PEP the question

July 11, 2014

It’s all about PEP this week – but is it a good gauge of success?

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Profit per equity partner (PEP) should be a beautiful thing, offering a simple benchmark of performance for lawyers and clients alike. Law firms with consistently rising PEP have a ready-made recruitment tool that better markets their firm than any dedicated campaign. And clients can see that they’re working with a successful and resilient business that can afford to recruit the best.

All great, except that it doesn’t work. Or so say an increasing number of firms and commentators who would rather do away with PEP altogether.

It’s not a new debate – it’s been doing the rounds for a while. But in the last month there has arisen a new and heated war of words over PEP centring on Dentons’ decision in June to stop reporting its average PEP.

According to the firm, PEP figures are meaningless and say nothing about success. In particular, the firm argues that PEP attempts the impossible: to compare firms that operate across many geographies (and have a very different culture) with those that don’t.

Rather predictably, sections of the press (namely the American Lawyer) came back suggesting that the real reason for Dentons pulling its figures is that its PEP has declined by 20 percent over the past year… Dentons hit back at the magazine’s ‘lack of understanding of basic math, let alone simple logic’. And so it went on. Ding ding round two…

But there is a growing consensus against PEP and for good reason. It’s too open to manipulation – de-equitisations or partner recruitment freezes, for example, will boost PEP making the firm look more successful than it really is.

Nor does it give any insight into the relative success of different business models working behind the headline figure. This means that it can encourage short-termism – anything to just get the PEP up for the year to convince the press, lawyers and clients that all is well.

‘Good old days’

There is another side to this too that may be just as important, if less discussed. Culturally, there is now something rather jarring about the PEP figure. For some firms it is clear that the distaste for PEP stems for the fact that it makes law firms look too much like businesses – ie, focused on profit.

This sounds a little too much like an excuse for firms to return to the ‘good old days’ when no-one mentioned sales. Yet while financial opacity can’t be the answer for lawyers or clients alike, it does point to a real concern.

PEP makes a law firm’s money making look individualistic. Partners may not take home anything like the reported PEP figure (another reason why it’s a pretty meaningless figure), but it still looks like it’s all about lining the pockets of the top dogs. Culturally it sits in the same bed as the billable hour. It’s not about investing back into the business to deliver a superior client service. It’s about keeping partners happy. It’s inward, not outward looking.

One comment in the legal press referred to PEP making lawyers look like parasites. It may seem unfair given the work firms have put into improving their financial transparency, but you can see where it stems from.

With an increasing awareness of the limitations of PEP, other financial measures will become more popular. Most publications already look beyond PEP into areas such as operating profit margin, turnover, revenue per lawyer and lawyer numbers – combining them all to produce more reliable indicators of longer term performance.

In the end such work may do away with the need for PEP altogether. That can only be a good thing not only for the sake of financial transparency but also for the reputation of law. CP  

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