Law firm health can't be measured by PPP

May 22, 2013 Average profits per equity partner is a metric that gets a lot of attention in the legal services industry, and is key to the results of the annual American Lawyer rankings — the Am Law 100.

But measuring the health and prospects of a law firm by looking at it’s PPP might be misguided, according to this article from Business Insider.

If law firm are reducing the size of their equity partnerships in order to ensure an increase in PPP, rather than for solid management reasons, the practice might have a deleterious effect on the entire business structure.

Since 1985, the average ratio of attorneys to equity partners for the Am Law 50 has doubled from 1.76 to more than 3.5. That means that it’s now twice as difficult to become an equity partner as it was when today’s senior partners were made up.

Between 1999 and 2009, the non-equity partnerships of Am Law 100 firms grew threefold, while the number of equity partners increased by less than one-third. In this context average profit per equity partner has rocketed up from $300,000 in 1985 ($650,000 in today’s dollars) to more than $1.7 million in 2012.

And while the data does not definitively show that firms are decreasing the relative size of their equity partnerships in order to boost PPP, many law firm leaders have indicated that high PPP is an important priority in their business. And in any case, one thing the data does describe is a growing concentration of wealth at the top, and a growing income spread within the equity partnership itself. Such spread can be very unstable.

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