Profit Per Partner, or the average profit generated by each equity partner in a law firm, is a staple of the American legal industry, widely used in assessing a firm’s performance and attractiveness to potential partners. 

This metric is undeniably significant. But it can also be a double-edged sword—especially for lateral partners evaluating a potential new firm

Generally, Profit Per Partner (PPP) measures a firm’s profitability: the higher the PPP, the more an equity partner can expect to make. It isn’t hard to see why this would interest a partner eyeing a lateral move. Likewise, when law firms consider bringing in lateral partners, they always consider the candidate’s potential impact on the firm’s profitability.

However, while Profit Per Partner is a crucial factor, it is not the only factor, and relying exclusively on PPP when deciding on your lateral move can be a severe mistake. 

In this post, I’ll unpack Profit Per Partner in more depth—and explore what it means for lateral partners. 

Understanding Profit Per Partner

Let’s start with a more detailed explanation of what Profit Per Partner is, how it’s calculated, and some factors that can influence PPP. 

Profit Per Partner is calculated by dividing a firm’s net profits for a fiscal year by the number of equity partners to derive the average profit that the firm made per equity partner in that year. 

Depending on the compensation model, Profit Per Partner ties back to partner compensation. 

There are some variations to the formula. 

For example, different firms may handle accounting differently, have different timing for profit distributions, or make certain adjustments based on varying contributions and commitments of partners.

It’s also worth underlining that Profit Per Partner exclusively encompasses equity partners and excludes other lawyers who hold the partner title but function as salaried individuals without profit-sharing privileges. 

These “non-equity” or “income” partners can, and often do, outnumber true equity partners, meaning firms can choose to include only their most successful rainmakers in the PPP equation. And indeed, de-equitizing less successful partners is one way for a firm to boost its numbers (more on this shortly). 

Why Profit Per Partner Matters

Bottom line: Profit Per Partner is a big deal in the legal industry. 

When The American Lawyer and similar organizations publish their annual rankings of top firms, many lawyers look to PPP as a vital indicator of a firm’s overall financial health, stability, management prowess, and potential for future growth. 

As such, higher Profit Per Partner is often a point of pride, a way for a firm to bolster its reputation and attract top legal talent, and a metric that firms manage to. 

Where a firm falls in these rankings overall makes a difference. If a firm rose from 37th last year to 32nd this year, it isn’t just industry insiders who take notice—a higher ranking can impact client trust and perceived value, as well, both in a firm’s existing client base and among potential new clients. 

Plenty of data and analysis goes into these rankings, of course, but PPP can be a valuable way to compare different firms quickly. As a lateral partner, it may be the first thing you look at when performing due diligence. 

That can be an excellent place to start, but if you’re seriously evaluating a firm for a potential lateral move, it’s important to remember: PPP does not tell the whole story.

It’s just an average, after all. To gain a comprehensive understanding of the financial dynamics of a firm, you must delve deeper. 

And additional factors can impact the big picture, both directly and indirectly.

A practice area that may appear less profitable on its own could still play a significant role in generating referral work for a more lucrative practice area. 

Specific offices within a firm may contribute to profitable work, even if their involvement is limited and profit is lower.

So, it’s essential to go beyond surface-level numbers. Other metrics that help include:

  • Revenue Per Lawyer, which is determined by dividing firm revenue by the total number of attorneys (both associate and partner level)
  • Profit margins in general and,
  • Levels of leverage. 

A note on the leverage ratio

The leverage ratio (total number of partners divided by the total other lawyers in the firm) is a great metric to understand and combine with profit per partner. A leverage ratio of 1.0 or higher suggests partners with profitable clients that can keep many people busy. Between two firms with identical Profit Per Partner, the one with higher leverage achieves this with less partner time and in a more sustainable way.

The takeaway for lateral partners is that it’s not as simple as going to the firm with the highest possible PPP or AmLaw ranking—it’s about going deeper to find the right match for your practice.

A Side Note: The Dark Side of Pursuing High PPP

Considering the significant impact of PPP, a topic I hear come up a lot is how easy it can be to game those numbers and how hard it is to find out who’s telling the truth. 

Is a firm finding a way not to count some people and overcount others? Are they de-equitizing partners or refusing to elevate new equity partners to inflate the number artificially?

Questions like these are common if more often grist for the rumor mill than the product of direct evidence. That said, some firms will pursue higher PPP to a fault. They’ll lay off or refuse to hire support staff, slash budgets, or decline expenses that would be significant investments in the firm’s long-term future just to keep their Profits Per Partner high in a given year or leapfrog over other firms. 

This singular focus on PPP might boost their metrics in the short term. But, the long-term effects can be damaging, from missing out on partners who would be a great fit to negatively impacting the firm’s culture and job satisfaction among staff and partners—and even hindering future (more sustainable) growth. Firms that make decisions driven primarily by a desire to increase PPP may cut corners and reduce expenses in a way that can make it difficult for you to grow your book of business and serve your clients.  As you conduct your due diligence, you will want to ask about firm strategy and ensure you align with it. There is no one answer to how to prioritize what in a firm – the key is that you agree with the priorities. 

PPP as One of Many Performance Indicators

Remember, although Profit Per Partner is an important metric, it should always be considered in conjunction with other financial and non-financial indicators of a firm’s health and success. 

This is especially true for lateral partners. If you choose your next firm based solely on a PPP ranking you saw in AmLaw 100; you could find yourself stuck at a firm where you can’t cross-sell, have no support staff or budget, dislike the firm’s culture, and more. 

Even worse, you may discover that the attractive sky-high PPP number was nothing but a mirage in the first place. 

If you’re considering a lateral move and feel a little overwhelmed by the prospect of navigating so many complex performance indicators, I can help. Let’s schedule a call to discuss your needs.