disservice.  It kept the bright light of controversy on simple denominator management - which won’t fix a thing except make the metric look better - instead of trying to turn the focus toward understanding how to determine what’s really wrong with the underlying businesses.

NIP/TUCK IN THE PACIFIC, LAWBALL STYLE

With an apology up front to FX Networks, I should’ve guessed that when LawBall’s meandering journey through Legalritaville landed in the Pacific division, the concentration of firms in California in general (87%) and LA in particular (42%) combined with the 2006 financial operating performance of the division and its firms would make me think of something related to entertainment.  So, pardon the admittedly poor pun and play on words (caused by an extended 4th of July visit to Margaritaville), but the 2006 competitive financial operating performance in the Pacific division was “nip and tuck.”

The division includes the 5 states of Alaska, California, Hawaii, Oregon, and Washington and consists of 31 firms from the 2007 AmLaw 200 (2006 operating information) – 13 based in Los Angeles; 9 in San Francisco; 3 in Seattle; 2 in Palo Alto; and, 1 each in Irvine, Mountain View, Portland, and, San Diego.  Unlike the East North Central division and the South Atlantic division, no one firm in the Pacific division played LawBall in 2006 so much better than the others that it created a significant degree of separation.  Instead, when measured by the sum of each firm’s individual ranking in 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), the difference between the firm ranked 1st (Quinn Emanuel Urquhart Oliver & Hedges) and the firm ranked 5th (O’Melveny & Myers) was only 18 points.  By comparison, the difference between the 1st and 2nd ranked firms in the East North Central division was 15 points, and in the South Atlantic division the difference between the 1st  and 2nd ranked firms was 22 points.

The AmLaw 200 firms in the Pacific division’s 5 states are:

•    California (27):  Allen Matkins Leck Gamble Mallory & Natsis; Cooley Godward Kronish; Fenwick & West; Gibson, Dunn & Crutcher; Gordon & Rees; Heller Ehrman; Irell & Manella; Jeffer, Mangels, Butler & Marmaro; Knobbe, Martens, Olson & Bear; Latham & Watkins; Lewis Brisbois Bisgaard & Smith; Littler Mendelson; Loeb & Loeb; Luce, Forward, Hamilton & Scripps; Manatt, Phelps & Phillips; Morrison & Foerster; Munger, Tolles & Olson; O’Melveny & Myers; Orrick, Herrington & Sutcliff (whose terminated merger with Dewey Ballantine was discussed in a prior posting – Mergers, Metrics, and Other Musings); Paul Hastings, Janofsky & Walker; Pillsbury Winthrop Shaw Pittman; Quinn Emanuel Urquhart Oliver & Hedges; Sedgwick, Detert, Moran & Arnold; Sheppard, Mullin, Richter & Hampton; Thelen Reid & Priest; Townsend and Townsend and Crew; and, Wilson Sonsini Goodrich & Rosati.
•    Oregon (1):  Stoel Rives.
•    Washington (3):  Davis Wright Tremaine; Perkins Coie; and, Preston Gates & Ellis (which merged with Pittsburg-based Kirkpatrick & Lockhart Nicholson Graham on January 1, 2007 and now is part of Kirkpatrick & Lockhart Preston Gates Ellis LLP, a merger that also was discussed in Mergers, Metrics, and Other Musings).

As has become the case during our Legalritaville tour, the number of firms in the Pacific division and the resulting size of the analytic tables has led me to place my observations before the tables and to place 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 Pacific division, as well as a table that shows the firms’ relative ranking (1 – 31) 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 Pacific Division Metrics 2006.”

Several observations:

  • When comparing the Pacific division’s performance in the key metric categories versus that of the aggregate AmLaw 200, the division did very well.
    • In each of the key financial operating performance metric categories, the division’s aggregate performance exceeded the aggregate performance achieved by the aggregate AmLaw 200:  margin (38.41% to 37.65%), asset turnover ($760,716 to $720,808), ROA ($292,201 to $271,403), leverage (3.9257 to 3.7302), and ROE ($1,147,105 to $1,012,375).
    • Seventeen (17) firms (55%) in the division achieved an asset turnover greater than did the aggregate AmLaw 200.
    • Fourteen (14) firms (45%) in the division achieved an ROA that exceeded the ROA achieved by the aggregate AmLaw 200.
    • Sixteen (16) firms (52%) in the division achieved an ROE greater than did the aggregate AmLaw 200.  A 17th firm in the division achieved an ROE of $1,000,000.
  • When summing up the Pacific division’s firm rankings in each of the key metric categories, Quinn Emanuel Urquhart Oliver & Hedges finished 1st with 26 points, nudging out 2nd ranked Gibson Dunn & Crutcher (32 points) by 6 points.  Quinn Emanuel was a model of consistency, with 4th place rankings in each of margin (“defense”), asset turnover (“offense”), and ROA; a 13th place ranking in leverage (“special teams”); and a 1st place ranking in ROE.  Gibson Dunn was not quite as consistent, with a 3rd place ranking in margin; a 1st in asset turnover; a 3rd in ROA; a 22nd in leverage; and, a 3rd in ROE.  In this instance, with the offensive (asset turnover) and defensive (margin) performance of both firms resulting in an ROA (remember, ROA = asset turnover x margin) that was nearly equal, the 9 point negative differential in special teams play (leverage) for Gibson Dunn was too much for it to overcome.  The other 3 firms in the top 5 rankings were not far behind:  Latham & Watkins (34 points) and Irell & Manella (34) points tied for 3rd; and O’Melveny & Myers (44 points) was 5th.  All 5 firms are LA-based.  (Those totals are not included in the tables for space reasons but are included for all of the firms in the *.pdf attachment).
  • When summing up the firms’ rankings in all of the metric categories, the same 5 LA-based firms occupied the top rankings, although the order changed slightly.  Gibson Dunn and Latham & Watkins tied for 1st with 56 points apiece.  Quinn Emanuel ranked 3rd with 64 points.  The cause for the difference?  When looking at all of the metric categories, gross revenue and profit are included and therefore size can matter – with 292 lawyers versus Latham’s 1,766 and Gibson Dunn’s 769, Quinn Emanuel ranked 13th in gross revenue and 8th in profit, while Latham finished 1st and 1st and Gibson Dunn finished 4th and 2nd, respectively. Finishing out the top 5 were O’Melveny & Myers (70 points)  (its size advantage – 2nd in gross revenues and 3rd in profit – was not enough to overcome its poorer relative performance in the key metric categories when compared to Quinn Emanuel) and Irell & Manella (73 points).

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 Pacific division in the aggregate and the AmLaw 200 in the aggregate.

Here're the tables:

July 02, 2007

WHEN IT REINS (WILEY, THAT IS), IT POURS – AT LEAST IN THE SOUTH ATLANTIC

LawBall trip continued to wind its way through Legalritaville, the next stop was the South Atlantic division of the U.S., where the weather trended toward the rainy season in the tropics.  It certainly gave rise to that age-old axiom, “When it Reins, it pours” – at least as it relates to the 2006 comparative financial operating performance of Wiley Rein.

The division includes the 8 states of Delaware, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, and West Virginia, as well as the District of Columbia, and consists of 37 firms from the 2007 AmLaw 200 (2006 operating information) – 19 based in Washington, D.C.; 7 in Atlanta; 3 in Richmond; 2 each in Miami and Tampa; and, 1 each in Charlotte and Winston-Salem, North Carolina and Columbia and Greenville, South Carolina,  No one in the South Atlantic played LawBall in 2006 any better than Wiley Rein – 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), Wiley Rein’s relative financial operating performance within it’s division at least was on a par with, and may even have been more dominating than that of, Kirkland & Ellis in the East North Central division.

The firms in the South Atlantic division’s 8 states and the District of Columbia are:

  • District of Columbia (19):  Akin Gump Strauss Hauer & Feld; Arent Fox; Arnold & Porter; Covington & Burling; Crowell & Moring; Dickstein Shapiro; DLA Piper US; Dow Lohnes; Finnegan, Henderson, Farabow, Garrett & Dunner; Hogan & Hartson; Howrey; McKee Nelson; McKenna Long & Aldridge; Patton Boggs; Steptoe & Johnson; Venable; Wiley Rein; Williams & Connolly; and, Wilmer Cutler Pickering Hale and Dorr.
  • Florida (4):  Akerman Senterfitt; Carlton Fields; Greenberg Traurig; and Holland & Knight.
  • Georgia (7):  Alston & Bird; Kilpatrick Stockton; King & Spalding; Morris, Manning & Martin; Powell & Goldstein; Sutherland Asbill & Brennan; and, Troutman Sanders.
  • North Carolina (2):  Moore & Van Allen; and, Womble Carlyle Sandridge & Rice.
  • South Carolina (2):  Nelson Mullins Riley & Scarborough; and, Ogletree, Deakins, Nash, Smoak & Stewart.
  • Virginia (3):  Hunton & Williams; McGuire Woods; and Williams Mullen.

Because of the number of firms in the South Atlantic 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 South Atlantic division, as well as a table that shows the firms’ relative ranking (1 – 37) 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 South Atlantic Division Metrics 2006.”

Several observations:

  • Wiley Rein dominated financial operating performance in the South Atlantic division in 2006.  It ranked 6th in financial leverage and 1st in each of the other key financial operating performance metric categories:  margin, asset turnover, ROA, and ROE.  Wiley Rein played both great “offense” (asset turnover) and great “defense” (margin); and, the combination of those 2 metrics yielded the 1st place ranking in ROA – at a level that was nearly 1.85 times higher than the 2nd place ROA finisher.  Combine that with good “special teams” play – it’s 6th place ranking in leverage – and you have a 1st place ranking in ROE that was 2.57 times as much as the 2nd place ROE finisher.
  • When summing up the East North Central division’s firm rankings in each of the key metric categories in the prior posting, I likened Kirkland & Ellis’ performance to Secretariat’s 31-length victory at the 1973 Belmont Stakes.  Carrying forward the horse racing analogy and imagery, when similarly summing up the South Atlantic division’s firm rankings in each of the key metric categories Wiley Rein’s 2006 relative financial operating performance likewise was so dominating as well that a race between the 2 firms might look like Affirmed and Alydar thundering neck and neck down the stretch in the 1978 Belmont Stakes.  Wiley Reins aggregate score in the key metric categories was a 10.  Finishing out the top 5 were 3 other D.C. firms – McKee Nelson with a 32; Akin Gump with a 47; and, Covington & Burling with a 54.  The other top 5 firm in the rankings was Atlanta-based King & Spalding with a 49.  (Those totals are not included in the tables for space reasons but are included for all of the firms in the *.pdf attachment).
  • McKee Nelson’s performance in the key metric categories ranked it a clear 2nd behind Wiley Rein’s 1st place ranking and ahead of Akin Gump’s 3rd place ranking.  McKee Nelson rated 2nd in margin, asset turnover, ROA, and ROE, behind Wiley Rein’s 1st place rating in each of those categories, while Akin Gump finished 17th, 7th, 10th, and 4th, respectively, in the same categories.  But McKee Nelson gave up a lot of ground in the rankings to Wiley Rein when it ranked 24th in leverage to Wiley Rein’s 6th; while Akin Gump’s inconsistent performance in the other key metrics kept its 9th place rating in leverage from significantly closing the gap with McKee Nelson.
  • Wiley Rein also ranked 1st, with a score of 58, when summing up the firms’ rankings in all of the metric categories.  Finishing out the top 5 again were 3 other D.C.-based firms – Akin Gump with an 89; Hogan & Hartson with a 98; and, Covington & Burling with a 98 – and Atlanta-based King & Spalding with a 90. (Again those scores are included only in the *.pdf attachment).
  • When comparing the South Atlantic division’s performance in the key metric categories versus that of the aggregate AmLaw 200, the division did fairly well.
    • Fourteen (14) firms (38%) in the division achieved a margin greater than did the aggregate AmLaw 200.
    • Fifteen (15) firms (41%) in the division achieved an asset turnover greater than did the aggregate AmLaw 200.
    • Fourteen (14) firms (38%) in the division achieved an ROA that exceeded the ROA achieved by the aggregate AmLaw 200.
    • Fifteen (15) firms (41%) in the division achieved a financial leverage higher than the aggregate AmLaw 200 leverage.
    • Ten (10) firms (27%) in the division achieved an ROE greater than did the aggregate AmLaw 200.  These firms included each of the 5 firms that finished 1 – 5 in the summed total of the key metric categories, together with 5 other firms, including 4 D.C.-based firms – Howrey; DLA Piper US; Dickstein Shapiro; and, Finnengan, Henderson, Farabow, Garrett & Dunner – and Miami-based Greenberg Traurig.

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 South Atlantic division in the aggregate and the AmLaw 200 in the aggregate.

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