Who really is the most profitable law firm of them all? We have no idea – but neither does anyone else, so we might as well have a stab at it.

BRW’s annual revenue survey of the top firms came out in September last year and a legal eagle provided us an interesting (albeit belated) critique, pointing out the flaws in the BRW’s ranking.

From the 12 August 2002 morning edition sealed section:

“11. BRW’S LEGAL FIRM REVENUE LISTS

A few months ago BRW published their annual list of revenues for our major legal firms [which can be viewed here].

An insider reckons the methodology is flawed and explains as follows:

“The strange thing about the BRW law firms list is the way they rank the firms. They base it upon total revenue not on total profitability (or predicted profitability). I suggest a more accurate indicator is to look at revenue per partner and on that basis, ask which firms are most efficient and therefore, likely to be more profitable.

For example, all the partners at Mallesons are making $1.8 million in revenue [per partner, including both equity and salaried partners] while Crikey’s own Corrs Chambers Westgarth is racking up $1.4 million but Minters ($1.2m) and Freehills ($1.3m) are ranked higher than Corrs in the BRW ‘Top 20 Law Firms List’ [which is based on total revenue].

The difference is even starker when you look at the revenue per equity partner [i.e. excluding salaried partners].

There, Mallesons is definitely top dog with $2 million per partner but Corrs, languishing at a lowly 8th place is making $1.9m per equity partner. If you compare that with Minters and Freehills which is $1.3m, Allens, Phillips Fox and Clutz at $1.6m and Blakes at $1.5m.

It seems BRW is measuring the top firms on basis of total revenue rather than revenue per partner, which surely is a better indicator.

I think a more accurate measurement is to look at how much each individual partner is earning for the firm as that shows (a) the firm’s efficiency (b) how well the partner groups are actually doing.

Minters & Freehills may be ranked near the top [in the BRW survey] but it is well known in the legal fraternity that their expenses are considerably higher than everyone else.

In addition, firms such as Mallesons, Corrs and Clutz have been embarking upon considerable cost-cutting exercises. They also have too many partners (take Freehills’ Perth office – between 45 and 50 partners in a city of 1.5 million!).

I think this analysis is backed up by the fact that even though Minters has 348 partners, earning around $23 million less in revenue than Mallesons, their partners are clearly earning less as revenue per partner is significantly less.

In my view, BRW’s analysis is flawed.

Here is a revised top 10 on the basis of revenue per partner (was quick so may have left one or two firms out):

Mallesons: $1.8m

Arnold Bloch Leibler: $1.8m

Allens: $1.6

Baker & McKenzie: $1.5m

Blakes: $1.5m

Corrs: $1.4m

Clutz: $1.4m

Gilbert & Tobin: $1.3

Freehills: $1.3

Minters: $1.2

Going on the gossip I hear about town, this is probably a better indicator. The top partners at Freehills, Allens & Mallesons earn significantly more then at other firms but I’d suggest that ‘middle range’ equity partners at those firms are earning significantly less than their cousins at Corrs, Clutz and Blakes.

The difference though is that the senior partners at Corrs, Clutz & Blakes are likely to be earning somewhat less than at the big three. There is probably also some differences in the quality and breadth of work for non-partners (Senior Associates, Solicitors etc.) between the big three and the next seven or so firms. Though salaries for non-partners are fairly similar.

CRIKEY: We’ve got several hundred lawyers who subscribe so forget those statements of claim for a few minutes and send in your response to this analysis. The inner workings of our major law firms should get a lot more exposure than they do at present and we’d love to put a bit of sunlight on them.”

– Ends –

Later in our Monday 12 August 2002 afternoon edition sealed section we followed up with this insight:

“9. HOW LAW FIRMS WORK

In response to this morning’s piece on what legal partners get paid, a subscriber writes:

“Stephen,

Until very recently I was a Senior Associate in a national law firm which is very close to the top of the BRW Law Firm Revenue List. There are a couple of very interesting points about law firm revenues. Firstly, even within the firm, partnership income levels are regarded as the inner secret of an exclusive little club.

A few years back I attended a conference of Senior Associates (the level below partner). Early in the conference, one of the Senior Partners gave a talk to us about how we were the future of the firm, valued, spin, spin spin.

At the end of this speech, said Senior Partner called for questions, at which point one very brave Senior Associate asked the very sensible question “Well, if we are going to work ourselves half to death to make partner, can you let us know what the benefits are, how much do we have to pay to buy in, what are the average level of drawings etc.”

The Senior Partner went pale and explained that such matters were only ever discussed between the Partners or with people who had been offered partnership. Keep it secret by all means but to not even to disclose it to the people next in line?

If you know how law firm’s work, this secrecy is understandable as the manner in which firms leverage wealth out of their staff is staggering. A junior solicitor (fresh out of law school) may be charged out at $120 per hour whereas a Partner would generally be charged out at somewhere between $300 and $500 per hour.

Now, if you were to think that on this basis the Partner would be paid 4 or 5 times the salary of the junior solicitor you would be very wrong, the multiple is more likely 15 -20 times. This gets even worse when you look at Senior Associate levels where the charge out rates may only be $50 to $100 below Partner level but the salary multiple is still between 4 and 8 in favour of the Partners. Now, I acknowledge that Partners are the business owners and should be compensated for the additional risk which they assume but these multiples are still pretty amazing.

I have moved to a senior position in the public sector and having spent all my working life in the secret world of law firms find the salary transparency amazing, for example, we all know that our CEO earns about 6 times what the most junior staff member earns and only about 15% more than the Deputy CEO.

Now those are reasonable multiples which reflect the various responsibilities.

The key to good law firm management is therefore to keep partnership numbers tight while at the same time throwing enough crumbs at the staff to keep them happy and motivated. Tied in with this is the need keep income figures secret and never comment on them. If these leak out, it becomes very hard to motivate a Senior Associate who discovers that he or she is earning one fifth of the salary of his Partner while working the same long hours and with a charge out rate only one sixth less. The situation becomes more acute when you work for a Partner who is in cruise mode and delegates all the tough work to his or her staff.

Keep up the good work,

Larry Lawyer”

CRIKEY: This is interesting stuff and we hope at least one or two more lawyers might be able to shed some more light on what goes on in the big firms.