The stewardship crisis

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Posted in: Leadership

Over the legal news wire this week came a report of the closure of a US law firm. The full report of the firm’s demise was restricted to those with a premium account that I have no interest in acquiring, and in any event, the details of what happened weren’t relevant to what caught my eye. It was the one-line description leading off the wire report, which looked something like this: “Law firm ABC is closing next month; its name partners will retire and the rest of its lawyers will form smaller boutiques or join bigger firms.”

That’s the capsule story of the end of a law firm. More importantly, though, it’s also a template — the founding partners’ retirement, coupled with a scattering of the remaining lawyers — that I expect to be repeated frequently throughout the legal profession over the coming decade, especially among small and midsize firms. It’s the natural outcome of the widespread inability of law firms to deal successfully with succession issues. And it reflects what can only be described as the failure of hundreds of law firm leaders (by which I mean founders and power brokers more than “managing partners”) to look beyond their own short-term interests to the long-term survival and success of the firms they created.

It’s a given that law firms exist to generate profits for their partners. The addition of leveraged associates, the admission of new partners, the arrangement of origination credits, the expansion of the firm to new regions and new practice areas — all these activities are undertaken in order to maximize partner revenue. Nobody really doubts this or has a serious problem with it.

The difficulty arises when the interests of the founding partners inevitably begin to diverge from the interests of everyone else in the firm, especially lawyers at the start or in the middle of their own careers. These lawyers’ own timelines extend beyond the expected career arcs of the partners who hired them, and they have an interest in seeing the firm continue to develop and thrive after the founders have moved on. This interest is primarily financial, of course — they want their turn occupying the most profitable seats — but it’s often also personal: they like the idea of taking up the mantle of a respected firm and leading it into a new age. I think most people would find these sentiments reasonable.

What has struck me over the past few years — what has shocked me, to be honest — is the number of founding partners and senior lawyers who don’t care all that much what happens to the firm after they leave. I mean, these partners talk a good game about legacy and continuity and a bright and promising future and so forth, and I’m sure that their well-wishing is sincere enough. But ask them to take steps to ensure that future in ways that might compromise their near-term revenue — especially as the economy worsens — and the conversation comes to an abrupt stop.

These partners essentially place their personal interests, even near the end of their careers, ahead of the long-term prospects of the firms they helped found. They do not share clients. They do not delegate work. They do not mentor juniors. And they do not approve compensation system changes that would motivate the next generation of leaders if those changes might also reduce the size of their own slice of pie. They couldn’t make their priorities much clearer. (My Edge International colleague Nick Jarrett-Kerr has written an excellent analysis of law firms’ challenges in this regard.)

This state of affairs creates immense levels of frustration and disillusionment among those members of the firm whose retirement is not in sight, for whom the firm is at the least a steady employer and at the most a stage for their own flourishing careers. These members of younger generations look at their leaders from an older generation and it begins to dawn on them: the founders weren’t creating an institution that could stand the test of time. They were creating a vehicle for their own financial interests, and once those interests draw to a close, so too does the need for the vehicle.

I don’t think it’s an accident that inter-generational tension within law firms has grown over the past several years, in both good times and bad. I don’t think it has much to do with the clichés about Generation Y and its “sense of entitlement,” except to the extent that younger members of the firm felt entitled to inherit some of the prosperity earned by the firm’s founders and leaders, in exchange for their own contributions and loyalty to the institution over the years. They’re now coming to conclude that there never was an institution — just a platform for founder prosperity. I expect them to react accordingly.

There’s a word you hardly ever hear mentioned in discussions of law firm leadership and succession planning these days. That word is “stewardship” — the sense that those who lead an organization have a responsibility to leave it in better shape than they found it, to ensure its future success for no other reason than that future generations will benefit.

Stewardship, among other things, requires the stewards to relinquish at least some of their own powers and priorities near the end of their terms in order to assure a better future. There are some stewards among law firm leaders today. There are not many.

Jordan Furlong delivers dynamic and thought-provoking presentations to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.

Too many partners

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Posted in: Big Firms, Management

Law firms, facing a formidable array of external trends and pressures, are simultaneously experiencing a series of internal shocks and shakeups. The most prominent of these is an ongoing reconsideration of the role played by each member of the firm — a process of asking, “What function do you play in this enterprise, and could that function be performed differently?”

This process, which has been underway for a couple of years now, is behind the move of back-office and middle-office jobs to outsourcing companies (both offshore and onshore) and the transfer of associates’ jobs to LPOs, free-agent project lawyers, and innovative offerings like Axiom and Lawyers On Demand. (Some of these functions are also being replaced by technology, at a rate that will steadily increase in the next few years.)

The impact of these efforts is already clear, ranging from the emergence of new “capitals of law” outside the major financial centers to the steady decline in the partner-associate ratio (leverage is now just below 1-to-1 in the AmLaw 200). There’s nothing sinister about this: it’s the natural market-driven process by which labour shifts and reconstitutes itself to its most efficient and effective use.

But I suspect that the partners driving this process forward haven’t thought about where it’s inevitably going to wind up. When you’ve finished asking, “What’s the point of an IT department?” and “What’s the point of all these associates?” there’s really only one question left: “What is the point of a partner?”

Asking that question — and every firm is either asking it now or will have to ask it shortly — raises some uncomfortable issues. We know what function the payroll clerk performs, and we know her job can be done in Wheeling or Belfast. Ditto the paralegal, whose job can be outsourced to someone working from home in a small town in California. We know what the associate is for: either to be groomed for future partnership and leadership or (far more likely) to do highly leveraged work and generate partner profit until eliminated, voluntarily or otherwise.

Positions like these, whose role in the overall  scheme of things is clear, can be understood and moved around as needed. But what about partners? What are they for? I can think of three possibilities.

  • Do they bring in big business? (That is to say, enough business to sustain much more than just their own practice?) A small percentage of partners do, and they’re incredibly valuable. (A friend of mine in a big firm estimates that the best rainmakers are probably underpaid by a factor of 10.)
  • If they don’t bring in big business, are they superb client relationship maintainers? (And I mean superb.) Most great “relationship” partners are rainmakers covered by the first category, but this possibility should still be raised.
  • If they’re not critical to client relationships in either of the two preceding senses, are they tremendous managers? That is to say, are they highly valued and indispensable managers of the organization, its people, or its processes?

To my mind, at least, those three categories cover virtually all the justifications for inviting a lawyer into a law firm partnership. These are the key roles that make a firm profitable and successful — they constitute the essence of what “partner” status is supposed to describe. But by no means do all or most law firm partners today qualify under one of these headings. And if a “partner” doesn’t fall into one of those three categories, then what precisely is he or she doing in the partnership?

I suspect that a lot of “partners” in law firms today are in that position because the firm didn’t know what else to do with them, because the other partners liked them, and because times were good — in short, they were made partners because it pleased the firm to do so. Not a few younger lawyers in law firms have glared upwards at the people above them and groused, “How did they become partners?” And in more than a few cases, they’re right to wonder, because these lawyers aren’t partners so much as they’re superannuated associates who came along at the right time. It’s my belief that, speaking from a labour utilization perspective, these partners are not occupying the correct role, either for them or the firm. They need to be reassigned.

And they are. Earlier this year came a report about increased profits at AmLaw 100 firms achieved at least in part by thinning the ranks: 2% of partners de-equitized over the previous two years. that fully half the UK’s top 30 law firms are now either de-equitizing partners or considering doing so, a development predicted back in January by Hildebrandt and Citi Private Bank. In addition to steadily reducing the partnership ranks, firms are taking steps to ensure that future cohorts are smaller: Eversheds, for example, has gone so far as to create a brand new position (legal director) as an alternative to becoming partner.

There’s a growing belief among many firms that they invited too many people into the partnership over the past years and decades. Those firms are now starting the process of unwinding those errors. Record low realization rates being reported for some of the biggest US firms, as low as 85%, will only spur that development, because there’s nothing else left to cut and no one else left to reassign.

Nor is it likely that partner ranks will swell again in future, following some highly anticipated but nowhere-in-sight economic recovery. Partnership, as Stephen Mayson argues, is neither an appropriate nor a viable way to manage enterprises of the size and complexity of most law firms. The imminent arrival of Alternative Business Structures in the UK and the outside ownership they’ll bring with them should ensure that the partnership model will henceforth be reserved for smaller firms, as it was originally intended.

Law firms are in the process of reinventing themselves, but the easy work — cutting staff and laying off associates — is long past. Removing lawyers from the partnership is (or should be) an extremely difficult experience for all concerned, but as times continue to be tough and worse, the stronger members of the herd will not hesitate to cull the weaker. But most firms have yet to face up to the hardest part of all — re-engineering the firm’s workflow, delivery, pricing and compensation systems in order to compete in a new marketplace. That’s a bridge, I suspect, that few firms will find themselves willing or able to cross.

Jordan Furlong delivers dynamic and thought-provoking presentations to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.