Tag Archives: partnership

5 Questions About Your Path to Partnership

One of your high-performing associates is about to enter her fifth year at the firm.  She has asked for a meeting to discuss the firm’s path to partnership.  Your partners recently had a meeting about “keeping the keepers” so you want to be ready.  Here are five questions you may have to answer.

1. Criteria for Partnership Admission

What are the firm’s written criteria for admission to partnership, and which of them are clearly subjective?

No firm is going to treat partnership as “automatic” upon attaining certain measurable goals.  At the same time, candidates for admission know that there are objective and subjective criteria.  Concerning subjective criteria, it won’t be sufficient to have a sweeping category such as “must have the right attitude and mentality to be an owner.”

At the very least, the subjective criteria should have specific categories that give an associate guidance on performance.  Categories such as management skills, business development performance indicators, legal project management and collaboration can all be evaluated.  When it comes to spending firm investment time, the candidate needs more guidance than “must have the right stuff.”

2. “On Track” Communications

When will I get an “on track” message about my prospects?

Larger firms often have a policy on this question.  Associates in their fifth or sixth year will get more frequent evaluations and will be told whether they are “on track” in the partnership.  This is followed by annual messaging about what must be done to remain on track.  This messaging is critical for retaining top associates.  The alternative (which we also see) is a message that “every associate has a partnership opportunity – and we’ll tell you around year 9 or 10”.  That ambiguity may cause your “keepers” to flee while they can make a good partnership case in another firm.  The message is still no guarantee, but it helps the associate use annual evaluations to improve, so that she can remain on track.

3. Chances in My Practice Area

How many new partners (from within or lateral) in my practice area have been admitted in the past five years?  What is the projection for the next five years?

This question is important for associates who are practicing in a group that is a niche, or a support practice. (Examples: Environmental Law in a transactional firm; Tax Law, ERISA).  It can also be important in a highly leveraged practice, where two or three partners are managing five times as many billing professionals.  If the current partners are young or in mid-career, the firm is not going to need another partner in that group unless there is an unexpected departure.  You’ll need to be honest about the prospects in these practices.

4. Book of Business

How does the firm assess a senior associate’s confirmed book of business and the prospects of building that book?  Are there any minimum expectations before one is put up for partnership?

This criterion has become much more important than in past years.  Growing the firm means more than technical and management skills, plus proven production.  Business development training is made available much earlier than it used to be.  A lateral partner with a proven book may be more attractive than the inside candidate.  A candidate will want to know the current expectations and how they have changed over the past few years.   She may be facing a higher hurdle in 4-5 years than today’s standard.

5. My Paycheck

If I were a senior associate today and became a partner in the new year, what would be my monthly draw and how much would be deferred (year-end) compensation?

New partners are sometimes shocked to see that their monthly paycheck is lower than their previous monthly net salary as an employee.  They may be facing quarterly estimated tax bills as well.  In some firms, the leap to partnership is so significant that this is not a material concern.  However, for an associate with a young family and high monthly costs for student loans, a mortgage, and child care, there will be financial security anxieties.  You can’t project that person’s exact total compensation in advance, but the firm’s financial team can give you historical annual ranges for partners in their early years.  You also have a program of monthly draws that can be easily explained and that will not change radically in the years ahead.  This is another topic on which you can remove the mystery of the transition to partnership.

Conclusion

These five questions are just some of the concerns on the minds of associates who are planning their career paths.  They have access to more information about other firms and other career options than existed 10 years ago – mostly due to legal websites and regular calls from recruiters.  Your firm cannot afford to be a “black box” of mystery when you talk with associates about a path to partnership.

David Cruickshank advises firms on talent development, management skills, leadership, and path to partnership issues.

Four ways to Ensure Success in Hiring New Partners

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.

Nick Jarrett-Kerr LL.B is a specialist adviser to law firms and professional services firms world-wide on issues of strategy, governance and leadership development as well as all important business issues facing firms as they compete in difficult market conditions. In the last twelve years, he has established himself as one of the leading UK and international advisers to law firms. He has been involved full-time in professional service firm management for over twenty years.

Splitting the Pie: Some Thoughts on Profit-sharing among Partners

According to the great David Maister, “Profit-sharing arrangements between partners are among the most difficult set of issues in professional service firm management”. The way partners share profit goes right to the heart of a firm, what it values, behaviours it seeks to foster and reward, the way it defines and recognises contribution, and the people it chooses to promote. There is no doubt about the difficulty of these issues, nor is there any about their importance.

Profit-sharing arrangements are inextricably linked to partner entry and exit, further complicating both complexity and importance.

First the facts. Contemporary alternatives

Individual sharing models vary from firm to firm. They can all work and they can all fail. Most models are a variation of the following:

Equity-based Sharing (Equal or Differential) with Valuable Goodwill

This model endures as the most popular model in the common law world. Although they garner little media attention, most law-firm partnerships have fewer than six partners. Partners are usually appointed internally from the ranks of associates. Firms are funded by partners. The volume of partner exit and entry transactions is relatively low and they are infrequent.

Under this model, a partner’s interest is valued – ideally using a formula based on sustainable profit, but usually by the firm’s accountant using a variety of methods that range from precedent to “using the force”. Profit is almost invariably shared equally, although some firms have differential ownership, allocating profit commensurate to ownership.

This is typically a small-firm model. It places strategic limitations on firms and, although it has endured for centuries, its appeal to the next generation of partners remains to be seen.

The idea of valuable goodwill in law firms has received a boost in recent years with the advent of publically owned (both listed and non-listed) law firms. These firms are demonstrating growth by acquisition intent, paying multiples of profit to current owners. Although limited to a small number of transactions to date, it is difficult to argue that goodwill doesn’t exist when there are people external to the firm paying for it.

Strengths

  • an opportunity to build an asset
  • tenure, security and “sovereignty”

Weaknesses

  • tenure, security and “sovereignty”
  • uncertainty of realisability of the asset
  • limitation to merger
  • limitation to lateral recruitment of partners
  • difficulty experienced by incoming partners to fund purchase, usually at an expensive time of life

Lock-step to Equality

“Lock step” describes the means by which a new equity partner acquires his or her equity. A pure lock-step firm will typically admit new equity partners every year. New partners usually contribute capital equal to the amounts contributed by all equity partners.

In their first year of equity, new partners receive profits of an amount equal to 35% to 50% (depending on the firm) of those received by the full-parity partners. The timing of progression varies from firm to firm, although allocations are usually for a twelve-month period. In all firms of this type, partners progress in locked step with fellow entrants, acquiring an increasing proportional entitlement until they reach full parity. This progression takes five to eight years, depending on the firm. Full parity partners all share equally.

Equal sharing is rooted in the nature of partnership. Partners contribute capital equally and share business risk equally. Equal-sharing firms accept that, at times, some of their specialised services will enjoy greater or less demand than others. Equality offers highly specialised lawyers the opportunity to minimise longer-term risk by partnering with other specialist providers. As commercial advice – such as corporate merger and acquisition services – cycle with economic activity, litigation-based services – such as insolvency litigation – enjoy counter cyclicality. Those committed to equality believe that such risk mitigation will provide better financial outcomes over sustained periods.

In large part, individual performance in such firms is regulated by social-control mechanisms. Performance is measured across a range of parameters. High performers are acknowledged by the partnership and enjoy high status among their colleagues. Sustained poor performers are usually counselled and on occasions sanctioned. In extreme situations, underperformers may be asked to leave the partnership or even the firm.

Advantages

  • affordable for incoming partners
  • consistent with joint and several liability
  • all partners benefit from referring clients and delegating files
  • recognises that senior partners will contribute differently to younger partners
  • minimises risk as some services experience less demand than others
  • everyone benefits equally from the firm’s brand equity

Disadvantages

  • possibility of shirking
  • any dissatisfaction is usually felt by the best performers
  • offers no financial benefit to partners who wish to do more
  • relies on social control to prevent agency problems

Performance-based Sharing

Performance-based sharing models vary from firm to firm. Generally, individual partners are assessed against a set of performance criteria. These criteria usually include financial performance factors, leadership, business-development activity and other strategic considerations relevant to individual firms. Individual firms attach different weightings or significance to each of these generic performance considerations.

New partners usually contribute capital equal to the amount contributed by all partners, thereafter sharing according to their relative performance. Under this system, any partner – new or senior – may receive the maximum profit allocation, subject to performance.

Some firms assess performance and adjust compensation annually. Individuals are usually assessed by a remuneration committee. The assessment process usually involves a submission by the partner under review and is often open to appeal. Other firms require sustained high performance over a number of years before compensation is increased. In these firms, they prefer not to assess the entire partnership annually, instead making adjustments to relative shares as needs dictate: they cite the significant monitoring costs inherent in annual assessment as the primary reason for their chosen model.

Performance-based models have enabled aspiring mid-tier firms to grow their partnership through lateral recruitment, introducing partners from outside the firm. These partners are usually attracted to a profit-share system that maximises their return for their perceived effort. This phenomenon has enabled some mid-tier firms to grow at annual rates in excess of 50% for the last three years.

Advantages

  • recognises over and under achievement
  • provides the incentive of direct financial benefit
  • attractive to hard working, young partners
  • partners can earn bigger incomes earlier
  • attractive to lateral recruits who feel disadvantaged under different models

Disadvantages

  • introduces risk to specialisation
  • requires close monitoring
  • assessment may not be seen as equitable by all partners
  • delays profit distribution until profit is allocated
  • can encourage hoarding of clients and files as relativities become more important than absolute performance
  • no formula can capture all aspects of performance
  • any formula selected will necessarily prioritise aspects of performance which may cause neglect of others
  • erodes collegiate culture

Hybrid Lock-Step Schemes

While the skeletal framework of the lock step remains, in this model progression is no longer dependent on time alone. Many hitherto pure lock-step firms have introduced the possibility of advancement ahead of time for high performance, and regression for poor performance. Performance gates have been introduced at intervals along the traditional lock steps. This has the effect of ensuring that partners do not progress beyond a certain step unless they meet performance criteria, effectively “parking” partners for a period of time or permanently, and individualizing the process quite significantly.

Some firms create a bonus pool that operates in conjunction with the traditional lock step. The relative size of the pool differs from firm to firm. The bonus is allocated annually, usually by a committee of partners that considers both the relative subjective and objective contribution of all profit-sharing partners.

Lock step has at its core the concept of entering partners all progressing in unison over time. It could be argued that any hybrid lock steps are in fact not lock steps at all, but are instead a differential sharing arrangement that includes time in partnership as a major performance measure.

Advantages

  • recognises that all partners are not equal
  • provides for recognition of outstanding performance
  • allows for differing levels of contribution
  • affordable for incoming partners
  • provides for “slow down”, part-time contribution, and greater flexibility
  • provides flexibility while maintaining culture of equality

Disadvantages

  • all partners must be regularly assessed
  • recognises contribution that is less than equal but not greater than equal
  • requires the majority of partners to progress to full parity (if everyone elected to stay at 60 points out of 100 and worked less, all would suffer)
  • sometimes used to manage parenting or special leave; seen as punitive and harsh

Discussion. (Not advice.)

What Are We Seeking to Achieve – Fashion or Strategy?

There is little doubt that as firms commercialised, evolving from collegiate fraternities to professionally managed businesses, most embraced some form of performance-based compensation for partners.

Many commentators, advisors and academics maintain that performance-based sharing is consistent with modern management and motivation theory: “Give ‘em an incentive, a reason to perform and stand back.” Theoretically we all respond to financial incentive by changing behaviours and improving performance. Oddly enough, many firms that share profits equally outperform those that do not, and many don’t. In fact there is a poor correlation both nationally and globally between profit-sharing methodology and firm performance.

Profit share (and partner entry/exit) should be strategic. It should have as its raison d’être a set of aims and objectives. I often encounter firms whose sharing methodology has morphed over time – not to achieve strategic business goals but to placate this year’s angry over-achievers. Similarly I encounter firms who plough on with equity-based sharing (cutting the pie relative to ownership) or equality, regardless of prolonged performance differences within the firm.

There is a stack of learned literature that details workplace motivation, and explores the issue of what drives us to succeed. Motivation varies from person to person, and I suspect that people are not born with a set of motivators but rather that these motivators are conditioned. The desire to rise, for instance, is probably significantly stronger for someone who spent their childhood in poverty than it is in someone who enjoyed a comfortable existence on Sydney’s North Shore. Sure, parental pressure can whip up a desire to rise, as can many other phenomena, but my point is that motivation is conditioned rather than innate. Of course, conditioning can occur over short time frames. In my experience, partners who earn seven-figure incomes become conditioned to them phenomenally quickly!

Despite this, most professional-service firms do not offer performance incentives to employees. We usually pay a salary, negotiated annually in a performance review that reflects market worth and internal relativity more than individual performance. To complicate this, in recent years the direct consequence of not achieving budget performance has been a pay rise.

We take employed practitioners who have never before encountered performance-based pay, and have never previously been directly compared to their peers, and expect them to thrive in a performance-based partnership. Strangely, many do. But sadly, many do not.

If we sampled a group of law firm partners and asked them why they became lawyers in the first place, I bet that few would say, “to make heaps of money”. The answers would vary but they would include altruistic reasons, prestige, the never-ending challenge, ego, love of the law, and so on. For many, promotion to partnership is more about perceived career achievement than money. How else could one explain the commercially fascinating construct of non-equity partnership, a position that encompasses joint and several liability with your employers.

We all know that objectives and motivators change over time; money becomes important to most at some stage in life. We become partners so we can be business owners, and apparently every business owner wants to maximise their profit.

I would contend that professional-service firms are quite different to other types of businesses and that generalising industry theory into the world of professional-service firms could be both wrong and dangerous. There are even differences among professionals: nobody likes a complicated formula more than an engineer; accountants don’t understand why anyone would be motivated by anything other than money; dentists actually aren’t motivated by anything other than money; doctors have been “done over” by the government and have forgotten what money looked like years ago; and the vagaries of patent attorneys remain the best kept secret in the country.

Maximising the performance of partners is likely to involve offering them what they were seeking when they became lawyers and subsequently partners, not just considering pay as a function of their monetary performance. This necessitates a wide definition of performance and a necessarily complex system of monitors and rewards.

Firms that have enjoyed great success with performance-based pay usually introduce this approach at the commencement of a career. In other words, they condition their potential partners to thrive, long before they become partners.

Perhaps you should determine what you want to achieve as a partnership. I would counsel against changing from equality to something else simply on the basis that “everyone’s doing it”. Determine answers to such questions as what you want your culture to become, what behaviours you want partners to exhibit and staff to learn, how you are going to choose the next group of partners and, of course, how much money you want to make. You should then build your profit-sharing methodology around these aims so it helps to create success, and tells your staff what you value and what you seek to reward. You should then tailor a similar approach to professional-staff compensation. Those who don’t fit will have left long before they are considered for partnership.

Leaving aside the top-tier law firms, in my experience there is little doubt that performance-based sharing is usually implemented defensively, as a retention tool. “We need to pay Barry more or he’ll go and we can’t afford to lose him”. In some cases it may be catastrophic to lose Barry but it usually isn’t. Barry may go as a result of quantum but rarely as a consequence of methodology (unless the firm’s current methodology is unequivocally unfair). There may also be a good reason to recognise and reward Barry, but this can be done within the framework of a lock-step. There is nothing wrong with one-off or regular prizes and rewards: these make good sense to me.

Redesigning the profit-share system to attempt retention is likely to be unsuccessful. Historic figures compiled by FMRC show voluntary attrition numbers are no better among the performance-based sharers; in fact they are worse, for both partners and staff.

I am neither for nor against any particular sharing methodology, I know they all work and they all don’t work; there is no best method. I also know that the success of any chosen method will largely depend on a firm’s culture, history and relative success.

I would encourage partners to hasten slowly, and to design a system for all the right reasons. A friend of mine told me an anecdote when he was the chairman of his firm – a major New Zealand law firm. He had recently attended an international managing partners’ forum in the USA. He recounted the envy with which he and his New Zealand colleagues were regarded there because many had stuck with lock-step to equality. “All of the Americans”, he said “had changed to performance-based sharing. They now longed for the simplicity of equality, but they knew they couldn’t go back”.

When Does Lock-step to Equality Work?

Equality is not easy. To succeed, it requires understood social-control mechanisms, good leadership, and institutionalised collegiality. Overachievers need to be acknowledged, and underperformers managed. If either are neglected or ignored, partnerships can develop conflicting factions. Partners like to know that someone is in control of these issues.

Successful partnerships that share equally have often literally grown up together. They usually recruit graduate solicitors, promoting them to associate and, ultimately, partner. These firms effectively operate an up-or-out tournament to success. Employed solicitors compete for limited partnership positions. They are successful or they leave. This sounds harsh but it is common to all of the world’s great professional-service firms.

The great majority of partners were employees of the firm for many years before they became partners. This has an obvious impact on culture: culture is rusted on.

In smaller firms, tournaments to success are not always practical. Often smaller firms need to recruit laterally at associate and partner level, sometimes recruiting over long-serving employees. In this circumstance, equality will succeed if cultural fit is the primary recruitment test. Many laterals find it hard to succeed in a well-established firm, equality or otherwise. They are, however, more likely to succeed if they quickly become recognised as “family members”.

It is also true to say that, in my experience, the higher the profit, the more likely partners are to be satisfied with equal sharing. Sounds cynical, but nevertheless it’s true.

The role of managing partner is critical to success in equal-sharing firms. In my view, managing partners should manage partners. It has been my experience that this is seldom satisfactorily done by employed practice managers, no matter their title. Evidence of this can be found in the recent history of the top tier of the Australian legal profession. Not one firm has retained a non-lawyer CEO. Although their profit-sharing arrangements may differ, they all have a partner as their senior executive. In the most successful of these elite firms the managing partner has been a partner of the firm for many years.

When Does Performance-based Sharing Work?

Performance-based sharing often works well in circumstances similar to the above, but that’s the easy way out.

Performance-based systems are more common among top- and mid-tier firms than are lock-step approaches, significantly. Interestingly though, of the four most successful large firms in Australia, two share profits with a lock-step to equality, and two have performance-based sharing. The same is true in New Zealand and in the United Kingdom.

Most but not all successful smaller performance-based firms are first-generation firms (i.e., the partners that put them together are still there); others have experienced significant growth in recent years. They are often a product of a merger, and growth has been achieved over a short timeframe by employing lateral recruits. There are of course exceptions to this but many firms have followed this path, expanding into multi-location firms, sometimes internationally.

Large performance-based firms see their profit-share system as an important tool, and have evolved to performance from equality to take advantage of the flexibility inherent in performance relative to equality.

The most successful performance-based sharers have either a totally transparent measurement and reward system, or (a) trusted arbiter(s) sitting in judgement. Nearly all of these firms have an appeals process as a part of the system.

I have heard of a partner who turned up for his performance discussion with his wife because “She’s a better negotiator than I am” and another who includes in his annual written submission, among other achievements, that he is “chief fire warden of the building.” It isn’t an easy process and it requires excellent leadership.

Measurement and Monitoring: What to Measure and When

A short time ago, I had lunch with a successful family-law lawyer who had been booted out of his partnership when his legal offerings had been deemed inconsistent with the corporate aspirations of his firm of 30 years. This lawyer had recently established a new boutique law firm with his fellow bootees.

As is often my experience, his initial bitterness soon turned to joy. “I’ve never been happier, Neil,” he said. “Do you know why?” Then, enthusiastically answering his own question in the manner of the truly enlightened, he said, “Sovereignty!” Don’t let anyone tell you that it’s not good to be the king.

The utopia of true freedom, the state of being left alone to do what you want to do when you want to do it, is rarely realised by professionals – let alone sovereignty: clients see to that long before partners interfere. That said, as partners we do enjoy a high degree of independence and relatively low levels of accountability. We don’t have to ask permission to duck off early, come in late, go and get a haircut, take the kids to their sports carnival and so on. Similarly we seldom have people looking over our shoulders, questioning our advice, workload, pricing or communication style. It’s not quite sovereignty, but it is good.

A good partner-performance monitoring system should not intrude on the freedom we can enjoy as partners. I would go as far as to say that it should foster it. Peer review is a coaching process. It should bring out the best in partners, not crunch them. In a good system, partners look forward to the process and enjoy it.

In my view a good system is a balanced system that applies equal weighting to a range of performance criteria. Some criteria will pertain to the management and leadership of staff, some to the management of clients, and some to financial management and performance. In a performance-sharing system, this should occur at least annually. In a lock-step system, it can occur by exception. In other words if partners are performing at expectation, leave them alone unless they request a review. Those who exceed expectation should be acknowledged publically, and those who fail to meet expectation should be subject to prompt review. Many firms, however, recognise the importance of maintaining the performance of the average so all partners are involved in annual reviews regardless of their relative performance.

Sanction for underperformance needs to be managed. Partners who have been reduced from equality or had their profit-entitlement downgraded usually feel it deeply. Sanction is often as cathartic as expulsion. In good firms sanction occurs with the consent of the partner concerned.

Some Comments on Diversity

For over twenty years the majority of law school graduates have been female. Female, full-parity equity partners are, however, a scant minority in most partnerships. In recent years the gender balance of graduates has been disproportionately tipped in favour of females. If firms are to continue prospering, partnership structures will need to take into account the needs of women lawyers.

By virtue of their employment brand, top-tier firms will, more than likely, always find graduates to fit their requirements. Other firms that compete for the rest of the graduating class and early career lawyers will have to develop their systems to suit the changing needs of future generations of partners, the majority of whom are likely to be women.

As I move around the profession I hear tell of the quality of recent graduates – no baggage, prepared to work hard, prepared to work long hours when clients require it, and so on. That said, smart firms are still moving to meet the needs of younger lawyers: money, flexibility, egalitarian cultures and so on. Partnership structures and sharing arrangements should reflect this.

In my opinion one of the mistakes that we made as an industry was lengthening the progression from employed solicitor to partner. Thirty years ago people became partners in their late 20s, now it’s in their early 40s. I think that firms are missing out on youthful innovative contributions that could be captured were they to evolve their sharing model to build more inclusive partnerships with greater diversity in age and gender.

This week, I’ve been engaged by the 50th anniversary of the moon landing. The average age of the flight controllers that made this great achievement possible was 26. Flight director Gene Kranz demanded that they be ‘tough and competent’ and they responded. Many firms could benefit from enthusiastic, well paid young partners. I suggest modifying your sharing model and letting them in.

Dr. Neil Oakes has served the Australasian legal profession since 1989. Neil lives on the mid north coast of NSW near the small coastal town of Scott’s Head and enjoys all of the pleasures of coastal life. He has a large garden in which he tries to grow vegetables organically, battling every bug in Christendom. His interests include art, cooking, eating and the odd glass of wine.

Are Traditional Profit-Sharing Models the Enemy of Diversity?

2 Fotolia_114409423_XSMethodologies for sharing profit among equity partners have been an interest of mine for many years. Some time ago I wrote a doctoral thesis on the behavioural consequences of alternative models, in particular the impact of various models on equity partner diversity.

When I started monitoring and consulting law firms in the late 1980s, equal sharing was the norm in Australasia; it is still common among many mid-sized and smaller firms in Australia and among all firms in New Zealand. While the number of performance-based sharers has significantly increased, many of these firms apply performance measures “at the margins,” with 80% of partners clustering around a new equality. The top 10% are topped up and the bottom 10% bashed up. Origination credits have not been institutionalised in Australasia to the same extent as in North America, although that is beginning to change. ‘Performance’ often includes an assessment of subjective contribution, but by and large it usually comes down to ‘fees controlled’: individual partners’ billings, their teams’ (direct reports’) billings, and work introduced to other partners.

There’s nothing new in all that. It’s the way we’ve been doing it for ages. Law firms see themselves as meritocracies. We promote people to equity partnership and compensate them accordingly. I suspect that’s why law firm partnerships seldom resemble the diverse nature of the annual graduating classes of lawyers. We’ve assumed ‘merit’ as a virtue axiomatically, but what does it really mean? Judging by the overwhelming majority of equity partners, it means doing what all of the white, middle-aged heterosexual men did, ‘performing’ and ‘contributing’ in the same, full-time manner. The individual sinks or swims on his or her own merits.

It is intriguing that despite the best of intentions, despite all of the investment in enquiries, diversity committees, and diverse graduate selection (even ‘blind’ graduate selection), and despite 20 years or more of gender balance among graduating classes (it’s actually an imbalance in favour of females), law firm partnerships remain very male, very white and very straight.

There is a growing scholarly literature around merit and diversity. I’ll develop this discussion in a future article. I would like here to concentrate on one of the root causes of partner homogeneity: traditional profit-sharing.

The underpinnings of equal or near-equal sharing are pretty obvious: portfolio theory (I’ll be up when you’re down and visa versa, hence risk minimisation), equal effort for equal return, and the greatest incentive to share clients and cross-refer. For these elements to coalesce in favour of success, partners need to contribute equally, for a long time, and in similar ways. Merit becomes a convenient verb for describing what all of our full-parity or equal-sharing partners do, and the way that they do it – in other words, role-modelling the successful, white, middle-aged men.

I regularly present in new partner programmes in Australia and New Zealand, and I often hear aspiring partners talk of their frustration with attaining perceived equal or near-equal contribution. They speak of the covert guilt that accompanies part-time or flexible partnership. They speak of inequity in opportunity. Who gets mentored by and wins the favour and friendship of influential senior partners? Well, not surprisingly, people like those partners (the next batch of white, heterosexual men). It’s as though many female lawyers and those from minorities perceive themselves as working in a different and separate workplace under the same roof with those who more closely conform to the traditional ‘norm’.

Achieving a greater level of minority-group representation at equity-partner level is a big and complex task, a task way beyond the scope of this brief article. There is however one thought balloon I’d like to float in the interest of greater gender equity among equity partners: share profits on the basis of contributed profit.

First, to profit, and an extreme illustration of the principle.  Most firms can measure this accurately, smaller firms probably less so, but it’s straightforward: partners’ billings, their team’s billings, fees referred to other partners, less the direct attributable cost. The partner with the highest profit contribution gets 100 points; others share proportionately. This would enable partners to enter much earlier. It would cater for part-time partners (if I can contribute more profit working three days a week than one of my full-time contemporaries, why should I earn less? Similarly, if I choose to work six days a week, why should I subsidise those on flexible arrangements?)

Profit-derived profit-sharing is educational. It encourages and rewards partners who structure their teams in the most profitable way. It also future-proofs the partnership. When the millennials arrive, they will require diversity and flexibility, and they will want the prize sooner. In five years’ time, compensating partners on the basis of fees controlled and time spent in the office will seem so ‘yesterday’.

Sharing entirely on profit contributed would be pretty extreme and probably a little short-sighted. Firms need to invest in practice areas from time to time, new partners need to be encouraged and supported, there are pro bono considerations, and the list goes on. I am just suggesting that measuring profit contribution in the mix (instead of fees controlled) removes a significant block to greater gender equity at partnership, and offers greater flexibility for all who want it. Think about it.

The Path to Partnership in Small to Mid-sized Firms

If you are a partner in a U.S. law firm with fewer than 200 lawyers, think for a moment of how your current group of senior associates with eight to nine years of experience got to the brink of partnership. Then reflect on who their contemporary associates were at five years of experience.  Many will have departed, voluntarily or otherwise. Do you wish that some of those associates were now partnership candidates? Are some of your remaining candidates under consideration by default? Do you have a plan for those who will not make partner in the next two years? We see many firms that do not have good answers to these questions. They have not been managing the “path to partnership” effectively.

Large firms, with recruiting and professional development staffs and personnel committees, have developed some excellent practices that can be borrowed without large investments in support staff.  Those firms are not perfect. They still hold on to productive associates who they know will not make partner. Nevertheless, these are some of their best practices that can work for you:

  • Develop a sound annual evaluation process, supervised by a committee of partners (with some associate representation); seek self-evaluations and use standard criteria; train partners in giving evaluations.
  • Put your criteria for partnership entry in writing, even if you have to express them as “minimum standards.” Explain the criteria and answer questions about them in an associate forum beginning in third year.
  • In fifth year, hold two reviews of each associate – one “standard evaluation” and one that advises associates if they are “on track” to make partner, and lets them know how to get back on track if they want that consideration.
  • Start business-development training early – awareness in the first two years, some skill in the next two years, then significant investment after the fifth year. You don’t need a big business development staff; you bring in outside trainers and use partner mentoring. (Too often, we expect the senior associate to suddenly have a “book of business” when our emphasis has only been only on long hours and quality work.)
  • Set the precedent of a “positive departure” for every departing associate, by holding confidential exit interviews, helping them with their next career steps, and welcoming them to your “alumni club” (more on that another time).
  • In the last two years of the path to partnership, assign a partner “sponsor” who has the job of helping the associate prepare his or her case to the Partnership Committee. (You have one, right?) The sponsorship is no guarantee of success, but it will send the message that the firm makes every effort to get associates over the bar.
  • Have a plan for those who will not make partner. Will they get one more chance next year? Is there room in the counsel ranks for a skilled niche lawyer? Are there clients or other career options that you can help steer them to? Despite some short-term pain, you may find that sensitive and supportive exit planning will bring positive referrals from that lawyer in the future.

Managing the path to partnership is not an overwhelming job. Partners in mid-sized and smaller firms can adopt some excellent large-firm practices. They will need some outside help and training, plus some annual time investment. Compared to the cost of losing the associates who could have been your star partners, the investment is modest.

David Cruickshank, a former Director of Professional Development at two large firms, helps law firms manage associate development, evaluation excellence, management training and path to partnership programs.

Lock step

Creating a Growth Structure from a Lockstep Mindset

compensationIt’s not often I stumble into mid-sized and larger firms that have successfully retained a compensation system that can honestly be described as pure lockstep. Other than a number of the most profitable Wall Street firms, the rest of BigLaw and “not-so-BigLaw” long ago began incorporating some features that track originations and link individual compensation to “slaying the dragons.” Nonetheless, I do stumble into some relatively pure lockstep situations where moving on up to a higher compensation band is a creature of firm tenure and age.

A tenure-based system can be attractive to mid-sized firms as it can reinforce collaboration and cohesion, but given the revenue-growth imperative most firms embrace, I typically recommend that these firms engage some origination tracking in order to assess individual contribution – after all, if you don’t measure and reward certain behaviors, you can expect to get less of those behaviors. For many of these firms, the question becomes how can they dip their toe in the waters of “eat what you kill” without becoming the Darwinian mess they fear?

Partnership Evaluation Purposes

Tracking originations can help firms make individual assessments of current-year compensation, or it can help firms make individual assessments regarding entry to partnership. Firms that haven’t made even anecdotal attribution of originations are often well served by being pretty measured with their first step. A suggested first step might be to begin including a subjective, non-formulaic origination criterion in the partnership evaluation process. The subset of firm lawyers that has strong opinions about partnership decisions tends to be smaller than the subset of firm lawyers that has strong opinions about how the current year “pie” is going to be apportioned.

Current Compensation Purposes

It is an understatement to say that the work of an annual compensation committee can operate in a “charged” environment. Moving in a new direction – like most efforts at law firms – will be best received if accomplished in an incremental way. Below are a few suggestions as to how a firm could introduce a movement away from a tenure-based compensation system:

  • Message, message, message – communicate with and educate the partnership on the reason for beginning to look at individual origination credit. The growth mission is a pretty uncontroversial concept, and aligning the firm’s incentive structure around that mission would make logical sense to the rank and file as long as it’s explained. An incidental benefit of this kind of communication is that it gives firm leadership an opportunity to reemphasize collective goals, which in turn reinforces an “all for one, one for all” firm philosophy.
  • Preserve basic lockstep elements – departing wholesale or substantially can create problems. Continue earmarking most of the partner profit pool for certain lockstep bands, and reserve a smaller portion for individualized partner incentive compensation awards.
  • Contingent on overall firm growth – A firm’s initial foray away from pure lockstep has a better chance of delivering its intended benefits if it is linked to overall firm growth. Establish a firm growth objective each year, and make the individualized partner incentive compensation awards dependent upon the firm hitting its revenue goal.
  • Start subjective, then move to the objective – The transition’s effect on firm culture will be received more organically if it is gradual.
  • Be nuanced – Allow for partial origination credit, as it tends to be reinforcing of the “all for one, one for all” philosophy undergirding.

Succession Doesn’t Just Happen

2 unnamed“We need a succession plan. My partners and I formed this firm thirty years ago. We started with clients aplenty, and spent the early and middle years – in fact, up until a few years ago – tasking younger partners to service the business we already had through the impressive rainmaking skills of the founding partners; we did not task them with developing their own client base because we wanted to make sure our (founding leadership) clients were serviced by the most seasoned and technically proficient lawyers. The truth is that we’ve always brought in most of the business, but now we’re concerned about ‘legacy’ and the health of the firm after we begin winding down and retire. At the very least, we’ve got a significant leadership gap and client development skills gap among the non-founding partners, and thinking more pessimistically our firm may not survive our retirement. Can you help us?”

I’ve been presented with this fact pattern pretty chronically over the past few years. On further inspection it usually becomes clear that the founders’ definition of the firm’s “problem” is a bit too limited. Lawyers in the associate ranks lack confidence about where their firm is going and the longer-term opportunity afforded them. They know precious little about how the firm is managed and what kind of compensation the firm generates for equity partners in the longer term; as a result, younger lawyers become very short-term focused and find lots of reasons to become disaffected. Layered on top of all this is the perceptible tentativeness of the “next generation of leadership” – they would like to inspire ambition within the junior ranks, but they don’t feel very confident themselves. What’s a firm to do?

It goes without saying that each law firm situation along these lines is fact-specific. However, I’ve found that there are a number of reliable recommendations from which most firms could benefit that fit this profile, namely:

Transparency – leadership needs to trust that non-founding partners and associates will benefit from having more information rather than less information. Let the rest of the firm know how you lead the firm and how you do your job. Help others understand and let them appreciate how effectively the firm is being managed in this regard.

Earn the Right to Teach Patience – if your firm generates above-market compensation for equity partners but achieves it in part because of a very tightly managed associate compensation grid, then let associates know what could be in store for them as they climb the ranks. Associates and non-equity partners have a hard time deferring near-term compensation gratification if they don’t know how that model could redound to their benefit down the road.

Define and Communicate Partnership Criteria – associates and non-equity partners crave a GPS system. Let them know in meaningful parameters what kind of “points they’ll need to put on the board” over time to become a shareholder.

Define and Communicate Partner Compensation Criteria – founding partners tend to not be very formulaic about how they split up the profits among themselves because it’s an intimate group that has worked side by side for so many years. As more non-founding “arm’s length” partners are made, first generation firms would benefit from defining their compensation criteria more explicitly. New partners and leaders want to understand how their activities are being valued, and they want to be put to their highest and best use; a law firm’s set of objective equity partner compensation criteria can supply direction and reinforce managerial credibility.

The “Vision Thing” – founding leadership ought to have in mind a longer term destination for the firm, and it ought to be documented. Whether the firm has landed on the right longer-term view of what place it will occupy in the marketplace is less important for these purposes then just having a destination in mind – a destination that can be articulated and supported intellectually.

Partner Readiness: Client Development Skills Training – lawyers do not passively bump into the skills they’ll need to begin sourcing clients on their own; rather, first-generation firms should take an active role in outfitting partners and leaders-in-waiting with the necessary consultative selling skills so they can build up their practices, and be ready to lead the firm’s revenue efforts over time.

Founding Partner Wind-Down Compensation – first generation firms often allow founding partners to retire gradually so that there is a wind down period during which partners are not active at the same historical levels. At wind down, founding partners typically become non-equity partners of the firm. As non-equity partners they’ll get a salary and bonus, but their bonus plan can and should be very tailored to the particular non-equity founding partner, and should answer loud and clear the question “What is my highest and best use to the firm?”

Client Transition – founding partners are well advised to put in place a 12- to 36-month plan for involving one or two other partners in the management of key clients, so that at wind down and full retirement there is at least one equity partner ready to slide into the full relationship management role. The non-equity bonus plan of a wind down partner should motivate and reward that partner to accomplish the client transition seamlessly over time, and interim client-transition milestones should be defined along the way before full retirement.

Generational transitions are not easy, particularly when it is the founding generation that is cycling out. Let the next generation of leadership appreciate how and why the firm has been so successful, and put some scaffolding in place so new leadership can leverage what you have built.

Entrepreneurship is at the Heart of Good Governance

Different peopleIn the last couple of years I have been honoured to advise nearly a dozen clients on complex governance projects in at least six different jurisdictions. Some of these projects have been driven by tax or regulatory considerations, but most have had effective management and leadership at their core. One of these projects was to help a mid-sized limited liability partnership to modernise its decision-making processes. Another was to create a structure to combine the best features of partnership into what is essentially a corporate structure. Several projects wrestled with complex partner compensation problems whilst other projects related to merger or, in a couple of cases, the firm’s growth which had rendered the historic structures obsolete or no longer fit for purpose. The context of this work has varied from traditional partnerships through to LLPs and LLCs, civil companies, corporations and multi-disciplinary structures.

What I have found is that the increasingly complex world of professional firm governance always raises the question of the qualification for ownership status. Until about ten years ago, professionals seemed to get promoted to partnership by little more than rites of passage and without questioning very deeply their fitness to be an owner. As a one-time managing partner, I have to put my hand up and admit to being at fault in failing sufficiently or rigorously to assess such promotions. More recently, however, equity in professional firms has become more tightly held, and this trend has been accompanied by a growth in professional competency and assessment frameworks, balanced scorecards, promotion criteria and partner job descriptions. Our recent Edge International Global Compensation Survey confirmed this trend, and particularly the growth in importance of business development skills as an essential partner competency.

Even so, firms nowadays are rightly reluctant to elevate professionals to partnership unless they seem to meet some hard-to-define extra qualities – some spark that lights them up. The negatives are easy to establish – no jerks, no journeymen partners, nobody who will impede progress, and nobody who lacks rainmaking skills.

Hardly anybody mentions entrepreneurship – maybe because it seems so difficult to describe in terms that lead to easy partner identification. Here then is a start. Entrepreneurship has been defined as “the identification and exploitation of previously unexploited opportunities.” It is clear from this description that the ability both to innovate and to drive is at the heart of entrepreneurship. In professional firms, this ability can be demonstrated in at least three areas – services, clients, and processes – and prospective partners should be required to show entrepreneurship in at least one of these areas. The ability to spot opportunities in new and emerging services or to exploit twists in existing services may be one such quality. Another might be the ability to re-energise or renew the way the firm interacts with its clients or delivers its services. Less obvious – but of equal importance – is the ability and drive to improve processes, capture knowledge, and create systems and unique ways of doing things.

In their business plans, prospective partners should be required to set out some of the unexploited opportunities that they could create, and how they would see themselves as exploiting and managing those opportunities for the benefit of the firm. I have lost count of the times that I have been told that firms contain partners who should never have been promoted. A more rigorous approach in promoting partners would in my view inexorably lead to more entrepreneurship, faster decision-making and better profitability.