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Law Firm Partnership Tracks Running Firms into the Ground – Is there a Solution? (Part 1 of 2)

Being an equity partner at a law firm used to be a give-in. For decades those who were relatively competent lawyers who served their time at the firm made equity partner.1 After the Great Recession the legal industry was hit hard and law firms were forced to reorganize themselves to remain competitive. The Recession marked a shift in the legal market “where companies are simply not willing to spend as much on lawyers.”2 This created a problem for the expensive traditional single tiered partnership track where firms would hand out equity partnerships after associates hit certain benchmarks including time served. Continued pressure from outside sources including the use of less expensive contract attorneys, companies supplementing more of the workload with in-house counsel and the pressure for cheaper rates have caused a shift in law firm business operations in general as well as a significant change in the partnership model. This two-part blog post will address the more recent adaptations to the law firm partnership model and analyze their pitfalls as well as discuss possible future partnership model alternatives that may better serve law firms and their clients. The first blogpost will focus on recent adaptations and their pitfalls.

First it is important to understand the current partnership model that exists in the majority of large and mid-sized law firms post-Great Recession. Most of these firms use the two-tier system with equity and non-equity partnership tracks.3 This model has provided a way for law firms to increase profits while managing talent and remaining competitive with the pressure from outside sources4 The non-equity partnership track can serve as a “waiting room, a safe harbor, and a warehouse.”5 These categories define the types of non-equity partners. Those in the waiting room are talented associates and laterals who the firm intends to promote to equity partner.6 The safe harbor non-equity partner is a partner who has specialized knowledge and is brought to the firm usually with the understanding that they will not be creating new business but their specialized knowledge is an asset.7 The warehouse includes partners who may have been equity partners or non-equity partners, but regardless they are underperforming and the goal is to oust these costly individuals.8

A two-tier partnership track may appear to accommodate law firm needs in theory, however, it has actually proven to be damaging to morale and is considered shortsighted.9 The continued pressures mentioned above including client demand for cheaper rates, additional in-house work and inexpensive contract attorneys won’t be going away any time soon. These factors will continue to strip away law firm profits and rather than finding a completely new and innovative way to improve profits after the Recession, many firms have turned to cannibalizing themselves.10

Dissatisfied senior associates and partners who anticipated becoming equity partners become susceptible to poaching by other firms.11 Firms trying to increase their profit margins may also de-equitize current equity partners and nab laterals and bring them in at the same level as these newly de-equitized partners.12. These actions by firms can cause partners to distrust one another and hoard business for themselves protecting their self-interest and losing sight of the firm’s long-term interests.13

The two tier partnership track is oversimplified and the result of a sluggish legal industry that is ill-equipped to pivot and adapt to the post-Recession pressures. In order to increase profits without cannibalizing talent, firms will need to be more dynamic in addressing the partnership equity model. Part two of this blogpost will identify promising future solutions for firm partnership models that will encourage rather than stifle business opportunities and profit margin increases.

 


  1. See Stephen Mayson, Law Firm Partnership: The Grand Delusion, (Oct. 9, 2012), https://stephenmayson.com/2012/10/09/law-firm-partnership-the-grand-delusion/. 

  2. Jordan Weissmann, The Death Spiral of America’s Big Law Firms, The Atlantic (Apr. 19, 2012), http://www.theatlantic.com/business/archive/2012/04/the-death-spiral-of-americas-big-law-firms/256124/. 

  3. Sarah, Kellogg, Two-Tier Partnerships Reshape Legal Landscape, Washington Lawyer (Jul./Aug. 2014), https://www.dcbar.org/bar-resources/publications/washington-lawyer/articles/july-august-2014-partnerships.cfm. 

  4. Id. 

  5. Id. 

  6. Id. 

  7. Id. 

  8. Id. 

  9. See Jonathan T. Molot, What’s Wrong with Law Firms? A Corporate Finance Solution to Law Firm Short-Termism, 88 S. Cal. L. Rev. 1, 11-12, 30 (2014). 

  10. Weissmann, supra note 2. 

  11. Jennie Bricker, In It Together? The Great Recession and Law Firm Culture, Or. St. B. Bull., May 2015, at 18. 

  12. Bricker, supra note 11; Weissmann, supra note 2. 

  13. Bricker, supra note 11. 

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