Diversity Drives Profitability
In introducing the LawyerMetrix Diversity Imperative series, we played our ace in the hole by stating that law firms with more diversity are also more profitable. This post explains how we arrived at this conclusion, and speculates about its meaning for the business of law.
Partners at Diverse Law Firms Make More Money
Drawing on LawyerMetrix's ongoing research on law firm profitability and first-in-class industry data set, we analyzed whether firms with higher headcount shares for attorneys of color are more profitable than firms with lower headcount shares, all else being equal. The "all else equal" feature of our approach is important to the utility and application of our research. It means we account for a range of potentially consequential "profit differentiators"1 -- attributes that make some firms more profitable than others -- and in turn, isolate the connection between racial/ethnic diversity and partner compensation.
The main takeaway of our analysis is that partners take home significantly more money at firms with higher shares of attorneys of color. We built the predictive visualizations in Figure 1 to illustrate the differences. The first visualization presents the profitability differences for firms with low versus average racial/ethnic diversity (orange curve). The second presents the differences for firms with high versus average racial/ethnic diversity (green curve).
Figure 1: Change In Average Partner Compensation Relative to Firm With Average Diversity
Diversity Pays Real Dividends
The diversity "dividend" is reflected in the difference between the distributions. Summarizing this difference using the median values (arrow endpoints), the gap between low- and high-diversity firms is potentially $20,000 per partner. Consistent with findings from McKinsey and others regarding the benefits of a diverse workforce, we find that diversity pays partners a significant dividend. This result holds after accounting for a range of significant profit differentiators.
In studying the role of headcount shares for attorneys of color, we capture only a single manifestation of diversity in large law firms. But connecting diversity to profitability in a consequential way is intended to raise the collective conscience - and a few eyebrows - and continue to shift the conversation from "how" to "why."
So, why does diversity pack such a punch?
There is growing appreciation that diverse teams make different, indeed better, decisions than non-diverse teams. Diverse teams are more effective because they draw on more and varied perspectives when solving organizational and business challenges. In a revealing example, researchers at Acritas found mixed gender teams outperformed single gender teams on 12 key performance indicators. This result occurred even though there were no significant differences between teams led by male versus female partners.
Viewed in broad perspective, this additional "soft" dividend gives diversity added value in today's competitive legal market. One LawyerMetrix analysis of what makes a law firm profitable identified several significant profitability drivers that reflect an industry trend toward a more strategic practice area focus. For firms looking to increase profits through such strategic initiatives, the incorporation of diverse perspectives is likely to produce better outcomes.
Subsequent Diversity Imperative posts will explore reasons why diversity at the AmLaw 200 has stagnated since 2009 despite the introduction of countless industry-wide diversity initiatives including; ABA Resolution 113, the increased appointment of Diversity and Inclusion Officers and the efforts to drive change led by organizations like the Leadership Council on Legal Diversity, a LawyerMetrix Partner in Diversity. LawyerMetrix will use data to demonstrate the impact of geography, the law school recruiting pipeline, utilization of diverse attorneys and "mirrortocracy" on a firm's ability to recruit, retain, promote and realize the benefits of a diverse workforce.
Watch for upcoming LawyerMetrix Diversity Imperative posts and contact us to learn how your firm's diversity metrics stack up against your competitors.
1 The differentiators include each firm's headquarters market, firm size (total headcount), practice area representations (28 in total), distinctiveness in the financial services practices, inflow-outflow of lateral partners, and three "concentration" metrics: (1) client-industry, (2) practice area, and (3) geographic. The concentration metrics (0 to 1 scale) are calculated using a statistic termed a "Herfindahl Index." A score of zero (0) reflects no concentration (e.g., regarding geography, a firm's attorney headcounts are equal across six offices), a score approaching one (1) reflects high concentration (e.g., 80% of a firm's attorneys are in a single office, and the remaining 20% are distributed across five offices), and a score equal to one (1) reflects total concentration (i.e., all attorneys are in a single office).