PPP and RPL Forum

[PartiallyLearnedHand]

Could someone please shed some insight into how these metrics are measured, what high PPP and RPL indicate, and how important they should be in choosing a firm for a SA position? Thank you.

[Anonymous User]

Proxies for the quality and complexity of the work, and the overall financial health of the firm — but also, and perhaps more so, an indicator of how willing partners are to work associates to the bone.

If you think you’re 100% going to make partner, then by all means make your decision based on PPP. But also, lol. If prestige is what your care about, just make a decision based on prestige irrespective of PPP!

[Anonymous User]

PPP is profits per EQUITY partner. Equity = partners who are owners of the business, essentially. This was the original AmLaw metric because AmLaw started out as a way for partners to compare how much money they were making.

As an associate, you should only focus on these metrics to the extent they are a sign of the firm’s overall health. PPP has some problems as a measure of firm health. Some firms have a lot of non-equity partners (who have the title partner but are salaried or on contract). Thus, high PPP might not mean that the firm is healthy, but just that they don’t make a ton of equity partners and have high leverage.

One thing that is important to realize is that firms have an overriding drive to maintain and grow PPP. When the PPP starts dropping, the firm is in serious risk of breaking up. We’ve been in a market where PPP has generally been growing so if a firm’s PPP has dropped the last few years I’d avoid that firm in favor of other comparable firms.

RPL is revenue per lawyer - equity partners, non-equity partners, associates (I do not think they count staff attorneys or attorneys serving in admin roles). This is a somewhat better metric for a firm’s health. A firm with high RPL is financially stronger and may also mean that the work is more evenly distributed among practice groups and offices.

AmLaw has recently introduced other metrics - PPL (profits per lawyer), VPL (value per lawyer) which try to measure different stuff. Basically, you should be wary of a firm with high PPP and low RPL. It could mean that PPP is being driven by high leverage and that if the economy heads south the firm will need to conduct a Lathaming to maintain PPP, or that PPP is being driven by one or two profitable groups and if they jump to a more profitable firm they will take the whole firm down with them.

[Anonymous User]

What counts as a high PPP vs. low RPL? For instance, if a firm has $3 mil PPP and $1 mil RPL, is that discrepancy also concerning? Or are we talking more $3 mil PPP but $500K RPL?

[Anonymous User]

What counts as a high PPP vs. low RPL? For instance, if a firm has $3 mil PPP and $1 mil RPL, is that discrepancy also concerning? Or are we talking more $3 mil PPP but $500K RPL?

It's generally indicative of higher leverage.

For the numerically inclined, here's a simple model, PPP and RPL are related by two quantities: margin and leverage. Margin is the ratio of profit to revenue (i.e. dollars of profit per dollar collected). Leverage is typically defined as "associates-per-partner" (in a more rigorous sense, the relevant quantity is total-lawyers-per-partner, which is associates-per-partner + 1). The mathematical relationship is (Profits/Partner) = (Revenue/Lawyer) x (Profit/Revenue) x (Lawyers/Partner), or (PPP) = (RPL) x (Margin) x (Leverage + 1).

It might be useful to compare the actual leverage to the ratio of PPP/RPL, because that will tell you something more meaningful about financial health. Consider PPP = $3mm and RPL = $1mm, PPP/RPL = 3.0. If there are 50 equity partners and 120 associates, then Lawyers-per-Partner = Leverage + 1 = 170/50 = 3.4. This means margin must be around .88, i.e. low operating costs with respect to profits. With the same PPP and RPL, but instead there are 500 associates (Leverage + 1 = 11.0), margin is around 0.27, meaning very high operating costs. You might be able to guess which is more likely to conduct layoffs in a downturn, or which would be more hesitant to match a salary increase. (Caveat that these numbers are not real and I don't know what's actually standard for the industry, or how to interpret them.)

[blkhk]

Thanks for explaining things in so much detail. To add a follow up question, I've noticed AmLaw's profitability index (PPP/RPL) also being thrown around when people talk about a firm's financial health: https://www.law.com/americanlawyer/2018 ... ity-index/

Based on your mathematical equation, it seems like (Profitability Index) = (Margin) x (Leverage + 1). I'm curious as to what kind of weight I should give this number? My first instinct is that since firms with a lot of leverage are obviously going to have an advantage, and high leverage can signal risk of layoffs in downtimes, it might not be the most useful thing to look at as an incoming associate. On the other hand, if that's the case then I'm curious why people don't just look at margin and instead look at the profitability index separately. Or is this more for the benefit of firm management?

Edit: Just wanted to add that from skimming the chart, it seems like a lot of the firms that people mention as possibly being in danger (DLA Piper, Cadwalader, Baker McKenzie etc.) have margins in the high 20s - low 30s. Which once again brings me to the question, does the profitability index have independent value beyond what we can get from looking at the margin by itself?