Gaming the Stats

This is exactly the sort of headline I usually cringe at - a very consultant/business school mealy-mouthed statement. I'm using it, however, to make a point (honestly) - that statistics can be important but that (a) you have to be sure that you are collecting and analysing the important numbers (not just the good ones) and (b) that you then talk about those important numbers. It's also important to remember that statistics can easily be used to fool people...

My somewhat odd train of thought was pushed into motion because of a headline on the "FindLaw" blog (here). Apparently the number of partners in law firms in England and Wales has reduced for the first time since 2008. The post says:

The survey revealed that the number of partner roles available to lawyers in the UK fell in the year to 30 June 2012 to 33,662, a fall of 153.
The fall is more remarkable because the number had grown by 689 last year and by 1,466 in 2009/10.
It is thought the fall in jobs reflects a wider uncertainty with the current economic outlook but may also be due to uncertainty created in the legal sector by the advent of Alternative Business Structures introduced by the Legal Services Act, or 'Tesco Law'.

I'm not sure that this is the whole picture.

Most law firms are obsessed by one particular statistic - PEP. Profit per Equity Partner (PEP) is one of the few numbers that most law partners can remember and want to talk about. Firms publish their PEP figures in the industry press and there is much discussion about the subject.

If you have read this blog before, you will know that I think that PEP is one of the most foolish statistics every used. I won't go on about it again - but there is no definition of how profit is measured, and no agreed definition of a partner (A Equity, B Equity, Fixed Equity...).

Importantly, too, there are too ways to improve PEP. The first is to improve the firm's profitability. This is very hard for most partners to think about. Other than firing people, few lawyers have the time to consider cost saving exercises and tend to view marketing as taking people out for meals and drinks.

The second way to improve PEP is to reduce the number of Equity Partners That's much easier - partly since it can involve effectively firing people...

The maths are simple (and apologies if you have seen this before - but I think it bears repeating):

In year 1, the firm's profit is £10million and they have 50 Equity Partners - so PEP is £200,000.
In year 2, the firm's profits have fallen to £9million (oh no!)  - but they have reduced Equity Partners by 6 (through retirements and 'nudging' aside a couple of partners that no-one liked too much) to 44 - and so PEP is now £204,545. Yippee!

My point is that there is a huge motivation to, at the very least, maintain partner numbers. In the example above, if profits remain the same, each additional partner reduces PEP by nearly £4,000.

It shouldn't be a surprise that partner numbers are falling - I'm surprised they haven't fallen further.

Tough Times for Equity Partners

Perhaps the title should read "A tough time to try to become an equity partner" which, although more accurate is less snappy.

It would appear from the statistics and results being released that there are fewer equity partners in law firms that in previous years. Firms (or rather existing equity partners) have protected their own earnings and the PEP figures (which they seem so fond of) by the simple expedient of either not increasing their partner numbers or by actively reducing them. Five years ago, perhaps, an equity partner would be 'carried' to an extent by his colleagues - for a while at least. Not now. The principle now seems to be 'perform or out'.

Only one major firm (as reported in "The Lawyer") has increased its ratio of equity partners over the last five years - although that figure is skewed by the partner activity over the last 12 - 18 months. Field Fisher Waterhouse, for example, have reduced their equity partners (that is, full. "A" level partners) from 41 to 27, according to "The Lawyer".

So what? Should we care? Only to the extent that it is another demonstration of the ruthlessness of the industry. In a way it is nice to see that this ruthlessness is applied to fellow equity partners as well as to employees. No-one would appear to be safe.

More seriously, however, this could be (some firms will, of course, have given the matter more thought than others) a further example of short-term thinking. Presumably those partners who no longer have equity in a firm will fell a little miffed. I suspect that it is, therefore, unlikely that they will continue for any length of time in that firm. Of course, this might not be a problem, if the partner really wasn't performing. I doubt, however, that this can be the case with all of them (surely?).

The other serious issue is that of motivating about-to-become-equity-partner level staff. Most lawyers only have one promotion path in mind - that of making partner. This progression has suddenly become more difficult and so firms will need to become ingenious in motivating the people before whom they used to dangle an equity partnership.

It will be interesting to see movement in this market over the next few months - and the clever ways in which firms work with their good senior associates or fixed share partners in order to keep them.