Profits tanking in 09? Take comfort from Neutron Jack
A sliver of consolation for law firms concerned with spinning awful partner profit numbers for 2008-09 came last week from celebrated ex-GE head Jack Welch, who criticised the cult that has grown up around shareholder value. In essence, Welch (pictured), regarded by many as the founder of the shareholder value movement in the 1980s, criticised companies' short-term focus on quarterly profitability at the expense of long-term goals. Interviewed in the FT, Welch said: "On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy."
March 19, 2009 at 08:03 PM
3 minute read
A sliver of consolation for law firms concerned with spinning awful partner profit numbers for 2008-09 came last week from celebrated ex-GE head Jack Welch, who criticised the cult that has grown up around shareholder value. In essence, Welch (pictured), regarded by many as the founder of the shareholder value movement in the 1980s, criticised companies' short-term focus on quarterly profitability at the expense of long-term goals. Interviewed in the FT, Welch said: "On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy."
Such words should be a comfort to the handful of City law firms preparing to unveil what they view as thoroughly depressing profits per equity partner (PEP) numbers this year. Thoroughly depressing in this context refers to the handful of major firms that are expecting to unveil (or sneak out) 25%-plus falls in profitability. What is striking when talking to partners at such firms is that they know on a basic level such concerns should be meaningless. Both the bottom and top line at these firms have grown at an exceptional rate over the last 10 years. One bad year in terms of profits won't reverse that or change the fact that partners will still be very, very wealthy men and women come May.
But the real concern, as with most issues regarding PEP, isn't about what you take home as with what Mayer Brown's Paul Maher once dubbed "our share price". Partners don't chase PEP primarily because of greed, they focus on it as they see it as their stock value – they worry what it will say about their firm if their PEP is significantly below that of their key rivals, even for a year or two. The focus on PEP becomes both defensive – the fear that key partners will defect to more profitable rivals – and proactive, as firms seek to move their business upmarket and improve the quality of lawyers they can attract and retain.
These issues are particularly in evidence at the kind of firms that have inherently cyclical practices, meaning that they will suffer worse than many top 50 rivals this year. But I suspect that they should stop worrying and take heed of Welch's counsel that profitability, both short and long-term, should be the outcome of your strategy, rather than the strategy itself. Providing you have a convincing story to tell about how you want to run the business, and providing you articulate that story with confidence, a short-term drop in profits should be irrelevant. Communicating that story will be far more convincing than a half-hearted attempt to graft on a second-rate disputes or restructuring practice at the eleventh hour. Be cyclical if that's what you want to be and forget the competitive gloom. Booms get exaggerated, as do busts. This bust will pass.
(Those in need of further inspiration can click here to read more of Welch's common sense.)
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