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I have been wondering the statistical meaning behind the PPEP and RPL numbers and how that relates to us - so for firms within the v10/20 range, say traditional v10 (excluding Wachtell/Cravath/SC), plus Cleary, Weil, Debevoise - I am assuming since those firms are peer firms, their billing rate should be somewhat similar, then why would there be differences in terms of RPL?

Revenue Per Lawyer=total revenue of the firm/number of attorneys within the firm;
Revenue per lawyer also=lawyers' average billable hours * lawyers' average billing rate.

if billing rates are similar (since they are peer firms and in direct competitions with each other), are the differences mostly due to average billable hours? so the average lawyer at say kirkland billed more hours than cleary/debevoise attorney hence their firm RPL is higher? there can be other reasons too like maybe some firms offers more discounts to get client, but I can't stop thinking that RPL is low key a scary concept - the higher the number is, it just means the average lawyers are billing higher number of hours ...? bc after all what are revenues for lawyers - billable hours

I understand PPEP can be more complicated, but so far it just sounds like, within the same ranks of firms, the more leveraged the firms is, the higher PPEP number could be (larger number of associates working on matters, but less equity partners to share the profit) - and KE PW and STB and plus other traditional wall street firms are all pretty leveraged, and their PPEPs are higher than their peers like Gibson, which is less leveraged (according to a report I read)?

Anyone has any thoughts on this? based on this logic, should we choose the firms with lower RPL and lower PPEP (within the similar tiers ofc)? pls don't laugh at me if you find this a dumb logic

RPL is confusing because firms have non-attorney timekeepers that don’t factor into the denominator for RPL. For example, a lot of tech firms have science advisors and stuff. They generate revenue, but they aren’t lawyers. So you count their fees but exclude them.

For PPEP, another thing you’re forgetting is nonequity partners. Some firms (Cravath, Covington, etc.) have no nonequity partners. And other firms, like Gibson Dunn, don’t have that many nonequity partners. So their PPEP is lower since generally lower-earning partners can be excluded from the PPEP calculation.

Anonymous User wrote: ↑

Mon Mar 08, 2021 4:48 am

if billing rates are similar (since they are peer firms and in direct competitions with each other), are the differences mostly due to average billable hours?

Theoretically, wouldn’t another important determinant of RPL be the relative seniority of one firm versus another? So if Firm A is comparatively mid-level & senior-heavy, its blended average billing rate will be higher than a comparatively more junior-heavy Firm B — even though, class by class, the two firms have the same rate structure. Small differences in terms of overall class composition could lead to somewhat large differences in RPL.

Of course, I don’t know empirically whether there actually are significant differences in seniority from firm to firm. But I have to wonder if Kirkland has less attrition in its mid-level ranks (people sticking around for non-equity partner title in year 6) vs. peer firms, and is able to benefit from that in the firm of higher blended billing rates.

Also: perhaps certain kinds of clients / work requires systematically more or less discounting that other kinds of clients / work?

It does seem a mystery that Cravath has such a brutal hours reputation (at least here on TLS), but its RPL is no higher than peers, and actually lower than S&C, STB, etc.

Anonymous User wrote: ↑

Mon Mar 08, 2021 9:52 am

Anonymous User wrote: ↑

Mon Mar 08, 2021 4:48 am

if billing rates are similar (since they are peer firms and in direct competitions with each other), are the differences mostly due to average billable hours?

Theoretically, wouldn’t another important determinant of RPL be the relative seniority of one firm versus another? So if Firm A is comparatively mid-level & senior-heavy, its blended average billing rate will be higher than a comparatively more junior-heavy Firm B — even though, class by class, the two firms have the same rate structure. Small differences in terms of overall class composition could lead to somewhat large differences in RPL.

Of course, I don’t know empirically whether there actually are significant differences in seniority from firm to firm. But I have to wonder if Kirkland has less attrition in its mid-level ranks (people sticking around for non-equity partner title in year 6) vs. peer firms, and is able to benefit from that in the firm of higher blended billing rates.

Also: perhaps certain kinds of clients / work requires systematically more or less discounting that other kinds of clients / work?

It does seem a mystery that Cravath has such a brutal hours reputation (at least here on TLS), but its RPL is no higher than peers, and actually lower than S&C, STB, etc.

I don't actually think Cravath lawyers bill more hours than STB and S&C, at least they still don't hire many laterals, I think their attrition rate is not as high as STB/KE/LW/PW at least - who is constantly looking for laterals to fill their class. I think Cravath's hiring structure determined that the firm cannot be burning through their associates like firms like STB/KE/PW/LW do - the firm needs decent amount of Carvath associates to stay so they wont have to hire massive amount of laterals, I don't think prestige is the only factor since the associates actually stayed? (if it is a significant factor at all) Cravath, of course has BAD hours, but I don't think it's worse than STB or SC due to its hiring structure (not sure)

Anonymous User wrote: ↑

Mon Mar 08, 2021 3:31 pm

I don't actually think Cravath lawyers bill more hours than STB and S&C, at least they still don't hire many laterals, I think their attrition rate is not as high as STB/KE/LW/PW at least - who is constantly looking for laterals to fill their class. I think Cravath's hiring structure determined that the firm cannot be burning through their associates like firms like STB/KE/PW/LW do - the firm needs decent amount of Carvath associates to stay so they wont have to hire massive amount of laterals, I don't think prestige is the only factor since the associates actually stayed? (if it is a significant factor at all) Cravath, of course has BAD hours, but I don't think it's worse than STB or SC due to its hiring structure (not sure)

I mean, we're getting off topic here, but I think Cravath probably has similar rates of attrition to those other firms. It's well known that CSM over-hires summer associates (i.e., it has a ~100 person summer class despite being a much smaller firm than peers), to compensate for its 'no lateral hiring' constraint.

2013 wrote: ↑

Mon Mar 08, 2021 9:02 am

RPL is confusing because firms have non-attorney timekeepers that don’t factor into the denominator for RPL. For example, a lot of tech firms have science advisors and stuff. They generate revenue, but they aren’t lawyers. So you count their fees but exclude them.

For PPEP, another thing you’re forgetting is nonequity partners. Some firms (Cravath, Covington, etc.) have no nonequity partners. And other firms, like Gibson Dunn, don’t have that many nonequity partners. So their PPEP is lower since generally lower-earning partners can be excluded from the PPEP calculation.

interesting point! I think it's similar to leverage ratio? bc the non-equity partners are actually part of the leverage that support the equity share partners

Anonymous User wrote: ↑

Mon Mar 08, 2021 4:48 am

I am assuming since those firms are peer firms, their billing rate should be somewhat similar

This is not true as often as you think it is, and it poorly informs your thesis that low RPL firms are to be avoided. In good times and bad, you generally want to be somewhere the money is. As you noted, it's a harder metric to manipulate than PPP. But as another posted noted, RPL can be misleading due to different firm structures (some firms are more junior-heavy than others, and some firms have a lot more expenditures in connections with certain revenue sources (like satellite offices) that kill their profitability.

Revenue per lawyer also=lawyers' average billable hours * lawyers' average billing rate.

It does not. Law firm realization rates are regularly below 90%. Fee caps, negotiated discounts, writeoffs, contigencies. Law firms also don't collect everything they bill. Also, not a big effect, but lawyers aren't the only ones who bill.

Anonymous User wrote: ↑

Mon Mar 08, 2021 4:48 am

if billing rates are similar (since they are peer firms and in direct competitions with each other), are the differences mostly due to average billable hours? so the average lawyer at say kirkland billed more hours than cleary/debevoise attorney hence their firm RPL is higher? there can be other reasons too like maybe some firms offers more discounts to get client, but I can't stop thinking that RPL is low key a scary concept - the higher the number is, it just means the average lawyers are billing higher number of hours ...? bc after all what are revenues for lawyers - billable hours

First, average hours are across all lawyers (including possibly staff attorneys). As you go up the ranks, the hope is you get more efficient, so may have less time that can be billed (not by much, of course) than more junior lawyers. This isn't an issue if you're non-stop busy (e.g., real estate or funds at STB, capital markets at LW/DPW) but there may be times when you're not. As others have said, if a firm is more bottom-heavy (as many are - the pyramid starts thinning pretty quickly around years 4/5/6) this means that the average price per hour billed will go down, thereby lowering revenue.

Second, not all work is charged the same. In fact, at a lot of places/in a lot of groups it's rare to get full sticker for rates. Some clients may negotiate discounts for lots of work (pretty common in tech transactions group that handle licenses, etc., outside the bigger deals, which is great experience, but also why some of the CA tech firms are a bit less profitable). Certain clients may distinguish rates for transactional and non-transactional work, and demand that first years' and paralegals' time be written off, that kind of thing. Most of the PE players offer "busted deal" discounts, with premiums if deals go - historically this was 80% of fees (discount) / 120% of fees (premium). I've more recently heard of firms going to 50/120 to try to attract work. Some transactions - e.g., underwriter representation on a follow-on bond issuance - lend themselves to fixed fee work, but this can lead to realization losses. Big litigation groups (like at Quinn) can get contingency fees that wipe out other deficits when there was no recovery. (When Kirkland was a Chicago firm with strong mid-market PE operations in New York, they used some litigation recoveries to attract big lateral stars, like David Fox.)

There are stories of some billing arrangements that go well into the future for no work at all (e.g., an IPO which, if successful, yielded 1.5m in fees every year for the next ten, but fees would have been written off entirely if it hadn't priced), retainers that are allocated despite no work being done on a file, etc. S&C's RPL is high both because it works lawyers to the bone (just like everywhere else), but also because it has high-end clients that are willing to pay more for bigger deals. It also just doesn't do as many of the smaller deals that some firms take on for relationship/training/league table reasons, and where fees may need to be lower despite the work being as complex. This may mean that as an S&C mid-level transactional associate you've received less valuable experience for certain in-house jobs than a contemporary at WSGR or Fenwick, but your partners are making a lot more off you.

There are also differing levels of client scrutiny. There aren't that many firms that can still send a fee note "For legal advice" with one line demanding $7,000,000 and a straight face and expect it to be paid. The giant shops (LW, Kirkland) have to be flexible to keep mouths fed and compete for established clients - or else why would people ever go elsewhere than their existing firms? And that of course sets an expectation for others, too.

Finally, PPP/PEP is a metric that can be and is gamed. It's also not super relevant in an eat-what-you-kill system where the best paid partners can make 20x what the lowest paid ones do. Its significance in a lockstep system is that most lawyers will be within 2 standard deviation of it as a mean. (So it's meaningful at Wachtell, Cravath, Debevoise, and some modified lockstep firms like Paul Weiss, DPW, and Cleary - citing a few NY examples only.)

Otherwise, it's just an average where the denominator is a moving target that may not really reflect the number of people with power in the firm and what they're making. As an example, for AmLaw purposes, a partner with a full vote and an equal liability for the firm as every other partner, but who's junior and so has 2/3 of compensation guaranteed, can be classed as a salaried/non-share partner. That obviously makes the denominator smaller and inflates the PPEP figure. Still, people look at that figure in isolation and use it as a cipher for how successful the firm has been or how well its partners do. I'd like to know what median (rather than mean) drawings per partner are. This isn't a figure that the American Lawyer furnishes at this point.