Law Firm Partnership Part 1: Do “True Partnerships” Still Exist?

Citi Private Bank has released its third quarter report on law firm growth and it indicates a slow-down since their mid-year report.  The following findings are important to note:

• Demand was nearly flat at .3%
• Revenue growth other than due to billing rate increases was only .3%
• Firms have seen an increase in compensation expenses (largely due to associate salary raises) from 3 to 4.1%
• As a cautionary step, firms increased their equity partnership by only .4%

Many law firms are feeling the strains of these economic realities, and likely are bracing for a disappointing fourth quarter.  This will drive those who manage firms to look carefully at their existing partners and in order to maintain high per partner profit levels, they likely will continue to reduce compensation, de-equitize partners and may even ask others to leave their firms.  There was another article in the New York Times this week about law firms culling their partner equity ranks.

 

Is Partnership Still a Safe Choice?

A recent article in Above the Law about where lawyers fall in the overall income bracket, the author notes that “Many former associates who do not make it to partner still enjoy salaries of equal or greater value, but there is far less security outside of BigLaw. Overall, attorneys who make it to BigLaw reap the rewards of a stable and lucrative career…” Source: Lateral Link, Above the Law

While salaries at BigLaw and even mid-size firms can be lucrative,  making partner in one of these firms no longer provides the guarantee of financial or career security that it may have decades ago.  The stakes have always been high for getting promoted to partner. Most of the largest firms still require associates to bill 1800 to 2200 or more per year and now associates have to demonstrate their ability to bring in business and grow revenue in order to be considered for partnership promotion.

Becoming a partner now, however, no longer ensures tenure at the firm.  Even equity partners in the last ten years have been demoted to non-equity status or asked to leave when their metrics were not strong enough.  By metrics, we mean a combination of productivity (at least 1500-1800 personal working hours billed and collected,) high realization rates of 85% or more, low receivables in both amounts and pay cycle, and at least $1-2 million of self-generated originations.  This focus on individual partner profitability metrics has in some cases eroded the bonds of a collective, collaborative partnership. On the other hand, many partnerships have grown to include partners who don’t really contribute as true owners of the business and who have not been held accountable. This also erodes healthy partnerships and sustainability.

 What Constitutes “True” and Healthy Partnerships?

Traditionally, law firms were organized as “true partnerships” — each partner a part owner in the business, sharing in the profits and the liabilities of the law firm and usually having a substantial voice in firm affairs.   These most often were general partnerships.  Once elevated into the partnership, partners were “tenured” in a sense, with little chance of ever being asked to leave the partnership.

Now, of course, there are many organizational structures used by law firms to limit liability and risk including professional corporations, limited liability corporations, and limited liability partnerships.  The partnership ranks have expanded to include equity partners, non-equity partners and hybrids including counsel, senior counsel, and special counsel.   These changes, along with the factors that drove these changes, may well have weakened the strength of many partnerships and the cultural fabric that used to hold many of them together more cohesively.

 6 Qualities of Successful and Strong Partnerships

While per partner profit metrics will continue to drive many firms’ decisions about partner status and compensation, too narrow a focus on financial metrics only may put firms at risk for losing their cultural glue and for destabilization.   As noted in a prior blog post, Culture Part 2: How to Use or Adapt Culture to Succeed in the “New Normal, ” John Cotter and Harvard Business School professor, James Heskett, in their book Corporate Culture and Performance, conclude that “strong corporate cultures that facilitate adaptation to a changing world are associated with strong financial results. We found that those cultures highly value employees, customers, and owners and that those cultures encourage leadership from everyone in the firm.”  Healthy organizational cultures will enable firms to “increase productivity, growth, efficiency and reduce counterproductive behavior and turnover of employees.”

In order to be sustainable and successful, law firm partnerships must embody a number of important traits in order to survive and prosper.  Strong financial grounding and individual performance are essential for healthy partnerships — partners must be committed and able to contribute in significant ways to the partnership’s growth and success.  There are several non-financial qualities and collective partner behaviors that result in strong partnerships including:

1. Trust and Integrity

• Do partners put the firm’s agenda and success in front of individual personal success?
• Do partners share mutual respect?
• Do partners question other partners’ ethics and integrity?
• Are partners ethical in their treatment of clients, finances, employees?
• Would you trust your partners to run your practice or the firm in your absence?

2. Support and Collaboration

• Do your partners “have your back?” Do you feel protected within the partnership?
• Do they work collaboratively and motivate each other to reach goals?
• Are partners optimistic and enthusiastic about the firm’s future?
• Are they taking ownership for overcoming hurdles and achieving goals?
• Do partners believe that being in the partnership is better because better things come of working together?

3. Satisfaction and Reward

• Do you derive personal and professional satisfaction working with your partners?
• Do your partners bring different perspectives that you acknowledge add value to the greater whole?
• Do you feel proud and inspired when your partners accomplish major wins or make significant contributions financially and professionally to the firm?

4. Open Communication and Fairness

• How effectively, frequently and openly do partners communicate with each other and with those in management, especially when they disagree?
• How are different points of view on issues expressed and addressed?
• Are partners able to take a fresh look at challenges or do they more often come with pre-conceived ideas which prevent progress or resolution?
• Do partners perceive that management addresses issues fairly (not necessarily equitably) and is transparent?
• Do partners listen and communicate openly and without judgment?

5. Commitment and Consistent Contribution

• Do your partners share a passion for their practice and for the firm’s success and direction?
• Do partners practice consistently at high levels of client service and practice quality?
• Although different partners contribute different strengths, are expectations established and followed about the amount of time and energy it takes from each to make the firm successful?
• Are individuals’ levels of time and other commitments well understood and recognized?
• Do partners share your enthusiasm for ideas?

6. Shared Values

• How well do the partners understand and share the firm’s core values?
• Does the partnership establish and live by the behaviors that advance the firm’s values?
• How does the partnership deal with individual partners who do not abide by the firm’s values, who engage in destructive or demeaning behaviors or who cannot be trusted?
• Do partners allow each other the space to think creatively and to be flexible?
• Are partners committed to the firm as a whole, and to supporting innovation and new ideas for achieving success?

Maintaining strong, cohesive partnerships has become increasingly difficult as firms expand into new markets and open new offices, merge and acquire laterals and smaller firms.  Given how important it is to a firm’s long-term success to have a shared vision and strong cultural fabric within the partnership, firms should look carefully at their current processes for partner promotion, lateral hiring, rewards and compensation and the overall criteria for partners and their contributions to the firm.  In our next blog post, Law Firm Partnership Part 2, we will look at what it takes to become and remain an equity partner in today’s environment.