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....

Mar-on Consulting

Geotrupes