The last week of April traditionally the world’s most successful law firms get very nervous. There is huge anxiety as the American Lawyer’s May issue gets published. The May issue contains the Am Law-100, an overview and ranking of the financial figures of the 100 largest law firms in the US. These rankings are closely watched and studied in detail. Law firms that go up will celebrate and those going down will face difficult internal discussions.
In this article I will not go into the details of this year’s Am Law-100. We have made an analysis and if you are interested in that, just send me an email. No, in this article I want to zoom in on the kneejerk reaction of partners to compare themselves with others. As we work with clients that belong to the world’s elite, I know that even within the top-10 of the most profitable law firms in the world, partners will be extremely unhappy and stressed if their firm drops one place in these rankings.
Profit per Equity Partner for the top-10 starts from $5.533.000 upwards. One would be inclined to think that such earnings come with extreme self-confidence, but that is not the case. Even the very best of the elite tend to focus on the few firms that are doing better and not on the almost 100 firms in the list that are doing – substantially – worse.
If you own a Porsche
“Oh Lord, won't you buy me a Mercedes Benz? My friends all drive Porsches, I must make amends” This is a famous line from a song recorded by Janis Joplin in 1971. Mercedes today is not what it used to be back in the days, but you will get the general idea. People measure their personal success always compared to others that are doing better.
If you are the first person in your neighborhood who is able to afford a Porsche, you are over the moon, proud and happy. If your neighbor then buys a Ferrari, your happiness is gone overnight. In our mind, success is not defined by owning a Porsche as such, but by how our Porsche compares to our neighbor’s car. For law firm partner compensation the same mechanism applies.
A destructive mechanism
I cannot remember how many times I have got the question what I think of Kirkland & Ellis. K&E is the number 2 in this year’s top-10 of the super-rich elite law firms. The firm is known for its aggressive and competitive culture and for their army of salaried partners. Other firms are preoccupied with Kirkland’s success and contemplate if they should try to copy their formula.
My answer is invariably: “you are not Kirkland, are you, and you do not want to be Kirkland either” This kind of sums up the essence: what works for one law firm, might not work for the next. Every law firm has its own unique set of partners and culture. Take for example Kirkland’s large pool of uber-competitive extremely hard working non-equity partners. This is so uniquely tied to the DNA of K&E, that it will not work for any of the other firms in the top-10 (except perhaps for Latham & Watkins).
In that same top-10, Wachtell Lipton, who has been the unrivalled number-1 for as long as I can remember, employs a business model that is in almost any aspect the complete opposite of K&E. Wachtel only has 91 partners, all of them full equity. Wachtell’s leverage is much lower than Kirkland’s. The PEP at Wachtell is $8.4 million, which is about 20% more than at K&E.
So should a firm try to copy Wachtell rather than Kirkland? Obviously not. Any law firm would be ill advised to try and copy a law firm that they are not. The example of Kirkland and Wachtell is intended to demonstrate that two completely opposite strategies can both equally lead to success. It is also intended to highlight that the strategy should always match the culture and human capital of the firm. Wachtell would never be successful with Kirkland’s strategy and vise versa.
Tough discussions ahead
Most of our readers are not with Kirkland or Wachtell, so there will always be a tendence, either latent or manifest, to compare with other firms that are in the same market. As in most markets financial performance of the competitors is more opaque than in the US (and even in the US one should not forget that all the numbers are self-reported), there is always speculation that another law firm is having really great results that outperform the own firm.
As the economy slows down, partners will increasingly argue that the competition is doing certain things and that their own firm is lagging behind or missing out. This obsession with the competition combined with the feeling that the own firm has sub-par performance is inevitably creating a distracting and destructive discussion.
Rather than focusing on what your firm is ‘doing wrong’, it is far more effective to be confident about one’s own culture, strengths and opportunities. My advice would be not to focus on what the competition is doing and trying to copy those, but to have your own independent strategy and focus on the execution. If you need help with that, we are there.
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