Minding the Law's Business: THE YELLOW ROSE OF TEXAS

To do my recent posting about the proposed merger between Kirkpatrick & Lockhart Preston Gates Ellis, “an international firm without a headquarters office,” and Dallas-based Hughes & Luce (A Merger Too Close to Call), I had to go to the Texas Top 25 published in the Texas Lawyer’s 2006 and 2007 Firm Finance Surveys since Hughes & Luce’s gross revenues were not large enough to be included in The American Lawyer’s AmLaw 200. Now armed with the information on the Texas Top 25, I thought it might be interesting, at least to readers in Texas-based firms, to see a LawBall-type analysis of the Texas Top 25 similar to the one I did recently (Beauty is in the Eye of the Beholder) on the AmLaw 200.

As has been my custom, I’ve attached a *.pdf document (“Texas Top 25 Performance Statistics 2006” under the category “Posting Attachments" in the upper right-hand margin of this blog) that includes an analytic table showing the 2006 financial operating performance metrics for each of the firms in the 2007 Texas Top 25 and another table showing the firms’ relative ranking (1 – 25) within each performance metric. The attachment also includes analytic tables showing 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.

As I noted before in the 2007 AmLaw 200 tour-concluding posting, I do believe beauty is in the eye of the beholder when evaluating a business – even a business involved in the practice of law. And, again ever-mindful not only of personal influence on business evaluation, but also the oft-quoted bromide “There are 3 types of lies – lies, damn lies, and statistics,” I’ve included my own ranking of the Texas Top 25 to illustrate how each of us personally may place different levels of importance on separate performance metrics in evaluating a business.

When I’m either evaluating a business for investment or purchase or identifying operating performance issues, I use the same metrics I’ve incorporated into LawBall. Ultimately, however, 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 by 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 also subscribe to Warren Buffett’s view on the conservative use of leverage.

The biggest differences between the business evaluation I typically perform and the one I shared with you on the AmLaw 200 and share with you today on the Texas Top 25 is 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.

Here in order are my LawBall top 5 financial operating performance firms for 2006 from the 2007 Texas Top 25 published in Texas Lawyer’s 2007 Firm Finance Survey: Susman Godfrey; Vinson & Elkins; Baker & Botts; Akin Gump Strauss Hauer & Feld; and Carrington, Coleman, Sloman & Blumenthal. Below are 2 tables for my top 5 - one has the 2006 financial operating performance metrics for each of the firms, with my personal key metrics highlighted in blue, and the other has the firms’ relative ranking among the Texas Top 25 (1 – 25) 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 list of the firms ranked (1 – 25) according to my 3 personal key metrics.

Several brief observations:

When compared to the aggregate performances of both the Texas Top 25 and the AmLaw 200, the relative financial operating performance of the aggregate LawBall Texas Top 5 picks exceeded both the Texas Top 25 and the AmLaw 200 in margin, asset turnover, ROA, and ROE. It also exceeded the aggregate Texas Top 25, but not the AmLaw 200, in leverage. In other words, these 5 firms achieved better performance with more risk (more aggressive leverage) than that of the aggregate Texas Top 25, but with less risk (more conservative leverage) than the aggregate AmLaw 200. However, the relative financial operating performance of the aggregate AmLaw LawBall Picks (Top 10) significantly exceeded that of the aggregate LawBall Texas Top 5 picks in every individual key metric category (margin, asset turnover, ROA, leverage, and ROE). Again, I ask the following question regarding the relative financial operating performance of these firms: What does that say about these 5 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 in comparison to other firms?

Three (3) of the LawBall Texas Top 5 picks were among the 4 largest Texas Top 25 firms in terms of both the number of lawyers and the amount of gross revenue; while 2 of the LawBall Texas Top 5 picks were among the smallest firms in terms of the number of lawyers. Susman Godfrey, which ranked 1st among the LawBall Texas Top 5 picks, and Carrington, Coleman, which ranked 5th among the LawBall Texas Top 5 picks, tied for the 3rd smallest number of lawyers (86) in the Texas Top 25.

By comparison to the LawBall Texas Top 5 picks, when summing up the Texas Top 25 rankings in each individual key metric category the top 5-ranked firms in order were: Vinson & Elkins (1st); Baker & Botts (2nd); Akin Gump (tied for 3rd); Susman Godfrey (tied for 3rd); and Fulbright & Jaworski (tied for 5th) and Locke Lidell & Sapp (tied for 5th).

By comparison to the LawBall Texas Top 5 picks, when summing up the Texas Top 25 rankings in all of the metric categories the top 5-ranked firms in order were: Vinson & Elkins (1st); Baker & Botts (2nd); Akin Gump (3rd); Susman Godfrey (4th); and Fulbright & Jaworski (5th).

The *.pdf attachment also has easy to view individual tables that reflect the firms’ individual rankings (1-25) in all of the key metric categories of margin, asset turnover, ROA, financial leverage, and ROE versus the Texas Top 25 in the aggregate and 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.