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Big Law Partners; De-Equitization of Partners

First to recap my prior blog post, Big Law firms are facing increased pressure from clients and the market to reign in their exorbitant costs. The traditional two-tier partnership model places an emphasis on profits per equity partner. This management structure manages the complex law firm organization as if it were still the small, collegial firm of the 1950s and 1960s.

In the past twenty years Big Law firms attempted to reduce their hemorrhaging partner costs by de-equitizing underperforming equity partners and bringing in lateral partner hires. ((Alfred S. Konefsky & Barry Sullivan, In This, the Winter of Our Discontent: Legal Practice, Legal Education, and the Culture of Distrust, 62 BUFF. L. REV. 659, 682-683 (2014).)) This model worked briefly with lateral partners bringing in potential new clients, however, growth in profitability has been limited. Current equity and non-equity partners at firms do not trust lateral partner hires and these laterals often do not bring with them a big book of business as was promised to the hiring firm. ((Victor Li, The End of Partnership? Fundamental Changes Are Turning Firms from Collegial to Corporate, ABA J., August 2015, at 48; William D. Henderson, From Big Law to Lean Law, 38 INT’L REV. L. & ECON. 5, 7 (2014).))

Big Law firms are now forced to confront the fact that the lateral partner – one of their leading methods for remedying their poor profits and ability to stay afloat – is not effective. The lateral partner does not detract from the short-term focus on partner profits and only increases competition and distrust. What makes the most sense now is building firm value. Competition for business will continue to increase and Big Law firms need to establish trust and confidence with the client.

Many scholars have suggested that one way to do this is to return to a single tier, permanent equity model. ((See Jonathan Molot, What’s Wrong with Law Firms? A Corporate Finance Solution to Law Firm Short-Termism, 88 S. CAL. L. REV. 1,1 (Sept. 2014).)) Limiting partnership tiers to single permanent equity holders would reward those partners for creating lasting business. ((Henderson, supra note 3.)) Big Law firms need to avoid self-interested individuals pulling the firm in different directions. Allowing a designated group to regulate the firm business and direction will help stabilize the firm’s future goals and client retention.

Another suggested solution is quite the opposite of a single tier partnership. It has become evident over the past 30 to 40 decades that law firms transformed from small collegial offices, into large corporations. ((Marion Crain, The Transformation of the Professional Workforce, 79 CHI.-KENT L. REV. 543, 571-572 (2004).)) With that drastic transformation comes the need to revamp the leadership structure to accommodate such a complex business. Firms grew to reflect the size of the mega corporations they represent and now firm management must play catch up. Many scholars have suggested that a multilevel talent management system would be best to replace the two-tier partnership structure. ((Sarah Kellogg, Two-Tier Partnerships Reshape Legal Landscape, WASHINGTON LAWYER, (Aug. 2014).)) If one looks to other similar industry firms, like accounting or consulting, their management style is easily distinguishable from that of a law firm. Those firms have multilevel management which helps them differentiate their specialties and better serve their clients. Law firms already have a diversified structure with the development of the practice group. It seems plausible that moving forward the various practice groups may serve as the basis for multilevel management that can address specific client concerns. ((See Li, supra note 2.))

The most important thing for Big Law expansion and growth is successfully meeting client’s needs. This is not easily done with a two-tier partnership structure that encourages distrust and the pursuit of too many individual goals. Big Law firms must restructure their partnership model to encourage trust and incentivize building long-term value for the firm. These goals may be accomplished through a single tier permanent equity model or a multilevel management model that can address specific client needs.

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