We’re here for a good time, not a long time

In the spirit of Casey Flaherty’s recent excellent post “Me Being Wrong,” I’m starting off the year with an admission of (at least) one thing about law firms I’ve totally swung and missed on. In some article or other within the last year or two, I wrote that “law firms are supposed to be multi-generational entities.” I’m now reluctantly set to admit that they are not.

I’ve had growing doubts about my multi-generational thesis for awhile, but the decisive blow against it was struck by this post at Adam Smith Esq. wherein Bruce MacEwen and Janet Stanton tick off all the reasons why the average law firm apparently stays in business only 40 years:

  • The desire of the firm’s leaders to avoid awkward “succession” conversations with longstanding friends and colleagues,
  • The immovability of senior rainmakers who will not be managed and will certainly not be “transitioned” anywhere they don’t want to go,
  • The confluence, in smaller law firms, of the rainmaker, founder, and senior management roles in the same people, and most of all,
  • The sorry fact that many senior lawyers really don’t care what happens to the firm the day after they retire.

What all these factors share in common is that the law firm hasn’t managed to become something more than the sum of its parts. As Dorothy Parker once said of Oakland, there’s no there there. The concept of the firm as a thriving legal services enterprise independent of the lawyers who supply its services never really caught on, at least not with the most important lawyers therein. 

You are never going to sit in that chair, Wesley.

A few years ago, I was contacted by some people at a boutique firm who were facing an existential problem: the name founders were all coming up on retirement, but were showing little interest in devolving authority, transitioning clients, or planning for the future. It was probably dawning on everyone else in the firm — junior partners, senior associates, staff — that the reason the firm existed was to be the commercial vehicle for the name partners’ legal careers, and that when those careers ended, the vehicle would have served its purpose.

I once wrote that many law firms seem to be run these days as if they intended to close their doors in five years’ time. I was half-joking at the time, but I now think there was more truth in it than I realized. Five years is probably the anticipated remaining career length of a typical law firm’s most powerful partners. If your law firm’s engine seems to be pushed into overdrive, such that it’s going to be immensely profitable in the short term but is imperilling itself in the long term, maybe there’s a reason for that.

Bruce and Janet are sanguine about whether one-generation firms are necessarily a bad thing, and they make some good points. I still think it’s kind of a sad turn of events, though, because although the firm’s founders and rainmakers might be perfectly happy to drain the contents of the firm and recycle the empty afterwards, most of the other people in the firm, especially associates and staff, put their backs and their hearts into the enterprise and believed that there was, in fact, a “there” there. Most will probably find employment elsewhere, that’s true; but they’ll also have lost something more personal that they’ll find harder to replace.

There’s no shortage of helpful information about law firm succession planning and partner exit strategies out there, and I plan to contribute something along those lines here soon enough. But I think there’s a critically important preliminary step that you need to take before your firm commits to any of these courses of action.

I think your firm’s leaders need to sit down and have a private and very honest discussion about whether your firm is one-generational or multi-generational. It doesn’t matter that much, from my perspective, which answer you come up with. What matters is that you arrive at a clear-eyed agreement about what the firm’s leaders really, genuinely want and expect from their firm.

Beware of being too aspirational, of saying, “Yes, we’re building for the future, we want to leave a legacy, etc,” if you don’t really mean it. Because if what the firm’s powerhouse people really want is to mainline cash from this machine for the next few years and then close up shop, then it’s wasteful and counterproductive to spend time, money, and effort on succession plans and generational handovers that will never take place. Everyone will be left poorer and more embittered. You’ve got to be honest with yourselves about what sort of firm you have here.  

But if you decide, during these conversations, that yes, you truly do want the firm to last beyond the current generation of rainmakers, then everyone needs to be clear about the hard choices and time-consuming mechanics that choice requires. This might, in fact, be the best way to go about the whole “succession” issue: start by establishing beyond any doubt whether this is a firm that wishes to have succession at all. 

Challenge the default assumption that your law firm will continue on in perpetuity. That’s a hard conversation to have, it’s true; but holding it will make every subsequent conversation about your firm’s future easier.

The endangered partner

Last time out, I wrote at some length about the coming obsolescence of law firm associates. So it now seems only fair to turn the spotlight onto the other category of lawyers within law firms: partners. (Equity partners, that is — I’m not bothering with the transparently profiteering holding pen of the “non-equity partner,” a term that still makes about as much sense as “non-lawyer attorney.”)

A good place to start this inquiry is with a simple question: why do law firms even have “partners,” anyway? What’s the value proposition that the role of partner offers, both to the firms that create this position and to the lawyers who fill it? All law firms believe they ought to have partners, and many lawyers believe they ought to become partners. Why is that?

Partnership was a lot more fun and engaging back in the '80s.

Partnership was a lot more fun and engaging in the ’80s.

Well, there’s only one reason why law firms have ever sought out partners, and I’ll get to that reason later on in this post. But equally, there’s really only one reason why lawyers have ever wanted equity partnership in law firms. Lawyers seek law firm partnership, if you’ll allow me to be blunt about it, because they want power. And partnership has long promised lawyers power, in several dimensions:

  • The power of control over your own work, to be the assignor rather than the assignee of files — which usually means pushing down the dull stuff and keeping the best and most lucrative, high-client-contact work for yourself.
  • The power of influence over the firm’s direction and strategy — theoretically so that you could guide the firm’s development, but certainly to create an environment more conductive to your own satisfaction and career advancement.
  • The power of prestige — being able to hand out that little white business card with the raised-type gold-leaf “Partner” to your family, your friends, and especially that one law school classmate who was always such a tool. And of course,
  • The power of money — because let’s face it, the profitability of many law firms throughout the last few decades has reached levels so astonishing that an entire generation of associates has expended extraordinary effort just for a chance to access it.

Lawyers love control, influence, status, and money. Partnership has always offered the keys to each of those kingdoms, and it has always delivered on that offer — or at least, it used to. The actual nature of law firm partnership today, however, has become something else entirely.

One of the legal profession’s most cherished myths is the autonomy of the law firm partner: you’re an owner now! You’re an independent shareholder who can dictate the terms of your relationship with the firm! But the reality that greets most lawyers upon accession to partnership is a little different. You still have all the billable-hour requirements of associateship, but now you’re also responsible for bringing in new business, getting more hours out of your subordinates, and taking on myriad unpaid management roles. And unless you’re part of the firm’s tight inner circles of leadership, you have little practical input into strategy or direction: you’re informed of the firm’s changes, not consulted on them. You might as well still be an associate, a mere employee.

What’s worse, however, is that increasingly, partnership in a law firm actually reduces your autonomy, binding you tighter to your firm and narrowing your options. The capital contribution you made to secure your admission to partnership immediately disappeared into the firm’s operating account, and the odds are good that you’ll never see it again. The same applies to lateral partner arrivals who fall for what Edwin Reeser calls one of the “honey traps” that capture and financially strap the partner to the firm. At firms with large spreads in partner compensation levels (that is to say, virtually all of them), junior partners are effectively being leveraged like associates. And if you try to leave the partnership, your signing bonuses could be clawed back and any return of your capital could be strung out over several years to discourage your departure. For many law firm partners, the brass ring has transformed into a pair of handcuffs.

I don’t think this is all down to avarice on the part of senior law firm lawyers (although avarice seems to occupy the co-pilot’s seat in quite a number of firms). What this really suggests to me is that the partnership model for law firms — or at least, for any firm whose equity shareholders can’t fit around a standard boardroom table — has run its course. “Have we reached the end of the partnership model?” asked the ABA Journal last year, and as the article illustrates in vivid detail, I think the answer is yes. The operational, cultural, and ethical contortions through which many law firms have put themselves in order to maintain the benefits of the partnership system tells me that that system simply doesn’t work well anymore.

This is becoming clearer to potential law firm partners every day, and there’s plenty of anecdotal evidence that fewer associates are interested in becoming partners at law firms than in the past. That may be just as well for them. As partner cohorts get older and thinner, and as the eventual day of reckoning draws closer, the payload of risk that partner status represents grows ever larger. Many law firms today seem to be run as if they expect to wind down operations and cash out their equity shareholders in about five years’ time, leaving leadership voidsunfunded retirement plans, and unmet mentorship needs behind them. If your name is on an equity partnership agreement at one of these firms, you do not want to be the last one left to turn out the lights.

Bonus points if you even remember who these guys were.

Bonus points if you even remember who these guys were.

Partner status, in short, is becoming more of a burden than a blessing for a lot of lawyers. Many firms will accordingly find that when older partners do eventually retire, their positions won’t always be replaced and the partnership ranks won’t be fully replenished. That is a serious problem for law firms, for one reason — and that reason is the answer to the other question I raised at the start, where I asked why law firms even seek out partners. Law firms seek out partners because they need capital.

The defining characteristic of equity partnership in a law firm is “equity.” Regulations in every common-law jurisdiction (except Australia, England & Wales, and the District of Columbia) are adamant that equity in law firms may be held only by lawyers. If your firm needs capital, it needs lawyers to pony it up. I sometimes suspect that at least a few law firms have made and continue to make partners of some lawyers not because of the lawyers’ intrinsic merit, but because the firms need the money. Law firms need lawyers to invest their own money simply so that the firm can carry on business.

So what happens when you start running short on equity partners? You start running short on equity, and that’s a problem. Law firms can incur debt from banks to help maintain operations, sure, but no bank will lend to a firm without sufficient capital of its own. Borrow from future accounts receivable? That’s a very dangerous game. Dip into the trust fund? Enjoy your disbarment hearing. Nothing can really replace cold, hard capital, and firms are slowly losing access to their sole source of it.

And by an ironic confluence of events, law firms are going to start hurting for capital right around the time when they’ll need capital more than ever — when their market positions are under threat from staggeringly well-financed competitors.

The growing army of alternative platforms and rival providers, emerging and competing with law firms in the legal market over the next several years, will bring with them financial resources an order of magnitude beyond what lawyer-only equity can provide. The gross revenue of the entire AmLaw 100 in 2015 was $83.1 billion. The Big 4 accounting firms’ revenue alone in 2015 was $123.5 billion. Throw in legal technology providers financed by colossal Silicon Valley venture funds, and the still-distant but inevitable entry into law of corporate giants like Google and Amazon. Law firms, as currently structured and financed, are going to be massively outgunned in the coming market, just as their sole source of capital with which to fund competitive efforts starts dwindling.

And that, among other effects, is what’s going to finally change the legal profession’s rules around non-lawyer ownership of law firms. Today, lawyers and bar groups are doing everything they can to oppose the legalization of non-lawyer law firm ownership. Within ten years’ time, they’ll be the ones leading the effort to authorize it, simply in order to level the playing field and keep lawyers and law firms alive in a marketplace full of richly financed providers. The days when lawyer capital constitutes the sole permissible type of law firm equity are drawing to a close.

In the not-distant future, therefore, law firms will have alternative sources for capital other than lawyers. And by that time, an entire generation of lawyers will have been raised to view the position of equity partner with a certain skepticism and even suspicion. In that kind of environment, the role of “law firm partner” inevitably is going to be very different than it is today.

No longer the firm’s sole provider of equity, no longer the automatic ambition of young practitioners, no longer the promised land of power and profits — what will partnership represent? Will firms even maintain the category of “partner” anymore, or will they find some other title — “director,” “principal,” “stakeholder,” whatever — to identify the firm’s most important members, regardless of their seniority or their connections or whether they own a law degree? Will law firms finally get around to doing what they should have done years ago and separate the roles of owner, worker, and director into discrete positions, rather than forcing lawyers to wear all three hats at once? Will they finally accord their “non-lawyer” professionals the respect, power, and equity status they deserve for their contributions to the firm? These are just some of the possible routes forward, and at least a few of them will come to pass.

“Partner” and “associate” were perfectly adequate categories to describe the two classes of lawyers in 20th-century law firms, back when these were the only classes of people that mattered. Neither of these categories fits easily or functions well in 21st-century law firms and the new market in which those firms will compete. More categories of key personnel — in management, marketing, professional development, technology, knowledge, pricing, process, procurement, customer service and more — will be needed. Neither these personnel, nor the firm’s financiers, will require a law degree.

That’s going to be a whole new ballgame. And it’s the structural and organizational reality for which today’s law firms, if they would like to also be tomorrow’s law firms, need to start preparing now.