#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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