Ten prerequisites for equity partnership
As with many aspects of the traditional partnership model, the notion of equity has always been a subject of debate amongst those who ‘have’ and those who ‘have not’. Questions such as who should be part of the exclusive club, what entry requirements should apply, what contribution members should make, and how remuneration should work, continue to exercise partners. The separation of partners’ roles as shareholders and worker-managers is becoming more distinct and, hence, the profile of equity partners is changing. However, there are a number of fundamental prerequisites that remain constant.
Very few lawyers become equity partners. This is not new. The highly leveraged ‘Tournament of Lawyers’ law firm business model of the last few decades of the twentieth century relied on the ‘up-or-out’ principle to sustain growth. Leverage has declined since the Global Financial Crisis of 2008-10 not only because of client resistance to traditional leveraged service delivery, but more recently because technology is displacing roles previously performed by junior lawyers. Law firms are evolving into very different kinds of business. Equity partner positions are becoming scarcer.
The quality of a firm’s partnership has never been more important. The role of partners, particularly equity partners, is critical in setting the standards for the firm and for determining the quality of client experiences. Much of the criticism aimed at partnerships today is not because of any fundamental misalignment between partnerships ‘per se’ and the demands of the modern world. Despite the emergence and proliferation of alternative structures and ownership models, partnerships remain a very viable construct for highly educated and skilled professionals who wish to practise together. Where criticism exists, it is usually directed at governance shortcomings within the partnership. Most of these shortcomings could be rectified by a) focusing on the responsibility of partners to each other and, collectively, to their firms, and b) enforcing their obligations in this regard.
To that end, whether or not performance evaluation is a formal or informal process, and whether a direct link exists between this and compensation, equity partners are accountable to each other for their combined success. It follows that they should expect to be held to account, by measuring the degree to which they meet their obligations and constantly striving to enhance that success, and the firm’s business.
We believe that there are ten attributes that should apply to any law firm equity partner.
1. Actively display the shared values and ethos of the firm
Most law firms have similar values or vision and mission, typically client-centricity, integrity, quality and collegiality. They frequently refer to a positive work environment, to commerciality (i.e. meeting certain profitability levels), and to their ability to attract and retain the best people. However, the best firms are differentiated by the congruity between espoused values and partner behaviours. They “walk the talk” even when it is difficult to do so. This is the single most important attribute that a law firm should expect from its partners, because it a) encapsulates the other prerequisites of equity partnership (reference below), and b) is hardest to replicate in a market in which firms are otherwise increasingly undifferentiated. This is most acute amongst equity partners because of the leadership role that they play within the partnership as a whole.
Firms whose equity partners lack this attribute seldom thrive and where they do, are frequently unable to replicate this from one generation to the next. They are equally seldom pleasant places to work. It follows that those elevated to equity partnership should already have demonstrated congruity of values and behaviours, whether as non-equity partners or other senior non-equity roles.
2. Be cash-positive oneself and manage a profitable team
Equity partners share a financial responsibility to generate sufficient revenues not only to cover their own compensation and share of firm overheads but also to generate a level of competitive profitability within their specific area of expertise in order to contribute to overall partner earnings. During the lifecycle of an equity partner, performance levels may differ according to the expectations at each level of development. For example, partners who are transitioning towards retirement should be more focused on transferring relationship and intellectual capital to younger partners than in personally generating income. Conversely, equity partners in the prime of their careers should be generating disproportionately higher levels of income. However, over the course of an equity partner’s tenure, s/he will have covered his/her costs and positively contributed to the growth of the equity pool.
Equity partners seldom practise alone. Whether a partner has a permanent team of salaried partners, associates, paralegals or others allocated, or the team is transient and changes from matter to matter, the team for whom an equity partner is responsible must also be profitable. In practice, this means delegating work appropriately, supervising work product quality, and ensuring the people tasked with delivering work product feel engaged and motivated to produce their best work. Also, work today Increasingly involves multi-partner teams. Managing a profitable multi-partner team means ensuring that work is effectively allocated between all those involved, both equity partners and others, and executed to the same standards of high quality and commerciality.
3. Manage the client interface
Revenue generation typically requires equity partners to carry greater client- and market-facing responsibilities than others in the firm. Lawyers who are technically competent but who lack strong relationship skills are unlikely to add sufficient value as equity partners, in the ways that clients expect. As the major sources of business development, equity partners require a range of competences including a highly tuned understanding of core clients’ operating environments, the ability to align commercial problems with legal-commercial solutions and to convert opportunities into profitable income, and empathy with their audience. These are attributes that can be learned but need to be clearly evident before a lawyer is promoted to equity partnership, rather than expect lawyers to learn these once promoted.
4. Grow and cultivate future equity partners
The long-term sustainable success of a firm is predicated on the quality of its talent pipeline. In large part, this is characterised by the systematic transition from one generation of equity partners to the next. At its core, the principle must be that every retiring equity partner leaves the partnership stronger than when s/he entered it. It follows that the next cadre of equity partners must be stronger than the one that preceded it. More importantly, individual partners bear responsibility for identifying prospective candidates early in their careers and, together with the support of the rest of the partnership, cultivating them as future equity partners.
5. Promote the practices of other equity partners
It is incumbent on equity partners to identify opportunities to introduce and actively assist their colleagues in selling services where a client has specific needs that their colleagues can meet. Those clients’ needs may already be serviced by another provider or, in some circumstances, may have to date been un-met. In promoting a fellow partner’s practice, it follows that the value proposition presented to clients must be compelling. Some of the circumstances in which cross-selling can be successful include where:
- the client is known to be dissatisfied with its current service provider
- the calibre of the firm’s specialists are at least comparable in the relevant areas as other existing providers, and that client is highly satisfied with the firm’s performance in other areas and generally
- collaboration is required and the work can be better done (from the client’s perspective) by two or more partners from the same firm
- a partner has specific specialist knowledge that will add significant value to the client
- bundling services together can reduce the overall cost to a client.
Silo behaviour is common in firms where internal competition is a cultural norm. Actively promoting others’ practices and, better still, generating work streams that require active collaboration across practices can be effective counter-measures to this. Active and willing collaboration is a crucial characteristic for aspiring equity partners. One measure of the health of a law firm is the level of net contribution between partners. Some practices by definition are typically ‘derivative’ in nature. However, those partners in practices from which other services flow will be expected to play a pivotal role in growing a firm’s overall ‘share of wallet’ of a client’s legal spend. In many cases, this has implications for the relative influence of individual partners, but the overriding goals are delivering coherent solutions and increasing the firm’s revenue stream.
6. Grow both partner and employee engagement
Engagement is fundamental to profitability. There is now considerable quantifiable research to support the proposition that strong causality exists between the two and, conversely, that aggressive or disrespectful interpersonal behaviour is damaging and dilutive to performance and profitability. Hence, the level of engagement that partners and employees have is one of the most important drivers of a law firm’s success. High levels of engagement also reduce employee attrition and create a more positive working environment. It follows that growing engagement levels across a firm is one of the most important roles for any partner, and especially equity partners.
Partner engagement can be achieved by being respectful and supportive of each other, agreeing in public even if disagreeing in private. Promoting each other’s practices and sharing clients, as previously described, is also a powerful tool for building such engagement. Employee engagement can be achieved by mentoring (whether formal or informal) and other forms of skills transfer, which lead in turn to juniors being able to take on increasingly complex, higher-value work. Public recognition of achievements is also important. Finally, teamwork (especially important for Millennials) has also been shown to drive engagement.
7. Engage robustly in partnership discussions
Equity partners, in their capacity as shareholders in a firm, carry two unique interrelated responsibilities. The first is to engage robustly on topics such as the future direction of the firm or the resolution of important, difficult problems, in the way in which shareholders might be expected to in a ‘conventional’ business. Such debate and challenging arguments invariably result in better solutions when conducted in the right spirit and with the interests of the firm first and foremost. However, this requires high degrees of trust between partners and the ability of individuals to relegate personal agenda.
8. Once something is agreed, support it wholeheartedly
The second interrelated responsibility (see point 7 for the first) is to support decisions once these have been taken by the partnership. In many cases these decisions involve a great deal of compromise. They may reflect a consensus about the ‘least unpopular option’ rather than the most desired. However, once a decision is reached, the partnership needs to be united in executing it. Hence, it is the duty of every partner to support the decision, whether or not s/he personally agrees with it. In some dysfunctional partnerships, efforts to sabotage a decision at the very least waste time and other resources and can undermine a firm’s ability to act decisively and with the necessary agility.
9. Building the firm’s brand and reputation in its markets
Responsibility for protecting and enhancing the firm’s reputation, whilst shared by every member of a firm, falls most heavily to its equity partners. Seeking out leadership roles in the community by serving in the leadership of associations and boards of community-based organisations is one way of doing this. Others include speaking, teaching and writing on matters related to the law and the welfare of the community, whether or not there is a direct link to billable work.
10. Pay close attention to the future
Clients’ needs are becoming more complex as clients’ businesses are disrupted by the same trends that are disrupting law firms. As demand on in-house legal departments intensifies to deliver ‘more for less,’ so cost pressures are mounting steadily on their external legal advisers as well. It is more important than ever for law firms to know what needs to remain constant, and what needs to change. A firm’s equity partners need to be at the forefront of managing this difficult balance. They need to constantly educate themselves about these emerging trends and to engage with clients about how their businesses are changing.
As the trends disrupting the legal profession generally and law firms in particular continue to unfold, so the nature of relationships within partners will also continue to evolve. As technology becomes more important in the creation and delivery of legal advisory work, so we expect the ‘billable hour’ to become less prevalent as a performance measure. It is fair to say that over recent decades, some of the characteristics of excellence for equity partners that have been outlined in this document have been diluted by the enormous emphasis that firms have placed on productivity, driven by business models that have been deeply premised on production of human effort. To quote former General Electric General Counsel Ben Heineman:
“Legal departments dislike, often intensely, a law firm economic model that inexorably seeks to increase revenues, often without regard to value, at the same time that corporations are inexorably striving to reduce costs and enhance value.”
The transition in economic model that law firm partnerships must undergo in order to align their value propositions with emergent client needs, technologies and socio-political realities, can only be successfully achieved by firms that have strong governance systems that are driven by highly effective equity partners. There has never been a more important time to, as partnerships, assess what qualities one should expect of each other and what partner behaviour is required to ensure the firms success. Or, simple survival.
Galanter, M. and Palay T. (1991). Tournament of lawyers: the transformation of the big law firm. University of Chicago Press.
Heineman, B.W. Jnr. (2018). The inside counsel revolution: resolving the partner-guardian tension. American Bar Association. p402