Bruce MacEwan (blogging as Adam Smith, Esq.) reports on and discusses a article by Guy Beringer, a senior partner at Allen & Overy, the major UK law firm, on the inadequacies (and unfortunate consequences) of using PROFIT PER EQUITY PARTNER (PEP) as a measure (or, perhaps more significantly) THE measure of firm performance.
This is not a new debate, in the law or in industry generally. The weaknesses of PEP are largely the same as the weaknesses of return on shareholders' equity measures. As Messrs Beringer and MacEwan point out, many games can be played with both the numerator and denominator of PEP, but it's not exactly news that companies can and do play games with both reported profits and invested equity, in order to bolster earnings per share numbers.
Welcome, leaders of professional firms, to the wonderful world and revered tradition of managed earnings and media games!
The problem with PEP is not that it's a bad financial measure. ALL measures, especially financial ones, can be gamed. As a lot of people have pointed out over the last two decades, the problem arises when financial measures are not used as part of a "balanced scorecard." It's always been true that a firm needs to serve three constituencies to flourish: clients, people and owners.
Industry makes the same mistake that Mr. Beringer cautions us against: focusing on financials to please Wall Street, hoping that no-one will notice that (initially) degrees of client satisfaction and employee morale are allowed to slip. He's absolutely right to propose the broader use of client and employee satisfaction measures.
One of the things that may cause this to actually happen would be if someone REALLY developed and put up on the web a "JD Powers-like" evaluation system which basically said: "evaluate your law firm and your lawyer here," allowing ready access for future clients and people to check out prospective firms (and individual practices) they might consider working with.
There are beginnings of this out there: Vault.com tries to rate the employee experience, and Chambers (in the UK) has print and on-line versions reporting firm's and people's reputations. But it could get a LOT more explicit, and high profile. I suspect there's a great business available for anyone who wanted to develop that "Rate your law firm" web site.
Of course, I'd be nervous about a "rate your consultant" website, but that's coming too, of course! Someday soon, we're ALL going to be held accountable to a balanced scorecard, whether we like it or not.
6 comments:
Alan Overy is not a the major firm in the UK.
Check this.
I suddenly remembered that for several years, in terms of number of lawyers and gross revenues the law firm Wachtell Lipton Rosen & Katz is smaller compared to the traditional Wall Street heavyweight law firms.
But if the basis is profits per partner, WLRK was always in the top 3.
For sure the partners there are no longer entertaining transferring elsewhere
Dennis --
If you're going to be picky about language, Alan Overy isn't a law firm at all.
Chas -- why not?
Richard, regarding your suggested "JD Powers" site for evaluating law firms: the March 3 edition of The Economist includes a short article (p. 60) about a website created by UK doctor Paul Hodgkin called "Patient Opinion".
The site allows ex-patients of acute-care hospitals to post their views on their experiences there.
The article says the site, now 18 months old, has garned more than 1,700 comments already -- perhaps surprisingly, given the stereotypical view of hospital sojourns, half of them are positive, one quarter critical, and the rest mixed.
I'd love to see someone launch this sort of site for law firms -- I suspect a 2-1 ratio of positive to negative ratings would not be the outcome for many firms.
Richard,
I know I'm a little late to this party, but I'd like to add to the comments about customer experience by pushing a little on this notion of employee morale.
That word, "morale", gets interpreted in a pretty soft way in my experience with professional firms.
When senior managers/ partners think about trying to improve morale, their natural thoughts go to hosting cool events, helping associates feel better about sacrificing their lives for the firm (because let's face it, most senior managers adopt the attitude of "I got murdered as an associate -- it's their turn now"), and paying enough to keep people from fleeing to the competition.
These are all well and good, but usually fall into the lower priority conversations with senior managers.
And they seem annoyed by even having to deal with this.
A different, perhaps more fundamental and strategic question for senior managers is this: Are we net creators or destroyers of talent?
After all, if a firm's future is largely determined by its ability to create, cultivate, and make the most of the best talent in a particular field, this question begs to be answered.
If senior managers added it all up -- the quantity and quality of people you're able to attract, grow, retain, and stay connected to -- even if they leave the firm and become "alumni" -- they might start looking at the talent thing differently.
Isn't it a little ironic that so many professional firms lag behind so-called industrial companies in as fundamental a practice as talent management?
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