The Impact of C-Suite Growth in the Am Law 200
In some firms, lawyers manage the business of the firm. In others, C-suite business professionals are charged with this responsibility to allow the lawyers to focus exclusively on practicing law and developing business.
My team at Colliers recently completed a comprehensive survey of the Am Law 200 firms to determine which C-suite positions each firm employs. We then sought to understand whether there was any correlation between the existence of a C-suite position and profits per equity partner (PPEP).
Arguably this is a classic problem of the chicken and the egg: Do more profitable firms have more money to hire C-suite professionals? Or do the efforts of C-suite professionals increase profitability? We completed a statistical analysis of our data together with the profitability data the Am Law 200 reported to The American Lawyer.
The insights documented herein are the result of a survey of the Am Law 200 law firms. Through email, telephone and internet surveying and research, Colliers was able to document whether 128 law firms (64 in the Am Law 100 and 64 in the Am Law 101 to 200) employed chief-level financial, marketing, IT, knowledge and HR professionals. Regressions of these results were run against the self-reported revenue and profitability data collected by Am Law. Interviews with leading law firm architects, legal recruiters and C-level officers at more than 10 major law firms augmented this research. I am immensely grateful to the many professionals who graciously agreed to share their knowledge with me.
As evidenced in the graph on the right, there is a strong correlation between the existence of a Chief Financial Officer (CFO) and higher profits per equity partner. Several Am Law 200 Chief Operating Officers (COO) consulted suggest that this is because firms that employ CFOs are typically sophisticated enough to pay attention to complex metrics. Those firms expend significant effort to understand financial data and use that data to determine what it is going to take to maintain profitability in the new legal market.
One Executive Director added that the CFO often adds discipline and structure to daily decision-making, citing as an example the hiring of laterals. Where lawyers or practice groups may be excited about a prospective lateral hire and become emotionally invested in the hire, a CFO will model the financial benefits of the hire to analyze whether the acquisition will be good for the whole firm. Essentially, the facts presented by strategic and knowledgeable CFOs help limit the role of emotion in decision-making.
Similarly, there exists a strong correlation between PPEP and the existence of a Chief HR Officer (CHRO). One C-suite member described the CHRO’s job as identifying, motivating, retaining and rewarding a firm’s best people. The CHRO’s duties include helping partners understand generational issues, building a professional development program, and managing a firm’s alumni network — a large source of referrals for many Am Law 200 firms.
According to Citi Private Bank Law Firm Group’s Gretta Rusanow — in a report delivered at the 2016 Law Firm COO/CFO Forum — continuously profitable firms are more careful and considered when bringing on laterals, and these hires are more successful. In addition, the 2015 Law Firms in Transition Altman Weil study found that 77 percent of firms making major changes to lawyer staffing models had increased PPEP, compared to 56 percent of others. When a CHRO is tasked with managing the lateral hiring process and strategically addressing the need for change in staffing models, it would logically follow that PPEP would increase as a result.
Lastly, there is a strong correlation between PPEP and the existence of a Chief Information Officer (CIO) or Chief Technology Officer (CTO). A 2015 study by Thomson Reuters Peer Monitor confirmed that upper-tier firms (in terms of financial performance) were much more likely to have adopted operational changes focused on technology.* COOs interviewed for this study cite the fact that CIO/CTOs are usually tasked with making lawyers more productive and efficient as the likely reason for the associated higher PPEP.
The most successful Am Law 200 law firms have evolved from being partner-run to being run by a group of highly skilled professionals reporting to the shareholders of the firm. This model is increasingly reflective of the corporate governance model. The data collected from our survey indicates that it is generally conducive to increased profitability for the firms that adopt it.
For growing firms, the addition of a newly formed C-suite position is often driven out of necessity to add order and control to firm management and operations. Firms can be reluctant to add these positions due to the additional overhead burden, but our research shows a strong positive correlation between PPEP and firms with a more extensive network of business executives (i.e., non-practicing lawyers) in leadership positions.
*There was not a statistically significant correlation between the existence of a Chief Marketing Officer or Chief Knowledge Officer and a change in the PPEP. Therefore, those statistics were omitted from this report. Further, arguably, revenues are a better measure of a CMO’s impact than profitability.
This report was excerpted from “The Law Firm C-Suite Study Guide: The Impact of C-Suite Growth in the AmLaw 200.” Read the full report here.
About the Author
Anita J. Turner is a commercial office real estate tenant representative and adviser. She is a former practicing lawyer and, consequently, she has a special interest in law firms and loves studying the evolution of the legal profession and its effect on legal workplaces. Turner is a graduate of Pepperdine Law School and obtained an MBA from UCLA.