Editors' Blog

Beringer's broadside needs a PEP

Posted 9/03/2007 by John Malpas

Is Guy Beringer’s broadside against profits per equity partner (PEP) as a measure of law firm performance a case of the lady – or in this case the senior partner – protesting too much?

In an article on Allen & Overy’s website, its senior partner calls on PEP to be dropped as a measure of law firm success, describing it as a “dangerous and undesirable metric” that encourages firms to pursue their own narrow self-interest at the expense of those of their clients.

Given the fact that A&O’s PEP lagged behind those of all of its magic circle rivals last year, some will dismiss Beringer’s piece as mere sour grapes. Actually, some already are, with one managing partner this week in his own words “roaring in laughter” after reading Beringer’s piece.

To be fair, it is true that A&O came in for some unwarranted stick last year when its performance was unfavourably compared to peers who have rather more flexibility in announcing their results – and in some cases a cultural tendency towards selective disclosure.

But, as far as Legal Week is concerned, if he is to be accused of anything, it is tilting at windmills.

In his piece Beringer contends that PEP is regarded by the legal profession as the sole measure of success. I can’t speak for anybody else, but at Legal Week we have always been at pains to put the firms’ PEP figures in context, both in a historical sense and in comparison to other important measures, such as turnover, fees per fee earner and leverage, not to mention the deal tables.

This approach prompted us to warn last year that law firms were being stretched to breaking point thanks to their policy of steadily increasing leverage (see story).

Where Beringer is on dodgier ground is in his apparent belief that we should be striving for new ways of measuring the success of law firms that draw on such factors as client satisfaction, staff morale and corporate social responsibility.

As far as I am aware, these are not the measures being used to decide whether Tesco or Marks & Spencer are delivering the goods - although, of course, it is usually assumed that their strong financial results would not be achievable without decent customer service, and so on.

While PEP is most certainly a blunt instrument, and one that should be treated with care, it remains the best starting point.