Thursday, 20 May 2010

Revenue down; Profit up. Is that good?

"The Lawyer" ran a story this week about the results from Denton Wilde Sapte (see here). The headline is a 22% increase in PEP while revenue has fallen.

I'm with Zook & Allen (Their excellent "Profit from the Core" - have a look on Google or buy it at Amazon - it's worth a read):
  • growing revenues but not profits does not lead to long term economic value
  • growing profits but not revenues is unsustainable
  • growing revenues and profits but not exceeding cost of capital and you just run out of capital
Let me just emphasise the second point - no firm can just increase profit but not revenues for long. It's just not sustainable.  I was so puzzled, I did some analysis, using figures from the article in "The Lawyer" above and from Dentons own web site:

Let's have a look at that in detail (and we'll ignore my mathematical dispute with the article about PEP). The number of total partners went down by 4.4% (from 181 to 173) while the number of Equity Partners increased by 1.2% (from 86 to 87). These partners produces slightly less revenue (a fall of £2.3million or 1.4%) but managed to produce significantly more profit (£5.9million or 23.3%) - leading to an increase of 29% of profit per partner (all partners) or an increase of 20% in PEP.

How is this possible? Well savage cost cutting will do some of it - although there will have been some "extraordinary costs" to go along with this sort of cost cutting (such as redundancy payments). Everyone will have been expected to work harder - or at least longer. A 29% increase in profit per partner, however, is a huge amount.

Rather than being impressed at Denton's performance, I find it rather worrying. I bet WIP has decreased - but that acts to pull revenue and profit from this year into last, which makes this year's performance more difficult. My main concern is this - what were partners doing in the years before that they could pull an increase in profit per partner of 29% out of the bag. Were they all going home early?  Were they just not billing for some hours? Will this new level of profitability be maintained? Was this increased profit paid to partners at the expense of retaining money for investing in the firm and its future?

My other concern would be as a client. Look at it from their point of view - Dentons have screwed more money out of every penny spent by clients. If I was one of those clients, I'd want a share of that increase profit.

Increasing profits without increasing revenue is unsustainable. It simply is. This might be a "blip" year for Dentons - but I'd still be worried and would be concentrating hard on ensuring that there was sufficient investment in the future and that there was a good, sustainable, long term plan.

I'd probably stop making such a noise about profitability and PEP in a difficult market too!

1 comment:

  1. I've noticed that "Solicitr" have written about this story too - and that they agree with my PEP maths! (