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Am Law 100's New Metric: Value Per Lawyer
[Editor's Note: For an extensive critique of "profits per equity partner" and other law firm performance metrics, see the roundtable discussion and related articles in A&FP's May and June 2004 editions. Jim Davidson's June 2004 article on the need for improved survey data standardization is also highly relevant to this month's companion article on spotting statistical problems in survey reports.]
For 20 years, The American Lawyer has measured the economics of law firms, first with The Am Law 50 and 75, more recently with The Am Law 200. Throughout, we've kept to the same metrics: gross, revenue per lawyer, profits per partner, and the Am Law Profitability Index (API). These lists helped inform and change the profession. (Note that we didn't say ruin.) We published them again this month with one significant addition that we think reflects the changed nature of the business of law: Value Per Lawyer (VPL).
Like it or not, for law firms, partner compensation is the primary economic value. VPL is a simple calculation: compensation-all partners (the combined payout to equity and nonequity partners, or CAP) divided by total lawyer head count. This tells us, on average, how much each lawyer contributes to partner comp. To state this proposition more memorably: How many Am Law 100 lawyers does it take to put $10 million in the pockets of firm partners? At top-ranked Wachtell, Lipton, Rosen & Katz, about seven. At second-ranked Sullivan & Cromwell, about 16. At bottom-ranked Coudert Brothers, about 91. At the median firm, Fish & Richardson, the count is 36. There may be partners at each of those firms who take home identical amounts of money; how firms divide their pools is their affair. But as firms, they are very different.
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