Big Law Life #95: The BigLaw Blind Spot: What Many Partners Don't Understand About PEP
Most lawyers can recite their firm's PEP number, but few truly understand what it measures, how their day-to-day actions affect it, or how it affects them (even if they are a non-eequity partner). In this episode, I explain why PEP is often misunderstood, the hidden levers that drive it, and what partners need to know about how it can broadly impact all attorneys across the firm.
From billing and collections to leverage ratios, capital contributions, and distribution timing, I break down what really impacts profitability and what that means for both equity and non-equity partners. I also share practical steps to become financially savvy inside your firm, strengthen your influence, and plan ahead for the realities of partner cash flow and tax obligations.
At a Glance: 00:00 Introduction and overview of why PEP matters for partners 02:17 What PEP actually measures and how it's calculated 03:31 Why new partners misunderstand PEP as guaranteed income 04:26 The misconception that billing more always leads to earning more 05:19 How margin and leverage, not volume, drive profitability 06:18 How accounting rules and firm policies affect profit definitions 07:14 Why realization and collections are critical to firm profitability 08:06 How capital contributions and working capital impact partner cash flow 09:26 What delayed distributions mean for tax and personal finance planning 11:09 Example showing how rising revenue can still reduce PEP 12:38 The ripple effect of declining PEP on both equity and non-equity partners 13:27 More metrics each partner should track: RPL, leverage, realization, and contribution margin 15:36 How to apply financial knowledge to strengthen your position 16:23 The importance of understanding your firm's leverage and margin model 17:15 Managing your own cash flow, reserves, and quarterly taxes 17:38 Why mastering firm economics builds long-term influence and stability 18:07 The bottom line: understanding the business of law is essential for partner success
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Show notes: https://www.lauraterrell.com/podcast