Monday, March 4, 2013

K&L Gates' Full Frontal Financial Disclosure

Parsley Sage Rosemary & Ginsburg LLP
“Always a reasonable result for a reasonable fee, always”
MEMORANDUM

To:
Partners
From:
Mike Marget
Date:
March 4, 2013
Re:
K&L Gates’ Full Frontal Financial Disclosure

        A week ago, a major law firm – K&LGates (1,700+ lawyers) – chose to disclose its key financial information to thepublic via its website.  Since law firms are not required to publish financial statements, this move was surprising on at least two levels:

1.   The firm chose to disclose significantly more financial information than is typically published in connection with The American Lawyer magazine’s annual survey of the top 200 Legal Industrial Complex firms.[i]  K&L Gates provided 2 pages of financial data – the typical revenue, PPP[ii] and RPL[iii] numbers, plus other statistics like cash, debt and capital balances as of year-end, high/low debt balances during the year, and a good deal of narrative akin to the management discussion section found in a corporate annual report.

2.   What could be the firm’s motivation for taking this step at this time?

K&L Gates Motivation
        Chairman Peter Kalis said the firm wasmotivated to improve the public image of the profession in light of the “Dewey debacle” – where management at Dewy & LeBoeuf misled partners, bankers and clients (via the AmLaw rankings)[iv] about the firm’s financial stability before filing for bankruptcy.

        Notwithstanding this noble and altruistic motive, K&L Gates has also positioned themselves very nicely vis-à-vis other firms in the never-ending quest to always pick up the best and brightest laterals to continually improve their franchise.  In one bold step, K&L Gates sent the following message:
  • Our internal financial disclosures and external communications (e.g., to The American Lawyer) are the same; we don’t manipulate our revenue figure or our equity partner headcount.  
  • Not only do we have no debt at year-end, we didn't borrow as much as a penny against the line of credit during 2012 and 2011.  
  • We’re "transparent" with our partners and our clients about the firm's financial stability.
  • Can your current firm or other potential lateral firm say the same thing?
Reality Check/Lateral Partners
        Can every firm be trusted to refrain from manipulating the numbers in the press release the same way they did for the AmLaw rankings?  There will undoubtedly be temptations, but the more statistics disclosed the less likely it becomes to alter the important numbers without leaving an obvious audit trail.  Moreover, if other firms do not reconcile their internal and external reporting, they can count on their rank-and-file partners to call them out about it.

        Nevertheless, laterals must always be weary of whatever financial data is provided by prospective new firms.  As a financial person, I would like K&L Gates’ disclosure to be expanded to include, among other things, information like the quality of the firm’s inventory (i.e., accounts receivable and unbilled fees) and the number of highly compensated partners with long-term guaranteed contracts (another problem at Dewey). 

        If you are a major rainmaker contemplating a move, use your clout to examine more financial data before taking the plunge to join a new firm.  For the sake of the capital you will invest in the new firm, for the sake of continuity of service to your clients, and for your own mental health, perform significant due diligence before committing to a new firm.  There are other financial reports you should request and review:
  • Citibank and Wells Fargo[v] provide participating law firms with detailed financial analysis – comparing the firm with peer firms – as part of their quarterly industry financial reviews.  Request copies going back 2 years, read them and have a sit-down with the firm’s CFO to discuss.
  •  
  • PricewaterhouseCoopers publishes a similar report which compares firms by geographic area, size and other demographics.
These reports provide significantly more data than that disclosed by K&L Gates last week.  Should any prospective new firm not wish to share this data with you, I would be afraid -- very afraid.

[i] Don’t get me started about the financial fallacy which is the AmLaw rankings.  Simply put – firms lie.  Not all of them, but enough to call into question the entire process.  Exhibit 1is Dewey & LeBoeuf who overstated their revenue by more than $150 millionfor each of calendar year 2010 and 2011.  The magazine took a credibility hit on that one, but has never adequately addressed the systemic problem illustrated by Howrey, Thacher Proffitt, Thelen, Heller Ehrman and others who kept posting good numbers right up until the time they ceased to exist. 
[ii] PPP is profits per equity partner.
[iii] RPL is revenue per lawyer.
[iv] See Endnote i.
[v] Buy a banker from the Legal Industry Groups at either Citibank or Wells Fargo a cocktail and he/she will tell you the numbers they receive in connection with their “privately published” surveys differ significantly from the very public numbers appearing in the AmLaw rankings.

6 comments:

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