Edge International

Why Partner Integration Should Be On Your Agenda

Leon Sacks

Partner integration signifies that partners are working, both individually and as a group, in a manner that optimizes firm performance and is in consonance with their expectations.

Firm management is customarily occupied with monitoring the project pipeline, the productivity of professionals, client satisfaction, hiring the best professionals and winning and managing work. These are considered key contributors to a firm’s performance and success.  However, partner integration can be an element of even greater significance to a firm’s performance and cannot be neglected or taken for granted.

Any sub-optimal performance at the partner level can have a multiple effect on the performance of the firm. This is because partners inevitably assume some management responsibility, whether managing a practice area, overseeing a group of professionals, handling certain client relationships or developing services and new business.

Partners consider themselves “owners” in the firm and, at a minimum, feel they should have some influence on how the firm is governed and managed.  To the extent that is not achieved it can lead to dissatisfaction, a lack of motivation and even disruption, resulting in a significant, and often costly, distraction for firm management.

Do any of the following symptoms of a lack of integration sound familiar to you?

  • complaints that a certain partner is not assuming his/her responsibilities or is not contributing sufficiently
  • partners whose shortcomings (e.g. poor relationships with subordinates or lack of collaboration) are overlooked because they have good financials
  • partners whose contributions are overlooked because their current financials are poor
  • practice groups or business units operating autonomously and, perhaps, with distinct and even incompatible approaches
  • lack of trust among partners reducing cooperation
  • communication gaps between firm management and the partners at large, causing misunderstandings
  • dissatisfaction with the fairness of the partner compensation system
  • no effective performance evaluation process for partners (including feedback) leading to accommodations and misalignment
  • partner promotion and advancement based on longevity rather than performance
  • partner concerns as to lack of participation in decision-making
  • controversial partner meetings without resolutions (disagreements allowed to fester)

Some of these situations may be overt (i.e. self-evident) while others may be covert (i.e. they exist but are not perceptible without specific questioning or analysis). All of them are examples of potential deficiencies in partner integration.

Where is your firm on the performance/integration map shown below?

Clearly performance and integration do not have unique definitions. They are a function of the values and objectives of a firm.  Their measurement is dependent on an evaluation of a series of characteristics, many of which are qualitative rather than quantitative.

For example, performance may not be based purely on revenue growth or levels of profit but also on levels of client satisfaction, growth in certain service areas or practices and retention rates of professionals and/or clients. Similarly, integration may include evaluation of such elements as time spent on partner issues, level of partner satisfaction, client feedback, level of cross-selling and partner turnover.

Can you plot your firm’s position based on your interpretation of the level of performance and integration?  Experiment doing this before reading on.

Let us now analyze the potential (common?) characteristics of firms in each quadrant of the map as indicated below.

Quadrant 1   LOWER PERFORMANCE/LOWER INTEGRATION

  • Start-ups
  • Group of disconnected partners
  • Lack of management
  • Unsuccessful merger (lack of trust/inability to change)

Risk: disruption, loss of partners/associates

Opportunity: improve financial returns, motivation and lifestyle 

Quadrant 2   HIGHER PERFORMANCE/LOWER INTEGRATION

  • Star individuals/practices run separately
  • Group of autonomous units – perform well individually but focused on own P&L
  • Lack of governance

Risk: loss of stars and/or practices

Opportunity: collaboration/synergies/cross-selling/joint client development

 Quadrant 3   LOWER PERFORMANCE/HIGHER INTEGRATION

  • Too nice – lots of “sticking together” but lack of drive/management discipline
  • Tolerate non-performance

Risk: retention of performing partners, lack competitive advantage, lack of growth and retention of professionals

Opportunity: high growth opportunity and competitiveness

 Quadrant 4   HIGHER PERFORMANCE/HIGHER INTEGRATION

  • Uniform practices and strong financials across the board
  • Smooth working relationships and stable governance structure
  • Healthy interactions and high degree of trust

Risk: low risk of partner issues or defection

Opportunity: focus on growth and development and market leadership.

Clearly Quadrant 4 is the place to be by maximizing opportunities and minimizing risks. There is no perfect firm and there is no such thing as zero risk, but moving toward the top right corner of the map should be on any firm’s agenda.

That move would consist of making adjustments to the firm’s structure, policies and procedures, its mode of management and partner expectations. These may be included in a Partner Integration Program (“PIP”) that could then evolve into an on-going process as the subject matter is fluid and requires monitoring.

A PIP may address the following, amongst other needs:

  • Promotion – promoting the right people facilitates integration and avoids costly mistakes. Promotion based only on the need to retain expertise and certain competencies may not be appropriate and alternative career paths are an option.
  • Training and orientation – alignment to strategy, provision of skills to progress and motivation to grow
  • Partner performance expectations, measurement and feedback

An effective partnership does not mean that all partners need to contribute in the same way but rather that the individual strengths of a diverse set of partners are used to maximize the strength of the partnership as a whole.

  • Partner compensation – a system that recognizes the relative contributions of partners and is seen to be fair
  • Adequate governance structure, leadership and communication channels
  • Strong cultural glue
  • Incentives for collaboration

 A PIP will consist of the following phases:

  • Define the components of partner integration to be measured
  • Develop a plan to collect data and information for measurement

Remember that certain situations may be covert and therefore, to be complete, any diagnosis should include some form of consultation with the partners themselves (interviews, surveys, etc.). Such consultations should be conducted by persons independent of management so as to avoid conflicts and not constrain responses.

  • Perform an evaluation of current status for each component
  • Summarize findings and recommended actions for improvement
  • Discussion and approval of action plan for implementation

Given that recommended actions will likely have a significant impact on partners’ roles and involvement with the firm, it is considered imperative that partners be consulted before any actions are approved. 

I would be delighted to explore further the idea of implementing a Partner Integration Program, (PIP) should it be of interest to you.

How Can You Reach and Recruit Diverse Lawyers?

Mike White

I’ve been gobsmacked by how many managing partners and firm practice group leaders tell me, “Mike, we’re having trouble recruiting a homogenous, non-diverse stable of lawyers; we want to grow our numbers but we can’t seem to break the cycle of onboarding lawyers who all look very different from each other and represent different life experiences, ethnicities, geographies and genders. Can you help us address this human capital challenge?” Alright . . . so I’m not hearing that! As you might assume, I’m hearing quite the opposite. Outpacing all other law firm laments- by a wide margin- is the frustration firms express about not being able to recruit successfully enough diverse and minority lawyers.

Why can’t firms win more than their fair share of recruiting battles for diverse lawyers, and why is this important? For one thing, culture matters to all lawyers- both diverse and non-diverse lawyers. Lawyers want to work in eclectic, stimulating environments. Non-diverse lawyers are a flight risk if they are denied the affirming experience of working with colleagues who represent true diversity. Moreover of course, corporate law departments for some of the same reasons want to work with a more diverse stable of providers and advisers.

The legal business is a human capital business. With GDP growth at 6x-7x normal rates reducing to “only” 3x-4x normal rates as the economy recovers, demand for commercial legal services will remain brisk for a long time. The challenge law firms face in recruiting diverse lawyers is in some respects a more acute form of the challenge they face in recruiting all lawyers. What diverse lawyers want to see in a firm to which they commit their career in many respects is what all lawyers want to see in a firm worthy of career commitment. Compensation of course is important, but what else should firms support to more reliably attract the most desirable lawyers to their firm?

Career Long Commercial Success

Make an explicit and detailed commitment to helping your diverse lawyers be successful commercially. Many firms view the path-to-partnership as a 10-year fraternity hazing experience- “we want autodidacts who can figure out success on their own- that’s our partnership readiness KPI.” What if you were simply better than your peers at teaching your diverse stable of layers the functions and vocabulary of business so they will have an easier time engaging with client prospects? What if you taught them from inception how to cultivate relationships, convert opportunities into paying engagements, and cause third parties to become introduction generators for their pipeline? I encourage my clients to demonstrate with concrete, tangible and packaged deliverables what their competency building experience at their firms would look like in these areas- you must show that you are as intentional and serious about building in them these skills as you are about building in them technical legal skills.

Help Them with Life

Committing to a law firm career = committing to an imbalanced life. Help your diverse lawyers- particularly if they’re new to the community-  build their supportive personal scaffolding so they can be even more effective at building their career. Get to know them and help them manage some of the non-work dimensions of their life that are rendered more complicated because of work. Do they want to send their kids to private school? If so, put them in touch with other partners who know something about that process. In what activities outside of work do they and their spouses/partners like to engage? Put them in touch with others who engage in those activities. How are they trying to build out their personal and professional network? Put them in touch with other firm lawyers who know people who would be interesting to them. Listen and learn, and then be helpful- pretty simple, huh? You should document what the firm does in these areas, and package it up (promote, educate others, and document) so that diverse recruits see that it is part of the firm DNA.

Educate Them with Expectations and Possible Roles

Many firms offer multiple paths and have cracked the code on how each flavor of lawyer can generate firm profits. Very few younger lawyers have a granular view of success over time at a law firm. We all know law firms can support thoughtful long term tracks for non-equity partners, fractional lawyers, and lawyers moving into business roles. Success in a law firm career is less binary and more complicated now. Firms expect to generate profits from all lawyers, no matter what title they have. All lawyers- including diverse recruits- need to understand what those roles look like and how they could be successful in each one.

Stop Being Cryptic

Many firms aren’t very open about what life will be like at a firm as a senior partner, or even as a young partner. AmLaw rankings may provide transparency into the financial benefits, but even those numbers don’t tell the whole financial story; e.g., amount of capital contributions, spread between highest and lowest compensated partners, what are the “doing my part” expectations at each stage. Also, be open about what people earn and why. You have much a better chance of convincing a desirable recruit to defer near term compensation gratification if they see a pathway to great financial security and reward down the road- but you must be specific and transparent here!

Control

Most lawyers care very deeply about blunting the imbalanced nature of law firm lawyering over a career by seeking control over what they are doing. “If I’m going to have to work this hard, I want to be able to do it on my terms . . . “ At bottom this means they need to see how they will build a client base of their own. How else could your firm help diverse lawyers establish control over their career- both long term and day to day?

If your firm is like 90% of the AmLaw 200 law firm that can’t throw more money at diverse recruits than your competition, then you have to be more thoughtful and holistic, if for no other reason than because your most desirable minority and diverse recruits bring their own thoughtful and holistic lens to these issues. Meet your human capital where they are, and give their long term career aspirations an intellectual bear hug- then you will begin winning more of these talent battles.

Results of the 2020/2021 Edge International Global Remote Working Survey Part 1: The Data

Jonathan Middleburgh

Please enjoy the above 7 minute video overview

I am delighted to publish the results of the Edge International 2020/2021 Global Remote Working Survey.

This is the first part of a two-part review of the results. In this part I am sharing the results.  In the second part, I – together with Gerry Riskin – will be suggesting some practical conclusions that can be drawn from the results, which should inform how leaders manage remote working post-pandemic.

This part of the article consists of this summary, which sets the headline results of the survey.  The detailed results are available in a slide deck, which can be accessed by clicking here.

Key Headlines

  • The vast majority of respondents (87%) want to continue working remotely between 1 and 4 days a week post-pandemic. Only 6% want to work remotely full-time.
  • Productivity and Motivation have held up relatively well during the period of remote working caused by the pandemic.
  • For most, remote working has either had a neutral or positive impact on both physical and emotional well-being. However, for a significant minority it has had detrimental consequences.
  • Almost half of respondents report that remote working has damaged the cohesiveness of their firms.
  • For the vast majority of respondents, feelings of loyalty towards their firms have stayed about the same or increased.
  • Most report that relationships with colleagues and with clients have stayed about the same or improved; however, a significant minority report that they have deteriorated somewhat or significantly.
  • Only a small minority report less effective supervision of their work or management while working remotely.
  • A high percentage of those with childcare responsibilities report that childcare issues impact detrimentally on their ability to work effectively while working remotely.
  • A significant minority report a belief that remote working will impact negatively on their opportunities for career progression and promotion if they continue to work remotely post-pandemic.
  • A third of respondents report that their remote working environment is less comfortable, far less comfortable or uncomfortable, compared to the office; likewise, a third of respondents report that their remote working IT resources are somewhat or significantly worse than those in the office.

Background to the Survey

Like other colleagues, I was struck last year by the lack of data available to help firms with their decision-making around remote working, both as the pandemic continued and looking ahead to a time when restrictions caused by the pandemic are lifted. I was concerned that some firms were beginning to make significant decisions without robust empirical data, in particular benchmarking data.  It is for this reason that I designed the survey.

Participation in the Survey – Benchmark Data Set

An open invitation was extended in early December 2020 to firms to participate in the survey.  The survey, which consists of 24 questions (several of which contain sub-questions), takes around 20-30 minutes to complete.

927 lawyers / law firm employees completed the survey between 12th December 2020 and 12th February 2021, at which point I decided to close the survey in terms of the benchmark data set.

The benchmark data set is made up of a spread of lawyers and other law firm employees (see Q3):

  • 4% are senior management
  • 27% are partners in their firms
  • 37% are associates
  • The balance are paralegals, interns/trainees, legal secretaries and business support of which business support is 11% of the data set.

In terms of length of tenure at their firms, 11% of respondents started after the onset of the pandemic, 39% have been at their firms for less than 5 years, 21% between 5 and 10 years and 29% more than 10 years.

History of Remote Working

The survey focuses on the experience of those who have worked remotely for a significant amount of time since the pandemic began (92% of respondents; the other 8% of respondents only answered Question 1 of the survey and were then taken to the end of the survey).

Of those who have worked remotely for a significant extent since the pandemic began, only 14% had worked remotely to a significant extent pre-pandemic.  This is important, as the vast majority of respondents who completed the survey had not previously had significant experience of remote working.

Productivity and Motivation

Questions 6 to 9 focus on productivity and motivation.  In terms of productivity, perceived productivity seems to have held up relatively well while working remotely, both in the early days of remote working, and as the pandemic has continued.  For example, 81% of respondents report that they believe their productivity has either stayed the same or increased over the entire period since they started working remotely.

However – and this is an important caveat – a significant minority report that their productivity has decreased.  Over the entire period 19% of respondents report that their productivity has decreased slightly or significantly.  That said, only 3% report that their productivity has decreased significantly.  These figures can of course be tested against actual productivity figures in many firms.

In terms of motivation, this too seems to have held up reasonably well while working remotely, both during the early days of remote working, and as the pandemic has continued.  78% of respondents report that their motivation has either stayed the same or increased over the entire period since they started working remotely. 22% of respondents report a slight or significant decrease in motivation (5% significant; 17% slight).

Being an Effective Resource for the Firm

One in three respondents report that they believe that they are a more effective resource for the firm when working remotely and a further 40% report that they are ‘about the same’ in terms of being an effective resource for the firm (Q10).

However, one in five (19%) do not believe that they are a more effective resource for the firm when working remotely.  This chimes with figures on productivity and motivation and would suggest that roughly one in five employees believe that they are either slightly less effective or significantly less effective as a resource for the firm when working remotely.

Physical and Emotional Well-being

Question 11 focuses on the perceived impact of remote working on physical and emotional well-being.

58% of respondents believe that remote working has had a somewhat or significantly positive effective on their physical well-being (28% somewhat; 30% significant).  21% report remote working as having had a neutral effect on their physical well-being.  Only 2% report remote working as having had a significantly negative effect on their physical well-being. However, 18% report that it has had a somewhat negative effect on their physical well-being.

Similarly, 53% of respondents believe that remote working has had a somewhat or significantly positive effective on their emotional well-being (27% somewhat; 26% significant).  20% report remote working as having had a neutral effect on their emotional well-being.  Only 4% report remote working as having had a significantly negative effect on their emotional well-being. However, 23% report that it has had a somewhat negative effect on their emotional well-being.

These figures came as a personal surprise to me – I had not anticipated that such a high percentage would report remote working as having a positive effect on their physical and emotional well-being.  The fact that a significant minority report remote working as having had a negative effect on their physical and emotional well-being was less surprising to me.

Further data points confirming the emotional impact of remote working can be drawn from the responses to question 20. For example, 21% of respondents report that they have experienced low motivation since working remotely, 20% low mood, 16% volatility of mood and 7% depression.

Childcare Issues

A very high percentage of respondents who have children requiring childcare report that childcare issues impact detrimentally on their ability to work effectively (Q13).

Of the 30% of respondents who have children requiring childcare, 60% report that childcare issues impact detrimentally on their ability to work effectively while working remotely.  One in five of these (22%) report that childcare issues impact detrimentally to a large extent on their ability to work remotely.

Relationships with Internal Colleagues / Team Working

A number of questions explore relationships with internal colleagues and team working.

In response to Q18(A), 50% of respondents report that their relationships with internal colleagues have stayed about the same and 13% report that they have improved somewhat or significantly. However a significant minority report that these relationships have deteriorated – 27% report that they have deteriorated somewhat; 4% significantly.

In response to Q18(D), 60% of respondents report that their ability to work as part of a team has stayed about the same and 20% report that it has improved somewhat or significantly.  Here too, a significant minority report a deterioration in team working.  14% report that their ability to work as part of a team has deteriorated somewhat; 3% report that it has deteriorated significantly.

In response to Q20, 43% of respondents report that they have experienced fewer opportunities to bounce ideas off colleagues while working remotely and 42% report fewer opportunities to brainstorm with colleagues.

Relationships with Clients

Question 20 explores relationships with external clients.

Just over half of respondents (53%) report that relationship with clients have stayed about the same.  11% report that they have improved somewhat and a further 4% report that they have improved significantly.

A small (but significant) percentage (11%) report that relationships with clients have deteriorated somewhat.  Only 1% report that relationships with clients have deteriorated significantly.

Leadership actions / Management while working remotely

Question 22 explores a variety of leadership actions during remote working. A high percentage of respondents have experienced virtual team meetings (84%) and / or virtual social events helping them to stay connected with team members and colleagues (74%).  A much lower percentage report one-to-one interactions with leadership – only 36% report that leadership has held virtual one-to-ones to touch base with them individually.  That said, 69% report that leadership has demonstrated concern for their well-being.

Overall, respondents appear to be relatively satisfied with how they have been managed while working remotely. Only 10% of respondents report less effective supervision of their work while working remotely and only 8% report less effective management by their manager or supervisor (see Q20).

Preferences regarding remote working post-pandemic

The vast majority of respondents would like to spend a significant percentage of their working week working remotely, post-pandemic (see Q21). 87% of respondents would like to work remotely between 1 and 4 days a week once the pandemic is no longer the determining factor.

22% would like to work remotely 1 day a week, 26% 2 days a week, 21% 3 days a week and 18% 4 days a week.  Only 6% express a preference for full-time remote working; 7% express a preference for full-time office working.

Firm cohesiveness / Feelings of loyalty

Just over half of respondents report that remote working has had no impact on or enhanced the cohesiveness of their firms (Q23).  However, just under half report that it has somewhat or significantly decreased its cohesiveness. 40% report that it has somewhat decreased the cohesiveness of their firm; 7% report that it has significantly decreased the cohesiveness of their firm.  These figures should be of some concern for senior leadership.

The responses to question 23 are somewhat difficult to square with the responses to question 24 which explores personal feelings of loyalty asking: ‘Have your feelings of loyalty towards your firm increased or decreased since you started working remotely?’

In response to this question only 6% report that feelings of loyalty have decreased.  58% report that they have stayed about the same and 33% report that they have increased.

Other important findings

Some other findings are as follows:

  • 26% of respondents report a higher level of disruptions when working remotely than when working in the office (Q12) – however only 6% report a significantly higher level of disruptions.
  • One in three respondents report that their remote working environment (as regards space, noise, desk, chair etc.) is either less comfortable, far less comfortable or uncomfortable compared to the office (Q14).
  • One in three respondents report that their remote working IT resources are somewhat or significantly worse than those in the office (Q15) – however only 4% report that they are significantly worse.
  • The vast majority of respondents report that they spend some or all of the time they save commuting on working (Q17) – 10% report that they spend all of it working and a further 17% report that they now work even longer hours than their previous working day including their daily commute.
  • The majority of respondents report that the punctuality and running of both internal meetings and meetings with clients has stayed the same or improved while working remotely (Q18(B-C); Q18(F-G)).
  • A significant minority of respondents report that their opportunities to enhance their professional skills (e.g. through formal or informal CPD) have deteriorated somewhat or significantly while working remotely (Q18(H)). 7% report that they have deteriorated significantly.
  • A significant percentage (20%) of respondents report that they believe their opportunities for career progression and promotion are likely to deteriorate if they continue to work remotely post-pandemic (Q19).

Implications of the Survey

I, together with Gerry Riskin, will be exploring the implications of the Survey in Part 2 of this review.  In the meantime, if you would like to discuss the survey with me, my contact details are below. Similarly, if you would like to consider having your firm take the survey – and receive a detailed report benchmarking your firm’s results against the benchmark data set – please be in contact with me.

A Talent Take on Law Firm Rankings

David Cruickshank

The first quarter brings us rapturous reports of revenues, rankings and profits per partner from the U.S. legal press.  American Lawyer Top 100 rankings are announced.  Headlines like “30% Profit Increase at Firm Despite Pandemic” appear.  And “rumored expensive deals” for lateral partners get favorable attention for the acquiring firm.  This drumbeat from the legal press about “top firms” is supposedly a proxy for excellence in law firms, law practices and excellent individual talent.  But are these the best measures to help a client or a job-hunting professional decide to choose a “top” firm?

How did we get here?

 The U.S. legal business is unlike that in any other nation because it voluntarily offers up its financial numbers to The American Lawyer and other data aggregators who will publish (for profit) comparison tables that are principally focused on revenues, lawyer numbers and profits.  There is no S.E.C., no regulatory body and no external shareholders asking for these data.  You can’t get these numbers on law firms in Canada, Brazil or France.  But it has become a “given” to discuss U.S. firm rankings as a proxy for excellence.

Some Alternative Measurements to Consider

 The Client Perspective

It is true that some clients will choose a high revenue large firm because of its perceived excellence or AmLaw ranking.  But that is often because the corporate counsel answers to a Board or executive that wants “the best” external legal talent.  This provides a buffer if the legal strategy goes south.  But why would a client choose the most profitable firm?  That seems like a proxy for over-paying your lawyers, not necessarily excellence.  Clients do value personal connections to lawyers who have demonstrated their talents and provide both value and excellent service.  For that reason, it is often assumed that an excellent lateral partner hire will bring their clients with them.  There is no ranking for “How many loyal clients-per-partner do you have?”

The Associate, Partner or Professional Hiring Candidate Perspective

It is doubtful that prospective hires make their decisions based on external rankings.  True, a top student or mid-level associate might use rankings to create a pool of potential firms.  However, they will put greater weight on their future co-workers, career advancement, training and business development opportunities when making a final choice.

Internal Talent Ranking Numbers

Most of these internal numbers are not available, because they are not shared or consistently reported.  Yet, if a firm wanted to persuade clients and prospective hires of their excellence, value and a “best fit” for a lasting relationship, these are some numbers they might promote:

  • Associate retention rates at years 2, 5 and 8
  • Associate retention per practice group
  • Professional position promotion opportunities per year
  • Acceptance rates from the ten law schools where the firm most often competes for talent
  • Percentage of budget spent on talent, CLE, training and mentoring (of administrative budget) and year-over-year changes over 5 to 10 years
  • Average and high/low of partner hours per year recorded for training and mentoring
  • Lateral hires incoming (partners and associates) per year, last 5 years
  • Departures of laterals who were with the firm less than 5 years (compared to laterals who “stick” longer than 5 years)
  • Diversity hire increases/decreases over 5 years

External Rankings

External rankings turn on surveys and perceptions of employees.  When taken annually or every two years, these can show that a firm is on a rise or a downslope where employee satisfaction is concerned.  Two measures that get a lot of attention from those who work in recruiting and professional development are:

  • The AmLaw Mid-Levels rankings
  • Fortune 100 Best Places to Work (annual, covers all companies).

These rankings are more likely to be seen by clients, since firms will promote the rankings in their websites and newsletters.  The 2020 rankings will reveal satisfaction with early handling of the pandemic.  In the AmLaw Mid-Levels survey for 2020, O’Melveny & Myers was the top ranked.  When compared to all companies and professional services firms, it is tougher to place in the Fortune 100.  Yet Alston Bird, the first law firm to break into those rankings, is a perennial top 100 choice of employees.  Perkins Coie was the highest ranked law firm in 2020 and 2021.  Only 3 or 4 law firms make the Fortune 100 every year.  Orrick regularly ranks well in the Fortune 100 and appears in the top 75 of the AmLaw survey.

Conclusion

 Whether you are a client looking for excellent lawyers or a jobseeker looking for a great place to work, the much-touted rankings for revenues and profits may be the wrong proxy for excellence.  Excellence may be better measured by how much investment a law firm makes in its people, how long they remain at the firm, and how the employees, from first hire to longer career paths, rank the firm.  A law firm that is not ranked highly in revenues and profits might turn instead to showing how they excel on internal measures of career development and external rankings by employees.  There’s a unique competitive advantage if your measurements make your firm a talent magnet.

Four ways to Ensure Success in Hiring New Partners

Nick Jarrett-Kerr

Lateral hiring in professional service firms has an uneven track record.  Statistics consistently show that hiring a ready-made partner from another firm often results in disappointment both for the firm hiring them and in terms of the new partner’s own expectations.

There are four main tactics to avoid the usual traps.

Tactic One – Get the Business Plan Right.  One principal reason for failure is that the new partner’s business plan misfires. Even glossily prepared plans can prove to be unrealistic over optimistic.  The Partner may expect to bring over clients or staff and everybody is disappointed when these arrivals do not actually transpire. That is often because the old firm manages to take steps to protect its client base and because team members often decide to stick with the old firm. Hence it is important that the business plan of any new hire should be tinged with a large dose of realism.   Even where the plan is realistic and sensible, firms and their new partners often mutually misunderstand how long it takes to bed the partner in, to move to full productivity and to generate revenue and cash flow.

Tactic Two – Choosing the Best Partner.  Failures can occur when the firm is blinded by what the prospective new partner can bring by way of client following or specialism.  The firm then fails to take the necessary steps to ensure that their new partner is someone who will fit in to the firm. Proper on-boarding processes are important to ensure that the new hire is left with no opportunity to hide away in a corner or to operate as a sole practitioner within the new firm. Some lateral hires seem to make little or no effort to espouse the new firm’s behaviours or to take part in firm activities.  Care should therefore be taking in the early on-boarding and induction processes to gain early warnings of possible trouble. Particular attention should be paid where there is any risk that the new partner might tend towards being an individualist “lone wolf” who may find it hard to fir into the firm’s collegial culture.   Conversely, where the culture and values of the firm stress and reward individual effort over team performance, persistent communication channels may be required where new partners are used to working as part of a team and consequently might struggle to be left entirely to their own devices.

Tactic Three – Form and Execute an Integration Project.  In tightly knit firms, practice groups, used as they may be to their own friendships, informal rules and patterns of behaviour, can find it difficult to admit a new person to their inner circle and hesitate to make insufficient effort to integrate new people.   The new partner may try to force his or her way in but find it easier said than done.  I hate to say it, but many groups still suffer from latent prejudices when faced with new partner from different backgrounds, diverse ethnic origins or even different genders to the majority.  Some firms can still be categorised as bastions of white male privilege.   In this connection the firm’s leadership can often give a firmer steer to communicate both the standards of behaviour that are required and the ingredients for integration success.   The integration project should be treated both as a change management program and as a team building exercise.  It sometimes helps to use a cultural inventory to create action plans and to work out areas of difference between the practice group and the new partner which may need development. In this connection the project is not finished and cannot be signed off until you’re absolutely sure that you can say “he or she is truly one of us“

Tactic Four – Ensure Appropriate Support from the Firm.  Professionals should of course be self-starters, but some firms are too quick to adopt a “sink or swim” attitude to new hires.   It is about twenty years since I was a managing partner, but we introduced a rule that we would always try to find the first engagement for the new partner from the firm’s existing resources and client base.  This was partly to ensure that the new partner felt welcomed but also to assure new partners that we were not expecting them to rely entirely on their own efforts.  Support can also be missing if the firm turns out to be the wrong platform for the new partner – I recall one experience when my firm hired a pensions partner to a practice which had insufficient client or work type synergies to enable the new partner to thrive.

The brutal truth is that despite all efforts not everybody will always fit in or be successful.  However, it is seldom too late to work on integrating new people and it is worth checking with recently hired partners how firmly are woven into the fabric of the firm and what more can be done to enhance relationships.

Move the Goalposts and Make Prospect Risk Aversion Your Friend

Mike White

During a recent client call I sat in on, one of the partners mentioned an opportunity to begin doing work for a global 1000 business (“Company A”). My client happened to be one of the few non-law firms with which I work- a strategy consulting firm that works with global corporates. My strategy consulting client had done a good job of setting the table and matching needs with capabilities, but their dialogue was plateauing. The below bullets reflect how I helped them find a decision catalyst to implement the relationship. One of the challenges was the perception that other strategy consulting firms competing against my client were specifically familiar with Company A’s industry and products; i.e., they had the benefit of reusable knowledge. Below are some comments I offered about how my client could “move the goalposts” and cause Company A to view retaining my client as being a less risky choice.

Make “Risk Sensitivity” Your Friend

► A decision by Company A to work with any of the other more technically oriented consulting firms likely will be a hat tip to risk aversion. Businesses derive comfort from reusable (technical) knowledge; reusable knowledge = no wheel spinning = less time and $ to generate insights = higher probability ROI.

►How can you inject “risk” into Company A’s decision to go with cheaper consultants who bring with them reusable technical knowledge?

► Reframe Company A’s problem from being a technical problem that is a creature of the relevant industry sector to being i) a growth problem, ii) a change management problem, iii) a creativity problem, a iv) it is a . . . . problem, but it is not a technical problem.

► High impact recommendations coming out of this process will require Company A to put in motion multiple work streams that look little like their legacy business; this will be hard. They will need an expert in how to manage de novo, unfamiliar work streams– i.e., the cadence, the carburetion, monitoring and course correcting, etc. A consultant who knows how to build Company A’s technical product is not an expert in unfamiliar, de novo work streams. Getting organizations to do something new for the first time is hard- and it is a discipline in and of itself. The real risk to Company A is in not finding a resource with THIS expertise.

► Technical industry experts with presumed reusable knowledge are more likely to bring with them parochial, insular “me too” prescriptions. How can you convince Company A that it is critical they make a real breakthrough here? That requires thinking (i.e., creativity) unconstrained by the narrow lens of “technical literacy and deep industry knowledge.” Amazon did not go to a retail consultant to go into the web services business, etc . . .

How to Deal with The Price Objection

► Company A is going to need to see what kind of prescription my client could author that is different in kind and capable of generating geometrically more value than another conventional technically oriented consultancy. Can you paint this picture during the sales stage before you have yet to do the work?

► Stories – the best way to move people in big ways to another place is with penetrating individual stories. Is there a case study you could cite where you were chosen at a much higher cost and your client experienced home run impact that clearly would not have been delivered by another “usual suspect” competitor?

Whether you’re a strategy consulting firm or a law firm, “difference in kind” persuasion requires big “goalpost moving”- you’re going to need to get prospects to look at their problem and the opportunity fundamentally different from the way they are likely looking at it when they present it to you. If you “move the goalposts” you win; if you allow them to lazily accept the framing they brought with them before talking to consultants you likely won’t win.

Leadership: Agility in the Face of Fragility

Gerry Riskin

I was delighted to be asked to create an article on leadership for the Law Practice Management Magazine of the American Bar Association.

My hands-on work with law firm clients has been very focused on the pandemic, remote working, and the need for extra special consideration of members of firm teams due to the strains and stresses created by the pandemic environment.

Smart people tend naturally to focus on the “efficient and effective”, however sometimes there are other management dimensions that need attention. This article explores the dimension of managing in light of pandemic-induced fragility in every firm

I am grateful to the ABA and the Law Practice Management Magazine and hope that you and your firm will benefit from this article.

Resolving Conflict: Trouble at the Top and Why it’s sometimes best to part company

Jonathan Middleburgh

I have written previously (in an article in the Edge Communiqué entitled ‘Law Firm Armaggedon: How a major Law Firm nearly imploded and how the conflict was resolved’) about how the survival of law firms sometimes requires the capacity to resolve senior-level conflict. In that article I shared the story of one such conflict and how it was resolved through a long and difficult resolution process.

On that occasion conflict resolution achieved a truce between the key protagonists. In the situation described in this article the outcome was a recognition on the part of one of the key protagonists that it was best for everyone if he leave the firm.  While ostensibly a less dramatic situation, in reality this outcome was important for the continued flourishing of the firm.

My Relevant Background

I described my relevant background in my earlier article.

I am an ex-barrister (I practised at the Bar in London for 12 years), schooled primarily in an adversarial approach to dispute resolution.

Around fifteen years ago, I started to retrain as a psychologist, completing my undergraduate equivalency in psychology while still practising at the Bar. After leaving the Bar, I continued my studies and started to practise as an occupational / organisational psychologist. Over the years I have worked extensively in the field of senior-level talent development in law firms and corporate legal departments, both in the UK where I live and also in the US and internationally.

As I explained in my earlier article, given the breadth of my background, I have been involved in a variety of projects, which defy easy categorisation. Several of these projects have involved senior-level conflict resolution, which has become a significant strand of my work.

A Case Study: Trouble at the Top

Unlike my earlier case study there was no cataclysmic precipitating incident that sparked my involvement with the law firm in question. Rather I was brought in ostensibly to help the Management Committee of the law firm to work together more effectively.

The background was that the law firm was a mid-sized regional firm in the UK.  The firm had grown rapidly over the last 10 years, through a mixture of organic growth and as the result of a couple of large mergers.

The Managing Partner of the firm was half way through a second term of tenure, having been re-elected unanimously as Managing Partner prior to his second term.  He had been at the firm for over 20 years and was coming towards the end of a very successful career as a transactional lawyer.

The other members of the Management Committee were the heads of the firm’s key departments – litigation, property, corporate / commercial, banking & finance and private client – together with the firm’s finance director / COO.

My introduction to the firm was via a consultancy that had been helping the firm with the development of a new 5 year strategy and the implementation of some key organisational and technological changes.  The consultancy, in discussion with the firm’s HR Director, had identified that it might be helpful for someone to do some team development work with the firm’s Management Committee, as the Committee was not fully aligned on some key aspects of the proposed changes.

The HR Director felt that it would be helpful for the Management Committee to have a team charter and described this as the core of the necessary work when I first met with her.  I was unconvinced that this was really at the heart of the necessary work, but decided to refrain from expressing this until I was clearer about what was actually going on.

What was clear from my initial briefing, however, was that all was not well at the top of this organisation.  Although not presented as of key concern in this initial briefing, it was clear that there was a degree of conflict between members of the Management Committee. It was also clear to me that if the top team was unable to align it was highly unlikely that the planned changes would be fully effective.

Choice of Process

The HR Director was convinced that the implementation of a ‘team charter’ would help ameliorate behaviour of Management Committee members.  I initially tried to question why a team charter would be a panacea but it was clear to me that the HR Director was focused on the team charter and did not want to listen to other possible approaches to the situation.

Rather than continue to debate this issue with the HR Director I decided that the best approach was to agree that I would work towards the Management Committee embracing a team charter.  I suggested that I have a mix of conversations with the team members combined with a series of workshops dealing with issues emerging from the conversations.  I suggested that I speak first to the Managing Partner and that I then have meetings with the other Management Committee members. I explained that I felt that the Management Committee members might welcome some coaching and support in relation to their respective roles in the change process, in addition to my providing support to the Management Committee as a team.

First round of meetings

I met first with the Managing Partner.  He was very happy to engage with the process and acknowledged that the behaviour of the Management Committee was holding back the change process.  It emerged from the discussion that the Managing Partner felt that the head of litigation was a particularly disruptive influence on the Management Committee. He was resistant to many of the proposed changes, in particular to some of the proposed changes in technology and to more centralised resourcing.

According to the Managing Partner the head of litigation was undermining some of the work of the Management Committee and the external consultants.  He was apparently having ‘offline’ conversations with Management Committee members outside the formal Management Committee meetings, seeking to persuade them to hold out against some of the recommendations or to resile from changes that had already been discussed and agreed. The Managing Partner also suspected that he was ‘briefing’ against some of the proposed changes, i.e. telling his direct reports and possibly others that he was not in favour of the changes.

I tried to ask the Managing Partner whether he had called out this behaviour and, if not, why not – but it was clear to me that the Managing Partner was very uncomfortable discussing this and I was concerned that it would damage the relationship if I pushed him too hard on this.

The meetings that I held with the other Management Committee members confirmed that the head of litigation was a disruptive force on the Committee and highly resistant to the proposed changes.  The other Committee members all mentioned that he tended to dominate Committee meetings and that his contributions used up a disproportionate amount of the available airtime.  While it was clear that the Managing Partner was highly respected as a brilliant lawyer it was also clear that his leadership of the Management Committee was lacking and that he was, in the view of several of the other Committee members, highly averse to conflict and confrontation.

A couple of other factors emerged from these initial meetings.  First, it was clear that although the larger of the firm’s mergers had taken place several years previously it remained highly significant in terms of actual and perceived loyalties of the Committee members.  Several of the Committee members referenced the mergers and would refer to other members according to whether they were ‘original’ or ‘legacy’ i.e. whether they had been with the ‘original’ firm or one of the legacy firms with which the ‘original’ firm had merged.

It was clear to me that Committee members had retained their identities as either ‘original’ firm partners or ‘legacy’ firm partners and that those identities remained determinative of how partners were viewed by each other.  There remained a web of alliance and commonality between the ‘original’ firm partners and a similar web of alliance and commonality between the ‘legacy’ firm partners.  Each group was distrustful of the other group.

Second, it emerged that I needed to tread carefully in terms of my work with the Committee as a team.  Several of the Committee members referenced a previous disastrous engagement with an external consultant who had done some work with the team, which had backfired badly.  The consultant had held a kick off meeting without laying the groundwork by having individual meetings with the team members.  In the kick off meeting the consultant had done an exercise with the team where he encouraged the team to imagine their fellow team members as common animals (badger, beaver, lion, tiger etc.) and to explain why they identified which particular colleague with which particular animal, based on that animal’s behaviours and attributes.

The exercise had derailed in a spectacular fashion.  A couple of the team members chose to ‘zoomorphise’ their colleagues as animals which those colleagues regarded as, at best, inappropriate and, at worst, highly offensive.  Everyone maintained a polite front during the meeting but there were post-meeting recriminations, the work with the consultant was abandoned, and the exercise had clearly scarred team relationships for a while.  There was an understandable desire to avoid anything that might be a repeat of this disastrous experience.

I chose to meet the head of litigation towards the end of this first round of meetings.   He was ostensibly extremely affable and keen to emphasise that he thought the team development work was an excellent idea and that he welcome personal coaching.  However he was careful to extract several reassurances that our conversation was entirely confidential and spent a significant part of the conversation critiquing the proposed changes, emphasising the critical nature of his role to the success of the firm and explaining why, in his opinion, the litigation department was significantly different from the other departments such that his department should be excepted from several of the changes, particularly with regard to centralised resourcing.

I had been forewarned as to two of the head of litigation’s key traits – a tendency to interrupt while being asked questions and a propensity to keep on talking way beyond the scope of the question that had been asked.

The First Workshop

I decided to play it safe in the first workshop.  I thought that it was important to build rapport with the team and to have a relatively gentle workshop rather than trying to tackle anything too ambitious.

I gave the Management Committee some general feedback from the conversations that I had held with them.  I fed back with regard to the previous disastrous team development intervention and discussed with the team how that intervention had been counterproductive and caused considerable friction within the team rather than improving team relationships. I also spent some time discussing the fact that legacy relationships (i.e. relationships carried over from the ‘original’ firm and from the merger firms) still seemed to affect the dynamics of the group and there was general agreement as to this and how there was still a perception that some loyalty was owed to the legacy network of relationships.

We discussed in generic terms the key attributes of a high functioning team and the behaviours of such a team.  These were captured for later use in the team charter exercise. While everyone expressed a commitment to operating as a high functioning team there was an acceptance that it would take time and effort to shift the embedded dynamics of the team.

My approach subsequent to the First Workshop

Following this first round of meetings and the first team workshop I reflected on the approach I should adopt moving forward.

I decided to focus on the following areas in the one to one coaching conversations:

  1. Legacy relationships – It was clear to me that the head of litigation was using the loyalty created by legacy relationships to undermine the work of the Management Committee as a whole. This was unfortunate as it seemed to me that the Management Committee – with the exception of the head of litigation – was broadly aligned around the importance of the proposed changes.  So I decided, in my one to one coaching of the team members, to encourage them to focus on the importance of working together as one team and to seek out opportunities to work more collaboratively with those with whom they did not have legacy relationships.  This could be as simple as having more regular catch ups with those individuals. I also encouraged the consultants driving the change process to ensure that the internal working groups driving the change were made up of a mix of players, so that the group members did not all share legacy relationships. It transpired that several of the key working groups had key members who had strong legacy relationships and these groups were gradually mixed up as a result of my recommendations.

 

  1. Offline conversations – Much of the work of the Management Committee was being undermined by offline conversations seeded or coordinated by the head of litigation.  I decided to focus on steering the team members away from having these conversations, particularly conversations whose purpose was to undermine the proposed changes or to revisit decisions that had already been made by the Committee.  I thought that it was unlikely that the head of litigation would change his approach to a more positive one – and, assuming this supposition was correct, I believed that it was important that the other team members deprive him of the oxygen he was being given to fuel resistance to the changes.

 

  1. Stronger leadership – I thought it was important that the Managing Partner showed stronger leadership, calling out bad behaviour on the part of the head of litigation. I was not sure whether he would be prepared to do so given his aversion to confrontation.  I felt that I needed to encourage him to do so.

Subsequent developments

I had further rounds of coaching conversations with each of the team members, each round being followed by a team workshop. The bulk of each team workshop was consumed with the team discussing detailed aspects of the strategic change process (with me observing this work) and a small but significant portion of each workshop was devoted to discussing the team’s development.

I followed the approach outlined above with regard to the one to one coaching conversations, focusing on the areas outlined above in addition to providing each individual with support in relation to their roles in the larger change process.

A number of things happened as a result of the approach I adopted:

  1. Within a couple of coaching sessions the team members – with the exception of the head of litigation – increasingly realised and articulated in conversation that their interests were aligned to those of the firm as a whole rather than those of the legacy organisations. They became careful to consider whether their decision-making was based on loyalty or affiliation because of legacy relationships – and also to avoid intuitively conferring with legacy colleagues when making decisions.   Several of the team members were surprised at the extent to which they had previously been influenced unconsciously or intuitively by legacy colleagues, and less so by their ‘newer’ colleagues (even though these ‘newer’ colleagues had been their colleagues for several years).

 

  1. The number of reported offline conversations declined, in particular conversations focused on reviewing or second-guessing decisions already made by the Management Committee. Specifically legacy colleagues of the head of litigation were careful to ensure that the head of litigation did not draw them into these conversations.

 

  1. Both legacy and non-legacy colleagues of the head of litigation became more likely respectfully to call out the head of litigation at their team meetings. Whereas the head of litigation had previously been allowed disproportionate airtime at these meetings, colleagues were more likely to ask him to make way for other contributions and to point out where he was being unjustifiably negative about aspects of the proposed changes.

 

It also important to note that the Managing Partner himself did not call out any of the head of litigation’s bad behaviour.  When I raised this with him he attributed it to wanting the team to take ownership of the situation rather than imposing a solution himself – but I believed that the reality was that he was uncomfortable doing so, despite my efforts to encourage him to show clearer leadership.

In any event, within a couple of coaching sessions with the head of litigation it was clear that he was starting to feel marginalised as a result of the developments outlined above. He recognised that he was feeling increasingly isolated on the Management Committee and I encouraged him to explore with me why that was the case and what was going on.  I was able to give him some of the feedback that the Managing Partner had not given him and to explain to him objectively and respectfully my observations as to his communication style. To my surprise he took some of these observations on board and realised, at least partly, that he was responsible for his own isolation.

Decision to part company

In subsequent conversations the head of litigation discussed with me whether he was capable of adapting his communication style – and whether he wanted to do so.

He recognised that aspects of his communication style were entrenched but felt that he could modulate aspects of his style if he wanted to do so.  Indeed, he became notably more positive in a couple of team workshops and yielded the floor in those meetings to his more constructive colleagues to an extent that was noticed by the other Management Committee members.

Ultimately, though, he decided that he did not want to accept the new status quo.  The new status quo would see (from his perspective) his leadership of his department sidelined in two key ways.  He would have to agree that the technological changes would apply as much to his department as to other departments.  He would also have to agree to more centralised resourcing, such that resources from the litigation team would be available to other departments depending on patterns of work flow.

For my part I encouraged him to think through the issues around his communication style – but as he edged towards the decision to leave his role I did not try to persuade him to stay.  My view was that the team would work together much more effectively were he to leave.

I also helped him to think through the sort of environment that might play to his strengths.  He decided (rightly in my view) that this would be an environment where he could call the shots.  After exploring a variety of options he accepted an in house role heading a small team in a legal department that handled a heavy volume of litigation.

Outcome and Conclusions

As the work with the Management Team continued, the team charter itself receded in significance – as I had suspected it would from the start.  We put together and agreed a team charter but in reality the charter captured many of the behaviours that the team had already started to exhibit.  Those behaviours would not have developed without the coaching of team members and the team workshops.

As indicated above, the head of litigation parted company with the organisation to take up  another role.  This provided the opportunity to refresh the team and to bring in a new team member – the newly appointed head of litigation who possessed qualities of communication and collaboration lacking in his predecessor.

Following the departure of the head of litigation the team started to work together more effectively and became increasingly aligned with regard to the changes, most of which were implemented within a relatively short timeframe.  The firm has continued to grow, pulling ahead of some of its direct competitors.

By way of footnote the Managing Partner himself moved on within a year of my concluding the work with the team and the ‘new’ head of litigation was voted as his successor.  I can in no way claim any credit for this development – but the change in team dynamics enabled a new leader to step up and to replace a Managing Partner who himself had shown some clear deficiencies in his own leadership style.

For me, the core work illustrated that it is sometimes better to recognise that a key relationship (in this case the relationship of the head of litigation with his senior management colleagues) is not working – and therefore to part company – rather than to assume that every dysfunction can be resolved or that it is worth the time and expenditure of organisational resource to try to do so.

 

For further information or to discuss the issues in this article, please contact Jonathan Middleburgh at Middleburgh@edge-international.com or on +44(0)7973 836343

Edge Principal Jonathan Middleburgh consults on senior human capital issues and coaches senior legal talent in both law firms and legal departments. A former practicing lawyer who is also trained as an organisational psychologist, Jonathan has a wide range of experience helping law firms and legal departments to develop their senior legal talent so as to maximise business outcomes.

Integration Or Disintegration, That Is The Question

Leon Sacks

The objective here is not to be alarmist or suggest that there is a binary choice between life or death, as in Shakespeare’s allusion. It is, however, meant to draw attention to the need for continuous focus on what keeps a professional services firm, and more particularly a partnership, ticking and successful, namely the integration and collective behavior of its partners.

Integration means that partners are working in the same direction towards a shared goal, that that they are aligned in managing their teams and representing the firm and that their capabilities, knowledge, experience and relationships complement each other.

Disintegration is a danger when there are conflicting priorities amongst the partners and divergent opinions about the way business should be conducted and individualistic rather than collective behavior becomes prevalent. The partners or groups of partners become isolated and unhappy and the firm may become a composite of fiefdoms rather than a homogenous unit.

The current reality of disruption with rapid changes in demand and supply chains is challenging leaders and management in the corporate world. In a partnership such challenges are often magnified by the fact that partners consider themselves co-owners of the business, desire to have a say in how business is conducted and wish to share the benefits.

While overseeing the quality of work, client relations, finances, talent, business development and efficient operations, management needs to be attuned to the concerns, motivation and behavior of partners that, untreated, might be detrimental to the achievement of goals in all those areas. Just as a relationship of a married couple needs to be managed so does a partnership, except that in the latter case the marriage counsellor has to deal with multiple people!

Clearly management deals with partner issues on a daily basis and often this means putting out fires and/or spending a great deal of time in managing people’s expectations or explaining why a certain decision makes sense. Issues will always arise but would it not be more efficient to have integration as a permanent item on the agenda knowing that it will require continuous action as the firm grows and changes and as its partners’ careers advance and ambitions change?

Conditions that might indicate the need for greater integration efforts include:

  • partner grievances or departures
  • extensive partner discussions on strategy, structure or processes
  • incompatibility between partners
  • doubts raised by partners about contributions of others
  • reduced partner performance or motivation
  • unsuccessful lateral integration
  • reduced retention rates of attorneys
  • individual v institutional behavior
  • offices or practice groups working autonomously
  • different approaches to service delivery and client management
  • little or no sharing of information
  • “my clients” attitude prevails rather than “our clients”
  • partner compensation system not perceived as fair
  • complaints of excessive centralization or lack of flexibility
  • inconsistent quality of service perceived by clients

These conditions might not have been a common trait but as a firm grows, the partner ranks grow, the number of offices/practices grow and the firm adapts to market conditions, they may develop quickly. If they are not isolated and become a pattern, management needs to evaluate the causes and adopt a remedial action plan.

As suggested earlier, it is preferable that this be done on an ongoing basis taking the temperature of the organization and the status of the partnership on a regular basis and adjusting accordingly – what we might call the integration “agenda”.

The integration agenda should aim to ensure:

a) Partners are “supporting sponsors”

The alignment of partners with the vision and strategy of the firm and their consistent adherence to common and agreed-upon principles is key to leading the firm in the right direction. They should all be supporting sponsors of the firm’s direction and communicate a consistent message in that regard. Partners are largely the face of the firm to clients and its professionals and their behavior weighs heavily on the way the firm is perceived.

b) Strategy drives structure

Whatever the message for integration, if a firm’s structure drives behaviors that are not aligned to that strategy, it will not succeed. As the Harvard Business Review once stated “leaders can no longer afford to follow the common practice of letting structure drive strategy”.

A crude example: if two offices of a firm are organized as two business units with their own local management and the partners in each office are compensated largely based on the results of their own office, a strategy of sharing resources and cross-selling might be prejudiced or, at a minimum, not incentivized.

c) A collaborative environment

Collaboration generates internal synergies (e.g. sharing talent and knowledge) and external benefits (e.g. client development) while allowing partners to feel more connected to each other, reduce their levels of stress (hopefully!) and enjoy more work freedom. Incentives and support for collaboration that reflects a more institutional approach to conducting business are to be encouraged. This is by no means inconsistent with an entrepreneurial approach to business or rewarding individuals for extraordinary performance.

It is not uncommon to find firms consisting of different groups or individuals that are somewhat autonomous, take different approaches to service delivery and client development and work largely in isolation from others (the “composite of fiefdoms” mentioned earlier). This is rarely a pre-meditated or deliberate action but rather derives from different cultures and work habits (resulting from previous experience in other organizations) and behaviors driven by the firm’s governance and partner compensation system (i.e. what is my decision-making authority and how is my compensation determined).

To be an “integrated” firm, a firm that is effective in providing solutions for clients and is efficient in its use of resources, it is imperative to create a unified culture and adopt governance and compensation models that motivate a one firm approach. Consequently, principles that typically underpin integration may be summarized under three headings:

Governance

  • the governance and decision-making structure be clear and understandable
  • the management structure reflects diversity of practices and offices, but with all decisions aligned to the firm’s strategy and to the best interests of the firm as a whole
  • the governance structure reflects the importance of practice and industry groups as natural integrators across offices and jurisdictions
  • authority and policies for decision-making be delegated as appropriate to avoid shackling the organization while allowing for risk mitigation
  • Committees and task forces with appropriate partner representation deal with ongoing issues (e.g. Compensation Committee, Talent Management) and specific projects (e.g. Strategy Review, Remote Working), respectively
  • a partner communication structure that allows partners to be continually informed and feel they are being consulted on issues of relevance to the business

Partner Compensation

  • the compensation system provides clarity on expectations of contributions from partners and aligns compensation with such contributions
  • adopt the right mix of compensation criteria to motivate and reward both behavior that drives the firm strategy (revenues, originations) as well as collaborative behavior that encourages teamwork and partner investment in the growth of the pie, rather than a struggle for a larger share (cross-selling, training initiatives)
  • couple the collection of objective data with subjective inquiries to adequately measure partner contributions and allow for appropriate discretion in applying compensation criteria to promote fair and equitable results
  • consistent partner feedback process

Leadership

  • build and support a culture with a shared mission, joint long-term goals and shared risks and rewards
  • align structure to strategy, clarify roles and responsibilities and enforce accountability
  • promote transparency and open communication and be inclusive
  • build trust and confidence facilitating interaction between partners and creating a healthy dose of interdependence amongst them

Firms can easily lose the focus on integration, an intangible asset, while they are busy dealing with the tangible issues of day to day operations, developing business, serving clients and controlling finances. It is better to manage integration than recover from disintegration.

Navigating the Compensation Maze

Nick Jarrett-Kerr

A Guide to the Six Main Systems, Sixteen variations, and Seven steps to Success 

Introduction

The last twenty years or so have seen considerable debate about the most suitable method of compensating and rewarding professional service firm partners and members.  The traditional practice model of a professional service firm has long been the partnership model, a model that has also for some years developed into a partnership/corporation hybrid in which the partnership model of compensation has remained dominant.  Over the last decade or so, more and more professional service firms have morphed into corporate models and this has introduced complexities to the various compensation models in use.   In traditional professional service firm models, the individualistic Eat What You Kill (EWYK) model is seen as one extreme of the spectrum, whilst the purer forms of equal-sharing lockstep schemes are viewed as being at the opposite end of the same spectrum.  In truth, the use of models at both opposing ends of the spectrum have largely become rare.  Many firms have constructed arrangements which try to meld the ethos of true partnership with something that encourages a hard-working in which individuals can be rewarded on a performance related basis

In this paper, I attempt to review the development of the more recent and bewildering trends in partner compensation in relation to the six main historical compensation systems.  This includes a review of the adaptation and cannibalisation of the different systems, usually based at least in part on the firm’s history and in part on current profit drivers and imperatives.  In a separate paper, I review the main methods of reviewing and assessing partner contribution.

The Six Main Compensation Systems in Professional Service Firms

There is no single system that has suited every professional service firm in the past and – as firms move towards greater degrees of corporate structures – there are likely  to be many systems that attempt to incorporate or hybridise the best of the “Big Six” whilst attempting to avoid the drawbacks.

System One: Performance Related (or ‘Subjective-based’) Compensation

There is a discernible global trend away from both pure lockstep and the more individual and statistics-based systems such as Eat-What-You-Kill and Formulaic systems.  Approximately 70% of U.S. and Canadian law firms primarily base their partner compensation on subjective criteria.[1] In accountancy 5% of US firms with 8+ partners use a compensation committee to allocate income vs. 15% using formulas[2]. The trend at both ends of the spectrum is towards a more performance-related system relying on qualitative or ’subjective’ assessments.  The exact make-up and structure of so called subjective-based systems will vary enormously.  Firms moving towards performance related systems will usually keep some vestiges of their historical or formula-based systems and many provide some certainty and security for their partners by fixing base salary or compensation tiers for their partners.

Some large international firms have moved onto compensation and rewards systems which are wholly performance based.  Such firms often have as many as nine to twelve bands and partners are allocated into bands on an assessment of the sustained value which they have brought to the firm.  In other words, the firm tries to look not just at one year’s performance but for long term contribution.  Some such firms will look two years back and one year forward to arrive at a view.

There are many examples of such firms worldwide.  Typically, the firm will place partners in one of about eight or nine bands.  A former partner of a UK-based international firm recently told us somewhat cynically that the top band is designed to ensure that a very small number of ‘power partners’ get more than $1 million per annum.  The bottom band is an entry level band. In most firms with a system like this, the bands themselves are arranged so as to have significant gaps between bands – $100,000 or more is a popular band interval and there are often band intervals of up to $200,000.

Structurally, the firm will – as with performance criteria – tend to fix the highest and lowest bands first.  The highest band will represent what the firm feels it must pay (assuming it is affordable) to the firm’s star performer or performers, whilst the lowest band will represent a fair market package for an incoming equity partner.  The other bands will be arranged with suitable intervening gaps between top and bottom.

Although this methodology can theoretically lead to huge uncertainty (as partners have no assurance or guarantee of what band they might be in next year), firms will often provide that partners can move up no more than two bands in any one year and have the certainty of knowing that they can only be demoted by one band in any one year.  We have also seen some partnership provisions which provide for almost automatic expulsion if a partner is demoted more than once in a reasonable period of time.

The point should be clear by now that movement either wholly or in part onto performance related (or subjective-based) compensation should not be attempted until and unless all the partners are crystal clear as to what the firm expects its partners to do and how it needs them to behave.  However small, the firm decides what the performance-related part of the overall compensation should be. Whatever the balance between client work production and other more ‘subjective’ areas, the firm has to decide the areas in which it wants its partners to perform as well as the criteria for success – those behaviours and outcomes which the firm will value and reward.  In addition, it has to form a view as to how the ‘subjective’ factors are going to be assessed, scored or judged.

System Two: Formula Systems

A formula system requires the firm to gather information such as billable hours recorded and billed, new business generation (originations), and collections, and then enter the data into an allocation formula which then spews out the compensation distribution.  Many partners assume that most large firms – particularly in the USA – operate on such a highly objective, pure formulaic system but by my observation, however, only about 10% of large firms use a strict formula.  Roughly one-third of firms have a system that at least in part is subjectively determined or moderated by a compensation committee based on consideration of data, interviews with partners, recommendations by firm leaders and similar inputs.  At the other end of the spectrum, I estimate that only about 5% of firms use a pure lockstep system where profits are evenly divided among partners or where seniority is the sole determinant of compensation, but another 10% have a modified lockstep system where the seniority-based rise up the compensation ladder may be affected by performance factors.  The remainder (about 40%) is some combination of two or more of these factors, most frequently an objective system that can be modified by subjective input.

Eat What You Kill (EWYK)

Typically, in an EWYK-based system, performance as a practicing professional is objectively measured by a combination of originations and work performed.  Although this approach is usually modified to include a few other performance criteria besides only billing, it still means that the professionals in the firm that produce are rewarded commensurately, while those that don’t are penalized. The advantages of this system are that the firm can pay the premium salaries that the very top talent demands, and that the system self-corrects for professionals that want to reduce workload, perhaps for lifestyle reasons.  For middle-sized and emerging firms, a highly incentivized system such as this may be the only way to attract top talent.

Under the extreme form of this system each partner bears a share of firm overhead, but pays the salary of his or her secretary or assistant. Also, individual marketing, continuing education, personal technology and memberships costs are the responsibility of the individual partner. The time of juniors is purchased from the firm at set rates but charged out to clients at whatever billing rate the partner thinks is appropriate. Partners can also sell an interest in a particular file to another partner at a negotiated rate. (Typically, the client originating partner will get 10 percent of whatever is billed by the other partner.) Having dealt with all of the costs, the partner then gets to keep 100 percent of all receipts.

The extreme version of the system does have strengths. As every partner has total responsibility for his or her income and clients, partners know exactly what they must do to achieve the income levels they desire. The system provides incentives at various levels. First, the partners will want to bring in business for others because they get a percentage of the billing when they sell the file to another partner or when they get a junior to manage the file. There is also an incentive for hiring and retaining only profitable, hardworking juniors so that they can maximize their own incomes. There is a strong motivation for partners to collect their receivables because it is their own money. Lastly, the firm will maintain tight controls on spending because partners will not tolerate too large an overhead allocation. There is no pie-splitting animosity because there is no pie-splitting. Everything is dealt with at an individual level.

Formula Systems

Under a “pure” formula system an allocation methodology is set up which typically is designed to reward ‘Finders’, ‘Minders’ and ‘Grinders’.  Whilst firms might weight each of these three areas, many will simply weight each with 33.3%.  This then becomes easy to measure – you simply calculate the volume of work introduced, the volume for which the partner is responsible in terms of being a team manager and the volume which the partner actually generates from his own efforts.  The formula then applies to work out each partner’s compensation.  There are many problems with such systems.  First, we have encountered many formula systems which do not recognise or reward all the criteria necessary for a firm’s success.  A formula has to operate against numbers and some factors are intangible. Second, formula systems have been proved to be easy to manipulate.  Third, formula systems are highly inflexible.

Agreeing a Formula for Credits (“Originations”)

All surveys in the legal and accountancy sectors confirm the continuing importance of tracking originations.  It seems that about 70% of firms who track originations continue to do so indefinitely with about 10% preferring to end originations after a number of years.  For origination credits to work fairly, there must be agreement on the rules for the identification of the originator, for shared credits, for changing allocations and for ending (or not ending) the duration of the credit.  The basis for the originations formula goes back to the 1940s, when the Boston law firm Hale and Dorr created what is regarded as the first incentive-based compensation system.  Under a modified version of this, 10% of profits would go to the finders, 20% to the minders, 60% to the grinders and 10% to a discretionary pool for allocation on a subjective basis.  One firm that still uses originations extensively is US law firm Flaster Greenberg.  In that firm thirty percent (30%) of the total amount available for distribution is allocated proportionately to the shareholders based on origination, nineteen percent (19%) is allocated proportionately to the shareholders based on minding and fifty-one percent (51%) is allocated to the shareholders proportionately based on production. Shareholders receive the same production credit regardless of whether they work on a client file they originated or another attorney’s file.

The firm argues “The financial credit for origination is divided into two categories – origination and minding, which allows attorneys to share credit for client acquisition and management. Accordingly, attorneys are rewarded for each step in a client relationship – bringing in clients, managing the file and performing the work. This means that minding attorneys are rewarded for servicing and growing the client.

The delicate balance between rewarding originators and rewarding the working attorneys is maintained as evidenced by the fact that both the firm’s high originators and high billers have remained at the firm.

Avoiding the Pitfalls in Formula Systems

In most major firms, the trend is away from compensation which is highly driven by partners individual client-related efforts.  The biggest drawback is that such systems are anti-institutional.  As such, they can be a good vehicle for smaller firms but are not really suitable for firms as they grow larger.  Because no one gets recognition for non-client time, there is often a void when it comes to firm management, training of juniors, firm marketing or human resources. There is certainly no room for those with a global mindset.   Additionally, such systems create no need for collegiality other than as a method to market other partners for work for their clients. Often partners don’t even talk to their colleagues unless they have a financial or personal reason to do so. That, in turn, spreads throughout the firm, creating a very difficult environment for most staff, juniors and even some partners to work in.

One further huge drawback with performance-based compensation systems is that they can become expensive nightmares to administer, if the metrics are not carefully selected. On the one hand, people do not as they are told but as they are rewarded, so the system needs to reward exactly the kind of behaviour that the firm desires. If practice leaders are measured on their individual contributions to billing, then they will not delegate, manage, coach or do anything else that fails to drive their individual billing. If securing new work is rewarded, existing clients will tend to be neglected. If originations are rewarded, then people will tend to pay attention to business development. [3]

System Three: Ad Hoc Systems

Although we have no explicit survey evidence to prove it, there are a great many professional service firms throughout the world who have historically allocated their profits and partner compensation on a fairly informal basis and continue to do so.  We  have however noticed that this exercise becomes more difficult and contentious once the firm grows to about fifteen or so equity partners, members or shareholders.  Above twenty or so partners, formal systems and structures generally become necessary.

Many firms employing ad hoc compensation systems started as family or sole proprietor firms where the founder partner or partners set all the rules and provided all of the leadership and partnership control.  As partners came in, they were allocated profit-sharing and compensation packages by the controlling partner or coalition of partners, and their shares tended only to increase over time if the firm leaders so decided or where the firm is faced with defections.  Firms with strong and controlling leadership, whether or not from a founding partner, have much to commend them.  The famous ‘herding of cats’ problems do not apply to firms where partners have to do what they are told.  Such firms, however, usually find that both a spirit of entrepreneurship and continuing profitable growth of the firm will eventually become stifled unless heavy central control and dictatorship develops into a more sustainable institutional model.   This generally leads to the formalisation of the rules for equity membership, progression and compensation.

Other firms have continued to adopt an annual negotiation where compensation allocations are discussed or fought over by the entire partnership.   In some firms, each partner fills out a slip of paper with his or her compensation proposals and these are then aggregated.  In some firms, this system is done anonymously; partners will see what other partners have proposed but they do not know who made which recommendation.  A variation of this is the open method where partners know who recommended what.  This can certainly lead to robust debate! Occasionally, a remuneration or compensation committee is appointed to apply rough justice without any detailed rules of engagement or criteria being agreed.

Ad hoc systems therefore can range from a heavily autocratic extreme to a predominantly democratic model where every partner is allowed an equal say in compensation setting discussions.  They can work well or badly depending on the level of trust and the culture of collegiality within the firm.  Partners generally need to have the comfort of knowing that their overall contribution to the firm is both known and being fairly taken into account.  Systems which are perceived to favour the popular partners and those who are best at selling themselves and their accomplishments within the partnership often act to disconcert those who prefer to keep themselves to themselves, or work in more humdrum areas of practice.

System Four: Founder Patronage Systems 

As a variation of ad hoc systems, I have noticed some firms where the influence of the founder partner or group of partners continues to influence the profit-sharing and compensation allocations.  Founders often maintain an iron grip on their firms generally and a rigid control on the equity of the firm in particular. The introduction of new equity partners in the typical founder firm often takes place when the need for succession planning is identified, when the firm starts to stagnate (and needs an infusion of new talent) or when the firm’s growth starts to outstrip the ability of the founders to control the growth within a rigid employment hierarchy.  When founders recognise the need to introduce new equity partners, their mindset often is that they are ‘giving away’ a share in the firm to their new partners, many of whom have been employed salaried partners for many years and were chosen originally for technical skill rather than leadership qualities.  This patronage mindset can continue for a long time after the firm is opened up to new blood and is demonstrated by the founders deciding all compensation issues against inevitable complaints of favouritism and arbitrariness.

System Five: Lockstep and its Variants

Under a Lockstep or seniority-based system, an individual Partner, upon admission to the Partnership, is exchanging individual earning power and intellectual capital, for participation in a ‘mutual fund’ of other Partners.  Through this, a Partner is able to share in the joint future incomes of all Partners, some of whom will be contemporaries and some of whom will offer differing levels of expertise and experience gained through the years.

A lockstep system has a number of attributes

  • Each Partner’s share of Profits depends entirely upon his seniority
  • In any given year, the relationship between Partners at different levels is pre-determined
  • The system recognises that Partners take time to find their feet following entry to Partnership
  • The system emphasises the mutuality of Partnership, and the sense of sharing and support which should exist between Partners
  • Lockstep is essentially a sharing model of Partnership, emphasising the gains and benefits to be had from diversifying opportunities and spreading risk amongst a group of Partners, and away from an individual ‘eat what you kill’ mentality
  • The system distinguishes between the personal attributes and earning power of each Partner (his ‘individual human capital’) and what the firm’s institutional capital – that which cannot be easily removed from the Firm, or duplicated outside it and described above
  • The system encourages a more collegial environment in which Partners are encouraged to pursue the firm’s best interests, rather than their own

The Perceived  Benefits of a Lockstep system

For a firm with a large element of firm-specific intellectual capital, the sharing or lockstep system has some important potential advantages.  The main benefit is to provide outstanding diversification and to reinforce a culture in which clients are viewed as firm clients and in which efficient teamwork is encouraged.

In the case of many lockstep firms the client is regarded as central to their whole ethos, and for such a firm a culture of firm before self’ is entirely consistent with a sharing, lockstep model of profit sharing. What is also clear is that the presence and level of firm-specific capital is so marked in such firms that they are potentially much more profitable for individual partners than alternatives outside the Firm.  This in turn reduces the risks of poaching by other Firms. This is borne out by the research of Messrs Gilson and Mnookin[4] nearly forty years ago who found that the concept of firm-specific intellectual capital explains why some sharing firms achieve substantial efficiencies, tend to be amongst the most profitable professional service firms, and avoid some of the risks of partners grabbing clients and leaving the firm.

The Draw Backs of Lockstep

Lockstep is seen as having the following disadvantages

  • It does not deal explicitly with the issue of underperformers or shirkers
  • It does not deal with the issue of exceptional high flyers
  • It does not reward, sufficiently quickly, superior young Partners
  • It can reward moderate partners to a greater extent than they deserve
  • Even if underperformance is not a problem, nevertheless, in the world of professional services there is a fine line between the good partner and the excellent one.
  • It can prove difficult to find the right pace on the equity ladder for lateral hires

In the Lockstep firm, the problem of shirkers and underperformers is seen as more of a management and development problem than a problem of reward.  Firms with a Lockstep or Sharing system of Profit Sharing tend to be less tolerant of poor or mediocre performance than firms which make extensive use of individual performance based rewards.   The attitude can be very much one of ‘shape up or ship out’. The problem is that not every issue of underperformance results from laziness or lack of intellect. The underlying causes for underperformance  can include:

  • Cultural problems, including complacency, coasting and a desire to remain in a comfort zone
  • Partners who have reached the limits of their capabilities
  • Partners with personal difficulties or under stress
  • Failure to understand why it is necessary for new approaches to be adopted or new tasks to be done
  • Mental blocks on how to raise the game
  • Conditions in the Market Place

The experience of a number of Firms is that a reduction in profit share to cope with underperformance brought about by some of the causes listed above, can tend to demotivate the Partner still further with the result that performance levels drop still further.

Trends for firms retaining ‘pure’ lockstep

 We see many firms across the world that are wedded to the concepts and values of ‘true partnership’ and equal sharing which finds its expression in the lockstep principle.  However, many such firms are tending to sand down the edges of pure lockstep in order to maintain flexibility and the ability to manage performance.

As a Partner moves up the lockstep and grows within the partnership, firms generally expect his/her contribution to increase. This does not relate to the overall hours spent on Firm business or the degree of collaboration, but to the value that the Partner brings to the Firm.  Firms very often therefore provide benchmarks and criteria which they wish to see partners attain as they develop through the partnership.  These benchmarks are supported by training and coaching and monitored via appraisal .  At the same time, these benchmarks and criteria will often provide the minimum acceptable standards for partners of the firm, protracted or persistent under-shooting of which will result in the partner being asked to leave.  The more caring firms will sweeten this frightening prospect by providing for a period of intensive care and coaching to allow the partner to address his or her perceived shortcomings.

Variations of Lockstep (Hybrid Lockstep)

 More radical solutions have also made their way into the structures of many firms.  Some 60% of UK law firms now report, for instance, that they have introduced some form of modified lockstep.  This is particularly the case where firms do not want to admit new partners if those partners are going to progress automatically to parity.  Equally, many firms are reluctant to go the whole way into a pure performance-related system but wish to retain the flexibility to even out elements of unfairness and to make some measure of alignment between individual contribution and individual rewards. Many of these ‘hybrid’ systems seek to give partners two things.  First, it gives certainty in that partners will know in advance what their guaranteed minimum income will be assuming the firm meets its financial targets.  Second, partners know that they will also be rewarded for performance in due course.

What is important to bear in mind is that the system must support the firm in its growth and in the attainment of its objectives. We have seen many such modifications but they tend to fall into one or more of the following eight types.

Lockstep Hybrid One: Managed Lockstep

 A managed lockstep is one where the progression up the lockstep ladder is assumed but not presumed.  The firm will preserve the right in exceptional circumstances to hold a Partner at his/her current position on the lockstep, or even to reduce points, if that Partner’s performance does not warrant progression.  In addition, there will often be a “gateway” at one or two places on the lockstep through which a Partner can and will pass only if the firm agrees that he/she should progress further.  Some firms also retain the right to advance a partner through the lockstep faster than the standard progression and in some cases to reduce a partners share.

Lockstep Hybrid Two: Lockstep plus discretionary performance related element

Another variation provides for Lockstep to apply to the major part of the firm’s profit pool, but the remaining part of a partners profit share is performance related.  There are two main methodologies currently in play.  The first methodology divides the profit pool into two parts, with one part allocated to the lockstep and the other part reserved for performance related allocations.  We have seen some firms allocate as much as 40% of the firm’s profit for distribution on a performance related basis, but commonly the percentage is between 15% and 30%.  The advantage of this methodology is that partners can often be persuaded to feel that, unless they are perceived to be underperforming, all partners will receive something from this part of the profit pool.

The second methodology provides for 10, 20 or 30 additional merit points to reward retroactively for superior or exceptional performance, but with a re-base to 100 points each year.  Some such systems seek to restrict the effect of such a provision by providing that points for superior or exceptional performance are unlikely to be awarded to more than a fairly small percentage of partners.

Lockstep Hybrid Three: The Super Plateau

The super plateau system is a managed lockstep under which, having reached 100 points (which would be the points plateau for a firm operating with a lockstep to 100 points), an exceptional partner can then progress further to a super plateau which is reserved for a very few star partners.  This super plateau generally operated prospectively in that partners are moved on to the super plateau on the assumption that future performance will match or exceed past performance.

Lockstep Hybrid Four: Lockstep plus formula bonus

A further variation gives a partner a formula bonus in addition to his points-based profit share.  This bonus generally operates as a first slice of profits and is based on a percentage of the partner’s realised billings.  This is not a popular system as it can reinforce tendencies to hog work and to be anti-collaborative.

Lockstep Hybrid Five: Exceptional bonuses for extreme high flyers

 Some firms also provide for the ability to award an individual payment in order to reward a “one-off instance” of exceptional performance.

Lockstep Hybrid Six: A two-tier system with a lockstep ‘salary’ element plus discretionary performance-related element

Under this system, a partner will receive a ‘salary’ which will usually have some relation (at least at entry level) to a market salary for a professional of similar seniority and market worth.  These ‘salaries’ are banded and partners will move up the bands in a similar way to lockstep progression.  The aggregate of the ‘salaries’ payable to partners operates a first tranche of distributable profit, and the residual profit is then allocated on a performance related basis.

Lockstep Hybrid Seven: A three-tier system – salary, ownership shares and performance-related element

 A further variation is designed to align partners’ profit shares more closely to remuneration methodologies in the corporate world.  Like senior employees of a corporation, a partner will receive a ‘salary’ plus a ‘dividend’ plus a performance related bonus.  The ‘salary’ is either reviewed regularly on a market basis or simply banded with partners moving up and down salary bands in a similar way to lockstep progression.  Again this salary operates as a first tranche of a firm’s profit.  The ‘dividend’ is received by means of the allocation to each partner of owners’ points (sometimes known as Proprietorship Points) on lockstep principles.  The residual profit (after deduction of the aggregate ‘salaries’, is then split between the amounts allocated for owners’ points on the one hand and a performance element on the other.

Lockstep Hybrid Eight: Fixed Value Points systems

 Firms operating internationally or with major profit differences between offices or regions whilst operating on a common profit pool usually build in some variation in the value of points.  The invidious alternative is to vary the actual number of points allocated with the effect that eminent or senior lawyers in different markets will be on different profit shares, which can cause difficulties. In general, the points allocation to each individual should be based on their peer group position on the lockstep, or their performance level relative to others, or a combination of both.  However, it is then necessary to recognise and reflect differences in profitability between offices, or purchasing power differences, or both, by adjusting the value of points between the various markets. There is an important psychological issue in this approach in that it has all peer group partners on the same level of points so it is according to them an equal level of seniority or performance or both.  This can be quite important in status terms and in motivation.  People can feel undervalued if their level of points varies from their peer group: this is much less where the value of a point varies because of external factors. 

System Six: Combination Systems

It is very difficult for any firm entirely and radically to change compensation systems to an entirely new model.  The vast majority have preferred an incremental approach to change. Hence, modifying a mainly formulaic or algebraic system to a combination system reflects the desire to maintain at least some of the attributes of a system to which partners have become used and in which they have some levels of confidence.  The aim of a combination system would be to retain some elements of formula whilst assessing partners for overall contributions.  The eventual objective might be to end up with three elements (like banks) of salary (to reflect effort and production), dividend (to reflect ownership state) and bonus (to reflect good contribution). The approach of firms has been multifold but some examples are:

  1. Formula plus Subjective Assessment. A combination of an algebraic formula based on performance with a subjective element based on a balanced scorecard. One accountancy firm mentioned in Aquila and Rice’s book[5] for instance used a 75% formula approach and 25% for subjectively assessed performance
  2. Base salary plus formula. All partners receive a base compensation (Salary) fixed at market rate or as a proportion (say 60%) of their average compensation over the past three years and the balance of the firm’s distributable profit (after deduction of the aggregate salaries) based on formula. The latest Rosenberg survey found that 86% of CPA firms have a base salary tier.  The base salary, usually 65-75% of total compensation, is both the historical and street value of a partner and gives both established and incoming partners confidence that their basic financial needs will be met
  3. Formula Salary with the balance assessed on a subjective basis that takes into account overall contribution
  4. Salary with a proportion of the residual profit being subjectively assessed and a further proportion being carved out into a bonus pool for allocation after year end for exceptional performance in that year
  5. An alternative approach is for all senior professionals to receive a base salary which reflects their efforts and status as working professionals with the remainder of the distributable profit being allocated through a combination of the existing formula and an adjustment to reflect non-financial contributions

Making Sense of it All; Seven Steps to Success

In our fast-changing world, with a bewildering choice of different compensation systems, it is vital to work through seven critical steps:

Step One: Supporting the firm’s strategy.

By far the most important aspect of a firm’s compensation system and underlying policies is that it must support the firm in achieving its strategic and economic objectives.  The system needs to help to underpin a unified understanding of where the firm wants to go, where it is likely to prove to be successful and what trade-offs are likely to take place along the way. Sadly, many compensation systems reward the past, and perhaps the immediate and short-term future; those who are working prospectively towards longer term goals can lose out in the pie sharing contest.

Step Two: Alignment with the firms business model and structure

The firm’s business model is the framework by which the firm competes, generates revenue and delivers profit.  For many firms there is an uneasy balance between high volume, low margin work at one extreme and lower volumes of ‘bespoke’ one carried out at high partner rates at the other extreme, and these differences need to be taken into account in assessing the value of partners’ contributions.  The firm’s structure – partnership, limited liability partnership, LLC or corporation – is also a vital determinant of compensation alignment

Step Three: Encouraging the right Behaviours.

Third, the system must encourage the behaviours, performances and contributions which will assist the firm in meeting its goals.  Whilst this may seem obvious, there is a worrying trend towards encouraging and rewarding short term behaviour at the expense of longer-term investment.  This means making sure that the firm clearly defines what it needs from its partners and – if possible – ensuring every partner has a written business plan and specific goals.

Step Four: Focus on Collaborative Effort.

Fourth, it must assist towards the development of a cohesive organisation by focussing on collaborative effort.  This makes for a difficult balancing act between the encouragement of individual performance and the drive for better teamwork.  The hogging of work to boost personal performance is still an issue in most firms.

Step Five: Improvement of long-term Commitment.

Fifth, the system must improve commitment, engagement and enthusiasm to aim for further and better business success.  As I have suggested elsewhere[6], we all spend large proportions of our lives at work and we owe it to ourselves and our firm that our career and the environment in which we work should be stimulating, satisfying and even fun.  I would go further and suggest that the pursuit of happiness in our firms is more important than the pursuit of profit.

Step Six: Developing the Firm as an Institution.

Sixth,  it must assist the firm in developing as (or into) an enduring institution by concentrating on the development of its intangible assets – those features that make the firm unique and competitive, such as specialist niches, systems, processes and know-how.  Included as important aspects  of any firm’s institutional capital are its ethos, internal ecology, expected sets of behaviours and ways of doing things – in other words, its unique organisational culture.  The compensation system should acknowledge and support the assets and value of the firm as an ongoing institution, taking into account, in particular, the value of the predictable flow of work from an established client base, the ability for partners to work from established premises and with the firm’s systems, equipment and staff, the reputation and name of the firm and the consequent value of the firm as a means of quality assurance to existing and potential clients.  Other factors in the firms institutional capital include the efficiencies and economies of scale associated with the firm, its collected know-how and applied knowledge and the synergies obtained from the development of expert teams across a broad range of professional  disciplines

Step Seven: Comfort and Certainty to Partners and Members.

Finally, over many years of experience we have consistently found that partners and owners of professional firms need the following for their systems of compensation:

  • Transparency, certainty and predictability – the system needs to be easy to understand, the processes easy to follow and any judgements or assessments seen to have been made with scrupulous sincerity
  • Security – they need to know they can fulfil at least their basic monthly financial needs
  • Good accounting practice – any (such as accountants) with a financial background need to know that the system is credible, logical and not overly complex
  • The absence of major change – we have found time and time again that it is difficult to get partners/owners to agree a wholescale transformation of the compensation system; incremental change is preferred
  • Fairness – in particular, partners/owners are reluctant to feel they are likely to be subsidising colleagues who they perceive to be slacking or under-performing
  • Overall contribution is valuable – most (but not all) want to feel that their overall contribution is taken into account and not just their financial performance

Conclusion

The ultimate choice of profit-sharing system depends very much on the specific firm’s history, culture, jurisdiction, size and maturity. Our own preference is for a system with a meaningful performance-related element of compensation or reward which is based on a qualitative assessment of every partner’s total contribution to the firm across a number of critical areas of performance.  However, such a system will not suit every firm.  We are seeing many firms still seeking to stick as closely as possible to what they see as the true partnership ethic which equal sharing and lockstep represents.  This is particularly true of those firms with large elements of firm-specific intellectual capital, such as the London magic circle firms and leading New York firms.  It is also clear that some firms in start-up mode or in a period of entrepreneurially-driven growth will continue to be attracted to the relative simplicity of an Eat-What-What-You-Kill system.  There will also continue to be a body of firms which are either heterogeneous motels for professionals or where both the business model and the emphasis are on individualistic business builders and fee barons.  For such firms the more formulaic models of compensation will continue to have their place.

What is clear is that every system requires active and robust management to ensure that partners do not creep their way up to progression beyond their competence and contribution.

[1] The Edge International  Global Compensation Survey

[2] The Rosenberg Survey 2019

[3] See the Ten Terrible Truths about Law Firm Partner Contribution by Ed Wesemann (August 2006) available from www.edge.ai

[4] Gilson & Mnookin – Sharing among the Human Capitalists: an Economic Inquiry into the Corporate Law Firm and how Partners split Profits  (Stanford Law Review January 1985)

[5] Aquila AJ and Rice CL (2007) Compensation as a Strategic Asset

[6] https://jarrett-kerr.com/ten-steps-towards-a-happier-firm/