Best indicator of a firm's financial health Forum

[redcard54]

In light of recent events, what is the best indicator of a firm's ability to weather the storm? In other words, when you're trying to figure out a firm's likelihood of no-offers, rescinded offers (SA and full time) or lay offs, what are good metrics to look at? Revenue? Revenue per lawyer? Profits per partner?

[M458]

In light of recent events, what is the best indicator of a firm's ability to weather the storm? In other words, when you're trying to figure out a firm's likelihood of no-offers, rescinded offers (SA and full time) or lay offs, what are good metrics to look at? Revenue? Revenue per lawyer? Profits per partner?

I think the metrics you listed above, plus leverage. It feels like (and maybe there's evidence to back this up) a highly leveraged firm with a ton of associates per partner would be more likely to conduct layoffs.

[BrainsyK]

I think PPL is probably the most useful and most underused performance metric. It actually diluted with leverage and measures what partners actually care about.

[nealric]

Revenue per lawyer is a good metric because it's harder to game. Profit per partner can be quite wonky, especially given the proliferation of non-equity partners. PPP gets artificially inflated as only the rainmakers get equity.

You'd also want to look out for firms that have recently undergone a major expansion or merger. That increases the likelihood of debt or guaranteed contracts. Dewy Leboeuf was famously brought down by huge guaranteed contracts given to lateral partners who didn't deliver the business that was expected.

Unfortunately, there's always going to be a good deal of guesswork in this space. Law firms aren't public companies, so they don't have to release comprehensive audited financials to the public on a regular basis.

[cavalier1138]

Unfortunately, there's always going to be a good deal of guesswork in this space. Law firms aren't public companies, so they don't have to release comprehensive audited financials to the public on a regular basis.

Totally agree with this. I would look at metrics, but I'd also investigate what a particular firm did during the last recession. Not everyone fired associates last time, and I don't think you could determine which firms took which course of action by looking solely at the public-facing financials.

[DC2NY2x]

Revenue per lawyer is a good metric because it's harder to game. Profit per partner can be quite wonky, especially given the proliferation of non-equity partners. PPP gets artificially inflated as only the rainmakers get equity.

You'd also want to look out for firms that have recently undergone a major expansion or merger. That increases the likelihood of debt or guaranteed contracts. Dewy Leboeuf was famously brought down by huge guaranteed contracts given to lateral partners who didn't deliver the business that was expected.

Unfortunately, there's always going to be a good deal of guesswork in this space. Law firms aren't public companies, so they don't have to release comprehensive audited financials to the public on a regular basis.

so what would be a "healthy" PPL number?

[nealric]

Revenue per lawyer is a good metric because it's harder to game. Profit per partner can be quite wonky, especially given the proliferation of non-equity partners. PPP gets artificially inflated as only the rainmakers get equity.

You'd also want to look out for firms that have recently undergone a major expansion or merger. That increases the likelihood of debt or guaranteed contracts. Dewy Leboeuf was famously brought down by huge guaranteed contracts given to lateral partners who didn't deliver the business that was expected.

Unfortunately, there's always going to be a good deal of guesswork in this space. Law firms aren't public companies, so they don't have to release comprehensive audited financials to the public on a regular basis.

so what would be a "healthy" PPL number?

It's going to depend on the location and the firm's place in the market. A healthy number from a mid-sized firm in Des Moines is going to be very different from an NYC based megafirm. I'd look at it in relation to peer firms rather than an absolute number.

[LBJ's Hair]

Would look at (a) PPP, (b) extent to which firm has broken with lockstep, (c) lit-corporate revenue mix.

Latter two are subjective obviously, but what can really screw over firms in a crisis are low profits and lots of guaranteed compensation packages. Over-leverage to pro-cyclical practices like M&A also a little concerning.

[trebekismyhero]

Would look at (a) PPP, (b) extent to which firm has broken with lockstep, (c) lit-corporate revenue mix.

Latter two are subjective obviously, but what can really screw over firms in a crisis are low profits and lots of guaranteed compensation packages. Over-leverage to pro-cyclical practices like M&A also a little concerning.

I agree with your last 2, but PPP is not a good measurement. As others have noted, firms can manipulate PPP. Cadawalder is top 25 in PPP, but obviously not a top 25 firm in terms of health. RPL and profit margins are better standards

[LBJ's Hair]

Would look at (a) PPP, (b) extent to which firm has broken with lockstep, (c) lit-corporate revenue mix.

Latter two are subjective obviously, but what can really screw over firms in a crisis are low profits and lots of guaranteed compensation packages. Over-leverage to pro-cyclical practices like M&A also a little concerning.

I agree with your last 2, but PPP is not a good measurement. As others have noted, firms can manipulate PPP. Cadawalder is top 25 in PPP, but obviously not a top 25 firm in terms of health. RPL and profit margins are better standards

Yeah fair. They're #35 by RPL apparently, right next to Sidley and WSGR. Seems not bad, just $100K off from #25? Sorta unremarkable, would not have guessed they'd be in trouble

[Sackboy]

Would look at (a) PPP, (b) extent to which firm has broken with lockstep, (c) lit-corporate revenue mix.

Latter two are subjective obviously, but what can really screw over firms in a crisis are low profits and lots of guaranteed compensation packages. Over-leverage to pro-cyclical practices like M&A also a little concerning.

I agree with your last 2, but PPP is not a good measurement. As others have noted, firms can manipulate PPP. Cadawalder is top 25 in PPP, but obviously not a top 25 firm in terms of health. RPL and profit margins are better standards

To better illustrate (Cadwalader):

• PPP: 24th
• RPL: 41st
• Profit Margin: 91st

[LBJ's Hair]

Would look at (a) PPP, (b) extent to which firm has broken with lockstep, (c) lit-corporate revenue mix.

Latter two are subjective obviously, but what can really screw over firms in a crisis are low profits and lots of guaranteed compensation packages. Over-leverage to pro-cyclical practices like M&A also a little concerning.

I agree with your last 2, but PPP is not a good measurement. As others have noted, firms can manipulate PPP. Cadawalder is top 25 in PPP, but obviously not a top 25 firm in terms of health. RPL and profit margins are better standards

To better illustrate (Cadwalader):

• PPP: 24th
• RPL: 41st
• Profit Margin: 91st

I have em at 35 for RPL for 2019 data, but that profit margin is atrocious. Maybe that's the canary...

[LaLiLuLeLo]

How is Kirkland not going to be in trouble with guaranteed partner comp? I don’t have all the details, but my understanding is that they guarantee a certain level of comp for x years when they hire lateral partners.

[LBJ's Hair]

How is Kirkland not going to be in trouble with guaranteed partner comp? I don’t have all the details, but my understanding is that they guarantee a certain level of comp for x years when they hire lateral partners.

Yeah, it's definitely not a positive.

[Ultramar vistas]

How is Kirkland not going to be in trouble with guaranteed partner comp? I don’t have all the details, but my understanding is that they guarantee a certain level of comp for x years when they hire lateral partners.

Yeah, it's definitely not a positive.

Firm leadership has been consistently very bearish in town halls and one on one conversations for the last ~2 years about the likelihood of recession. I find it unlikely that those same people entered into contracts that would doom the firm in a downturn. It’s just not even a topic of conversation on the inside - everyone is being fed hours and no one I know is slow except because they’re hiding from bankruptcy work.

[Anonymous User]

How is Kirkland not going to be in trouble with guaranteed partner comp? I don’t have all the details, but my understanding is that they guarantee a certain level of comp for x years when they hire lateral partners.

I’m at Kirkland, have not heard of compensation guarantees for partners. Might be troubling if the lateral partners didn’t bring in big books or whatever. Dewey has some issues here but I felt like it wasn’t the only issue at that firm.

[JusticeSquee]

Would look at (a) PPP, (b) extent to which firm has broken with lockstep, (c) lit-corporate revenue mix.

Latter two are subjective obviously, but what can really screw over firms in a crisis are low profits and lots of guaranteed compensation packages. Over-leverage to pro-cyclical practices like M&A also a little concerning.

I agree with your last 2, but PPP is not a good measurement. As others have noted, firms can manipulate PPP. Cadawalder is top 25 in PPP, but obviously not a top 25 firm in terms of health. RPL and profit margins are better standards

To better illustrate (Cadwalader):

• PPP: 24th
• RPL: 41st
• Profit Margin: 91st

I have em at 35 for RPL for 2019 data, but that profit margin is atrocious. Maybe that's the canary...

One thing that is being missed in all the Cadwalader discussion so far. Maybe the firm is financially unstable. But it is highly likely that the Cadwalader leadership is acting in a far more self-interested manner than peer firms. Firms that are in a similar situation to Cadwalader are not cutting compensation for associates/staff. Some firms will deal with this crisis by trying to weather the storm in a number of ways. Cadwalader leadership has let you know what path they have chosen, and what kind of leaders they are.

[LaLiLuLeLo]

How is Kirkland not going to be in trouble with guaranteed partner comp? I don’t have all the details, but my understanding is that they guarantee a certain level of comp for x years when they hire lateral partners.

I’m at Kirkland, have not heard of compensation guarantees for partners. Might be troubling if the lateral partners didn’t bring in big books or whatever. Dewey has some issues here but I felt like it wasn’t the only issue at that firm.

It’s scuttlebutt through (non-Kirkland) partners I talk to. One expressed frustration that a group they were trying to poach went to Kirkland because they couldn’t match the guarantees. Another said she has friends with a guarantee. It’s usually not long term, about 3 years. But my understanding is it’s a large driver of how they’re able to poach so many partners/groups.

[trebekismyhero]

How is Kirkland not going to be in trouble with guaranteed partner comp? I don’t have all the details, but my understanding is that they guarantee a certain level of comp for x years when they hire lateral partners.

I’m at Kirkland, have not heard of compensation guarantees for partners. Might be troubling if the lateral partners didn’t bring in big books or whatever. Dewey has some issues here but I felt like it wasn’t the only issue at that firm.

It’s scuttlebutt through (non-Kirkland) partners I talk to. One expressed frustration that a group they were trying to poach went to Kirkland because they couldn’t match the guarantees. Another said she has friends with a guarantee. It’s usually not long term, about 3 years. But my understanding is it’s a large driver of how they’re able to poach so many partners/groups.

Yeah, I knew a few partners that were taken away from my old firm to Kirkland with guarantees that basically doubled their salary. But those were all several years ago so maybe they have cut back on the guarantees.

[Sackboy]

I have em at 35 for RPL for 2019 data, but that profit margin is atrocious. Maybe that's the canary...

I am working off 2017/2018 data that I pulled from wikipedia, because I knew it would be the fastest way to throw together the lists, so you're likely correct. Despite any changes year-to-year, the overall narrative for CWT is the same: their PPP is not representative of overall firm health.

How is Kirkland not going to be in trouble with guaranteed partner comp? I don’t have all the details, but my understanding is that they guarantee a certain level of comp for x years when they hire lateral partners.

I’m at Kirkland, have not heard of compensation guarantees for partners. Might be troubling if the lateral partners didn’t bring in big books or whatever. Dewey has some issues here but I felt like it wasn’t the only issue at that firm.

Kirkland does not guarantee compensation to all lateral partners, and the agreements normally last 2yrs. The firm uses guaranteed compensation to hook partners that it knows it would otherwise have a low chance of getting. Most partners have no problem taking equity at Kirkland, because the lowest payout was 1.75M and highest was 15M in 2018 (or maybe it was 2019, can't exactly remember). The two guaranteed compensation arrangements I can think of off the top of my head are Goldstein (Cravath's former head of litigation) and Khuzami (former SEC head of enforcement), and Khuzami's ended in 2015. Though, I'd imagine Eric Schiele (former Cravath M&A) is also on a guaranteed compensation arrangement. From my understanding, Kirkland has used this hook fairly conservatively and strategically.

Guaranteed compensation arrangements are also not uniform and are frequently quite a bit different than they were in the Dewey days. With some arrangements, there is more emphasis on the compensation component than on the guaranteed component. A number of these compensation arrangements also require the firm to hit certain financial targets and offer a range of compensation instead of a fixed sum, both mechanisms to avoid Dewey problems.

[abcdoremi]

Would look at (a) PPP, (b) extent to which firm has broken with lockstep, (c) lit-corporate revenue mix.

Latter two are subjective obviously, but what can really screw over firms in a crisis are low profits and lots of guaranteed compensation packages. Over-leverage to pro-cyclical practices like M&A also a little concerning.

I agree with your last 2, but PPP is not a good measurement. As others have noted, firms can manipulate PPP. Cadawalder is top 25 in PPP, but obviously not a top 25 firm in terms of health. RPL and profit margins are better standards

To better illustrate (Cadwalader):

• PPP: 24th
• RPL: 41st
• Profit Margin: 91st

I have em at 35 for RPL for 2019 data, but that profit margin is atrocious. Maybe that's the canary...

One thing that is being missed in all the Cadwalader discussion so far. Maybe the firm is financially unstable. But it is highly likely that the Cadwalader leadership is acting in a far more self-interested manner than peer firms. Firms that are in a similar situation to Cadwalader are not cutting compensation for associates/staff. Some firms will deal with this crisis by trying to weather the storm in a number of ways. Cadwalader leadership has let you know what path they have chosen, and what kind of leaders they are.

I'm not sure about this. There are plenty of firms with a profit margin in the 30% range and I'm not sure how different the financial health of the firm is dependent on if profit margin is 30% (like Cadwalader) vs. 38% (like Sidley). Second, if a firm is going to have to do cuts, it may be more responsible to do it earlier rather than later. It could be the Cadwalader is being responsible and instead of caring about optics they are being the first mover now to prevent deeper cuts that other firms will make down the line. Or they could be being opportunistic, we just don't know at this point. The scary thing is, it could be that firms that are not making cuts now are going to be in far more trouble than some of the ones that are. We just do not know. As far as I know the only V100 firm to reduce summer associate salaries thus far is Cooley, and to me this would be a big indicator of financial distress since summer associates don't get benefits, and so their cost is lower than other associates, and so a firm must have serious cash-flow problems to risk these optics and the fact that if the economy improves all of these associates will likely try to flee the firm.

[TMJ2017]

Something being overlooked is that any cost-cutting action in the near-term that a firm takes depends on the management committee's outlook for how bleak the future is, which is a huge variable. Per reporting, CWT is forecasting the "peak of the crisis" to last through July. That's a relatively conservative outlook compared to things I have been hearing from certain boomer partners I come into contact with, who still believe in a V-shaped recovery starting in May. Get enough people with that outlook on a management committee and they will stop the firm from taking any action until reality hits them in the face.

[Necho2]

Re the Kirkland Guarantees- this might indicate they're better prepared for this

"Benjamin Barton, a law professor at the University of Tennessee and author of Glass Half Full: The Decline and Rebirth of the Legal Profession, says guaranteed payouts are dangerous to firm culture and financial health—though reports of Kirkland’s arrangements with its lateral hires make him suspect they are less of a threat to its bottom line than they were to Dewey’s. According to the New York Times, Kirkland appears to have not technically guaranteed a particular figure, but rather granted a number of equity shares that would equal $11 million a year at current revenue and profit levels. “If so, that’s less dangerous than what happened at Dewey, because if overall revenue and profits fall in a downturn, the per-share payouts would also fall, allowing for more protection,” Barton says."

https://www.abajournal.com/magazine/art ... d-concerns

[10b5-1]

Re the Kirkland Guarantees- this might indicate they're better prepared for this

"Benjamin Barton, a law professor at the University of Tennessee and author of Glass Half Full: The Decline and Rebirth of the Legal Profession, says guaranteed payouts are dangerous to firm culture and financial health—though reports of Kirkland’s arrangements with its lateral hires make him suspect they are less of a threat to its bottom line than they were to Dewey’s. According to the New York Times, Kirkland appears to have not technically guaranteed a particular figure, but rather granted a number of equity shares that would equal $11 million a year at current revenue and profit levels. “If so, that’s less dangerous than what happened at Dewey, because if overall revenue and profits fall in a downturn, the per-share payouts would also fall, allowing for more protection,” Barton says."

https://www.abajournal.com/magazine/art ... d-concerns

Woah woah woah, doing research rather than just wildly speculating? Crazy times.

[Anonymous User]

Kirkland guarantees a share count to certain laterals (i.e., you won't get your share count docked for at least X years) and does not guarantee a dollar amount.

(K&E person)