Profit Per Partner (PPP) is an important tool used in the legal industry to review the profits of the largest 200 law firms. This number provides insight into the highest-performing organizations. The higher the PPP, the more lucrative the firm’s financial performance. This direct correlation is exactly why Valeo Partners closely analyzes a firm’s PPP and its billing rates.
The highest PPP firms receive 50% or more of their revenue from transactional, private equity and capital markets work and frequently, also have the highest leverage – 4 Associates to 1 Partner, for example. This is particularly interesting as I covered the comeback of M&A in my last blog post, and the optimism that has returned to the market to push through more M&A deals not only this year, but the uptick in M&A is expected to continue and not just be a one year catch up following the pandemic. Though the Fed has not cut interest rates yet this year, it is expected they will this year at some point, catapulting M&A activity even further.
As in the past, the largest revenue and PPP firms will maintain greater control of their hourly rates and overall rate increases than the lower revenue and lower profitability firms.
The importance of pricing per industry
New PPP numbers are being released this month, as Kirkland & Ellis broke another law firm record, crossing the $7 billion mark last year and revealing 10.6% revenue growth to gross $7.208 billion. This was due in part to a restructuring, diversifying funds, strong litigation, and improvements in profit margins. According to American Lawyer, Kirkland’s net income grew nearly 13% to $4.288 billion in 2023, and average profits per equity partner rose nearly 6% to $7.955 million.
Though firms like Kirkland & Ellis grew their rates and revenue last year, many Partners should be cautious to raise their rates for a couple of reasons. First, they have no reliable data that shows what real-time market rates are if they are using annual surveys, and second, they believe their clients when they say their rates are too high. To gain more confidence in their pricing strategy, firms must have access to the most accurate numbers and real-time rates.
In addition to having the data on hand to determine the fairest billing price for attorneys, it’s also critical to understand your audience. Let’s start at the top – Partners are directly concerned about PPP, so that becomes our concern as well. The data that Valeo publishes helps Partners 1) develop their pricing internally vis a vis their closest competitors (as measured by experience, practice, client portfolio and city / jurisdiction of practice) and then 2) confidently request rate changes from their largest clients, knowing that they (the Partners) have actionable data to back up their requests. Putting these numbers in Partners hands helps them have a direct impact on their income and the firms’ profits, ultimately creating a higher PPP.
Overall, the legal industry is one that notoriously uses pricing data from 3-6 months ago. But it’s time for this trend to end. No other industry uses stale pricing data – retail, hospitality, and services are constantly looking at competitor pricing daily and throughout the day and making decisions off of their pricing models to reflect in their own. To constantly be thinking about a firm’s PPP all year, law firms should look to new technology and data and analytical solutions to pull real-time hourly rate information by attorney and firm that can be monetized into higher revenue and profits per partner. For firms, this can be the competitive edge they are looking for.
To learn more about these trends, you can register here for our next webinar on April 9, 2024, or book a meeting with me for a full analysis of your pricing strategy.