Partnership

This article reprinted with permission from American Lawyer.  © 2009 by Incisive Media US Properties, LLC, futher distribution or reproduction without permission is prohibited.

Sometimes a firm is less than the sum of its parts. In a struggling economy, business misalignment can be fatal.

IT'S NO SECRET THAT WE ARE IN A period of significant economic stress. Many firms are struggling with declining revenues, lower billable hours, slower-paying clients, and, inevitably, declining partner incomes. A few firms have already called it quits. Time to circle the wagons and ride out the storm, right? Maybe, for some. But many firms will face radical restructuring, and some will fail, for reasons that go well beyond the downturn.

There are two reasons for this. The first is that the economy is not just in distress--it is being remade at a remarkable pace, in ways we do not yet fully understand. The second reason is more fundamental. Many firms are in greater-than-expected distress, because they were fundamentally misaligned as businesses before the economic crisis hit. The economy has simply forced some to come to grips with these challenges faster and more aggressively than they likely would have otherwise.

Firm-level alignment problems tend to fall into three primary, but sometimes interrelated, categories--economic, strategic, and cultural. Each has different roots and implications.

Reprinted with permission from the May 2008 issue of the Lexpert Magazine. © Thomson Carswell.  Further reproduction or distribution prohibited.

There is an old saying in the law firm strategy consulting world that has to do with the alignment between a law firm’s compensation system and its strategy.

Specifically, this axiom is: If your compensation system does not support the goals and objectives of your strategy then your compensation system is your strategy.

Whenever I say this to a law firm partnership for the first time, I usually see nods of agreement from a majority — along with looks of strong protest from a few. Those who agree tend to accept the following concepts:

• You generally get what you reward with respect to the compensation system for partners.
• Management is ultimately responsible for the implementation of a strategic plan.

This article originally appeared in the New York Law Journal Magazine Volume 6, Issue 5.   © 2007 ALM Properties, Inc., further distribution and reproduction prohibited.

Today, it is rare to find a mid-sized or larger law firm that operates with a single partnership tier. Instead, most have moved to multi-tier structures that include equity and income tiers. Some have even added a third position that typically falls somewhere between equity and income.

While there is skepticism that multi-tier partnerships are created simply to boost net income per equity partner, in the majority of firms the addition of a second tier reflects an evolution in the organization and in the expectations of partners.

For purposes of this discussion we use the terms 'equity partner' and 'income partner' to refer to the two partner positions. The primary differences between them are that the equity partners:

 (i) make a capital contribution,

 (ii) participate directly in the profits of the firm,

 (iii) are liable for the firm's debts, and

 (iv) exercise ultimate control over the policies and direction of the firm.

© 2007 ALM Properties, Inc. All rights reserved.  Reprinted with permission from the Law Firm Partnership and Benefits Report, May 2007. Further duplication without permission is prohibited.

During the past year, we witnessed a marked increase in the number of law firms, both large and small, which are finding that their existing unfunded retirement plans are becoming significant, disruptive forces. The underlying problem created by these plans is that the plans result in current income being diverted to former partners, thereby reducing the compensation of the remaining active partners. Today, the combination of an expected spike in retirements related to the baby boom generation and, for many firms, greatly increased benefit exposure due to sharp increases in firm profitability that is factored into the value of retiree benefits, stand ready to test the financial viability of even the strongest firms.

© 2007 ALM Properties Inc. All rights reserved. Reprinted with permission from the March 2007 issue of Accounting and Financial Planning for Law Firms. Further duplication without permission is prohibited.

Lately, we've been hearing from a growing number of our clients about escalating concerns relating to career path and non-equity opportunities. Although 79 AmLaw 100 firms and 169 of the NLJ 250 firms acknowledge a tiered ownership structure, and a large number of others utilize a de facto two-tier structure, many firms still adhere to a single-tier model.

Still a large number of other firms have moved to a two-tier structure but continue to apply an "up or out" policy, forcing all non-equity partners to ultimately meet the criteria required of equity partnership or to find a new law firm. Like single-tier firms, these firms limit long-term opportunities for strong lawyers who lack business development skills or equity partnership interests.

Over the last few weeks, many of the top 100 UK firm’s 2010¹ provisional revenue and profitability figures have been announced. The full and underlying financials are yet to be published (we are awaiting more detailed information on productivity, leverage, costs, margin, etc.) but in the meantime enough indicative data is available to begin to discuss the potential drivers of this year’s results and expectations for the future.