Friday, 17 July 2009

Statistics, Damned Lies, and Context

The legal press is enjoying itself at the moment in reporting falls in PEP figures. Both "The Lawyer" and "Legal Week" have published lists recently.

Not quite at random, I decided to have a look at a few firms either side of the £100m mark (using 2009 revenue as data). Before I continue with the analysis, I should like to repeat a mantra I learnt at London Business School: "Turnover is vanity, profit is sanity and cashflow is reality". I frequently mention my concerns at the measurements used in law firms - particularly a delight in reporting revenue figures (which really don't mean much and can fool lawyers into taking work with lots of turnover and no profit). Having said that, the numbers seem striking at first pass.

Firstly let's look at revenue in 2008 and 2009 (as reported in "The Lawyer):
Firm Name 2009 Rev(£M) 2008 Rev(£M) % change
Linklaters 1,300 1,293 0.54%
Freshfields 1,290 1,180 9.32%
Clifford Chance 1,260 1,330 (5.26%)
Lovells 531 479 10.86%
Eversheds 366 390 (6.15%)
Norton Rose Group 314 297 5.72%
Ashurst 301 323 (6.81%)
CMS Cameron McKenna 240 236 1.91%
Taylor Wessing 188 185 1.67%
Clyde & Co LLP 185 157 17.83%
Addleshaw Goddard 173 195 (11.41%)
Denton Wilde Sapte LLP 170 164 3.28%
Nabarro 127 142 (11.17%)
Beachcroft LLP 121 114 6.14%
Trowers 90 78 15.34%
Stephenson Harwood 85 85 (0.23%)
Hill Dickinson 82 73 12.18%
WFW 74 59 24.58%
Charles Russell LLP 70 71 (1.70%)
Kennedys 67 52 30.68%
DWF 60 55 8.68%
Dickinson Dees LLP 54 60 (10.33%)
Mishcon de Reya 47 47 0.42%
Shepherd & Wedderburn 40 43 (7.04%)
TLT LLP 39 41 (4.88%)
Manches 34 34 (0.87%)
Morgan Cole 34 32 4.36%
Bircham Dyson Bell 32 36 (8.73%)
Across this group, the average increase in revenue is 2.82%. The average of the top 50 firms in 2007/2008 was 12.5% according to "Legal Week".

Now PEP for the same group in the same period:
Firm Name 2009 PEP 2008 PEP PEP % change
Linklaters 1,302 1,440 (9.58%)
Freshfields 1,440 1,440 0.00%
Clifford Chance 733 1,150 (36.26%)
Lovells 585 661 (11.50%)
Eversheds 404 552 (26.81%)
Norton Rose Group 517 625 (17.28%)
Ashurst 673 1,040 (35.29%)
CMS Cameron McKenna 554 650 (14.77%)
Taylor Wessing 369 457 (19.26%)
Clyde & Co LLP 550 550 0.00%
Addleshaw Goddard 405 586 (30.89%)
Denton Wilde Sapte LLP 300 470 (36.17%)
Nabarro 375 610 (38.52%)
Beachcroft LLP 301 310 (2.90%)
Trowers 509 515 (1.17%)
Stephenson Harwood 610 620 (1.61%)
Hill Dickinson 294 312 (5.77%)
WFW 430 424 1.42%
Charles Russell LLP 235 390 (39.74%)
Kennedys 350 300 16.67%
DWF 260 350 (25.71%)
Dickinson Dees LLP 150 336 (55.36%)
Mishcon de Reya 575 740 (22.30%)
Shepherd & Wedderburn 230 311 (26.05%)
TLT LLP 198 268 (26.12%)
Manches 209 227 (7.93%)
Morgan Cole 218 241 (9.54%)
Bircham Dyson Bell 230 312 (26.28%)
Across this group, the average decrease in PEP was 18.1% compared with an average increase for Legal Week's top 50 for 2007/2008 of 7.3%.

On the left you can see a chart of the changes in revenue and PEP for the "Over £100m" group mentioned above. It is rather depressing, I agree, but really what is required is a longer term understanding of both of these figures. I would like to see these measurements for as many firms as possible over a five or ten year period. This is much more likely to give useful information and to provide an insight into the health of individual firms. It can also provide a useful context for analysts to be able to comment on a single year. Is a reduction in PEP of 11% bad? I don't know. In the context of five years of over 10% growth - no, probably not. In the context of five years of reductions in PEP - probably yes.

The reduction in PEP was surely coming. A combination of tax payments for the previous year, reduced client spending, additional extraordinary expenditure to get rid of (possibly too many) staff and a lag in reductions in other expenditures made a reduction in PEP very predictable. What is interesting is in how the changes seem to affect firms with all sizes of turnover.

My point is that firms should not use a reduction in PEP in one year as a signal for further panic measures. Now is the time to speak with the partners and to explain that PEP will be cyclical; that PEP is in any case a fairly poor measurement of the firm's well being - it is far too short-term a measure; and that now is the time to look for efficiencies rather than savings. Now is the time to ensure that every process in the firm is working effectively not just cheaply. Now is also the time to work very hard at the firm's marketing and business development. The partners should be concentrating on excellence in client work, client retention and finding new clients - and not much more. Now is the time that they must (a) make sure they have world-class business support staff; that (b) they have a clear and concise strategy; and that (c) they let the experts concentrate on their areas of expertise - let the partners run the legal side of the business and let the firms executives run the business.

Does PEP matter? Yes - sadly it does. Firms seem to need to have one measure of comparison and have jumped at using PEP. I suggest a move to looking at trend data - PEP over a rolling 5 and 10 year period and revenue on the same basis. How about profit figures for individual cases and business units - I realise that these will never be published, but surely these are a more useful measurement for any firm's management.

Well done to those firm's who either managed to increase PEP or kept the reduction to a minimum - but let's not pretend that data for one year means that much. Legal week have an interesting article looking at five year trends - this is surely the way forward.

I should like to add, as a postscript, that now is probably a very good time for law firms to hiring high quality consulting advice in the areas of structural planning, efficiency, process planning, training and risk. Happily I know one or two firms who can help with that....

1 comment:

  1. Thanks for posting this great analysis.

    With some firms finding themselves short of cash as the economy contracts, having over-extracted in the good times, benefit could well accrue from (a) using this crunch to drive through real change and (b) stepping back from the cash focus to review where the longer-term strategic opportunities lie.

    In the meantime, performance trends must indeed be more meaningful in assessing management efficacy.