In what was once unthinkable, annual profits for each of the top attorneys at one L.A. law firm have topped $4 million.
Quinn Emanuel Urquhart & Sullivan LLP reported a profit per partner of $4.2 million last year, up 15 percent from 2010, according to the Business Journal’s annual list of local law firms. That easily outpaces runner-up Gibson Dunn & Crutcher LLP, which reported $2.5 million.
It was only a decade ago when the first local law firms breached the $1 million-per-partner profit threshold. Quinn Emanuel didn’t join that club until 2004. But since then, the firm has seen the most rapid improvement in this crucial, though controversial, metric.
William Urquhart, Quinn Emanuel name partner, attributed the profit boost to payouts from a number of major contingency case wins. Also, he said, many of the firm’s attorneys posted sharp increases in billable hours.
Why so much focus on profits per partner?
Over the last decade, it’s become the single most important factor that top-level partners look at in determining whether to stay put or move to another firm.
“Put simply, it’s become a reality that if you don’t have a profitable law firm, you are in danger of a more profitable law firm recruiting your partners,” Urquhart said. “Conversely, if you do have a profitable law firm, you have a distinct advantage in attracting legal talent.”
But with so much focus on this measurement, law firms have been known to juice up their profits-per-partner figures to make themselves more marketable to top attorneys.
“There’s a lot of smoke and mirrors with these profits numbers to make the profitability seem higher than it really is,” said Sandy Lechtick, chief executive of Esquire Search Inc., a Woodland Hills recruiter for the legal industry.
The easiest way to increase profits per partner is to keep down the number of partners who receive the profits. Some law firms have long had equity partners that receive profit payouts and nonequity, or income, partners who get salaries and bonuses.
For example, West L.A.-based Manatt Phelps & Phillips LLP had 98 partners in its L.A. offices last year, but only 33 equity partners, for a ratio of roughly two income partners for each equity partner.
In the 25 years since introducing the tiered partner structure, this ratio of income partners to equity partners has widened, according to Manatt Chief Executive and Managing Partner William Quicksilver.
“As the firm has grown, a two-tiered partnership has allowed Manatt the flexibility to promote lawyers to partner status,” he said.
Only those income partners who generate significant business from existing and new clients, exercised leadership roles within their practice groups or contribute to the firm’s overall strategic objectives move up to become equity partners, he added.
In recent years, more law firms have adopted this tiered partner strategy, keeping a tighter lid on the number of equity partners. Of the 100 law firms on the Business Journal list, 28 reported a tally of equity partners that was lower than the number of overall partners.
“Law firms used to do this quietly, but in recent years, it’s come out in the open,” Lechtick said.
Then there’s the tiering of profit payouts. A law firm that lists its profits per partner at $1 million could pay what it considers its top equity partners $2 million and the rest $500,000. Under that scenario, Lechtick said, income partners may earn more than the lower tier of equity partners.
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