Pitcher Partners recently conducted our fourth annual Legal Firm Survey. The survey was designed to gain further industry insight and to help firms make informed decisions during times of rapid change.
It was interesting to compare how the legal structure, number of equity partners and the decision-making models adopted have impacted on the financial performance of respondent firms.
In general terms, the results of our survey showed that:
Firms with fewer than 5 equity partners were more profitable as a percentage of revenue (32%) followed by
Firms with greater than 10 equity partners (27%) and then
Firms with between 5-10 equity partners (21%)
Firms with 5-10 equity partners were more profitable per equity partner (over $711k) followed by
Firms with >10 equity partners (over $637k) and
Firms with <5 equity partners (over $511K)
Firms where decisions were made more collaboratively (all partners, board or committee of partners) were more profitable than those where decisions were made by the managing partner.
There are a number of factors that could be driving these results, many of which our survey did not cover in detail. For example:
Smaller firms appear to benefit from the ability to carry lower overheads, however an assumed lack of leverage and the assumption that partners also spend more time undertaking administrative tasks, result in a lower profit per partner in dollars.
Large firms have the ability to engage senior executives to administer the firm whilst consciously managing leverage and multiples, however the nature of a large practice lends itself to carrying greater overhead and cost leakage. Therefore a reduction in profit per partner in dollars.
5-10 partner firms, whilst of a size able to implement effective leveraging, also permit the partners to take on significant support in practice administration therefore allowing greater revenue contribution in the way of partner billable hours. In percentage terms, the overheads suggest a lower profit return which is misleading given the leverage benefits outweigh the costs.
This however, should not discount the importance of governance and decision making. Managing and leading a firm is far more complex and presents more difficult challenges today than in the past. A firm’s governance structure needs to support managing, leading and competing strategically and effectively. Good governance should result in all partners sharing their views while allowing for growth and adoption of change.