Biglaw, In-House Counsel, Partner Issues, Partner Profits

Inside Straight: How De-Equitizing Partners Can Undermine A Business Model

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on

Last week’s Am Law 100 list revealed publicly a trend that partners at big law firms have been feeling acutely: The largest law firms have de-equitized partners in the last two years in an unprecedented way. In the words of one of the articles, “Equity partner head count alone slipped 0.9 percent last year, after dropping 0.7 percent in 2009.” That trend may undermine the business models of some law firms.

Law firms have many and varied business plans and compensation systems. But one reasonable way to run a firm is to market your most marketable lawyers — concentrate business development in the folks best able to develop business. For that model to work, however, all partners must trust the institution. De-equitization reduces the necessary trust and may kick the stilts out from under this business model.

Here’s how the model works. If a potential new client asks your firm to respond to an RFP for litigation matters, you turn to your half-dozen heaviest-hitting litigators and decide which one will be offered up as the lawyer to lead the new engagement. You know that, if you’re invited to a beauty contest, the heavy-hitter will clinch the deal, because he’s clinched so many deals in the past.

If you read in today’s Wall Street Journal that the plaintiffs’ mass tort bar has just put another industry under seige, you spring into action. Pull together the firm’s marketing materials, identify lawyers with relationships in the relevant industry, draft up outlines of motions to dismiss and oppositions to class certification, assemble an outline of key issues and proposed responses, and then have your relationship lawyers call and email their client contacts, offering to have one of the heavy-hitters meet with the client to explain the firm’s capabilities. The heavy-hitter takes it from there.

If a corporate lawyer gets a serious litigation nibble, the corporate lawyer will naturally advise the head of litigation about the opportunity, so the firm can make an appropriate pitch. The head of litigation asks one of the heavy-hitters to lead the charge.

If a client asks a junior partner in the commercial trial department about the firm’s ability to defend a multi-billion dollar case, the junior partner reports up through the ranks. The firm puts together a response that proposes a talented litigation team to handle the case — led, of course, by one of the heavy-hitters.

This approach to running a firm isn’t crazy. To the contrary: Institutionally, this system makes a lot of sense. You offer up your most impressive lawyers to handle the most important opportunities, land the business, and distribute that business among the masses to keep everyone busy. Collectively, everyone at the firm benefits.

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Enter de-equitization….

If, as the Am Law 100 suggests, large firms have de-equitized nearly one out of every fifty partners over the last two years, then all partners know this is happening. If firms are de-equitizing two percent of their partners on average, then some places are de-equitizing four percent. At those rates, de-equitization isn’t an occasional event; it’s happening to your long-time colleagues and friends down the hall, and, unless you’re among the anointed, it could happen to you.

Every sentient partner sees that the heavy-hitters are not the ones being de-equitized. It’s the loyal guy on the street who’s been slaving away for decades, working for the good of the team, and converting what could be personal opportunities into institutional ones, because he thought it was important to serve the greater good. That poor schlub is powerless against the institution. He isn’t fortified by the implicit threat that, if the firm mistreats him, he’ll leave the firm and take a chunk of business with him. In the past, that guy was told that he was safe: “Bring in the business at the top. We’ll spread it around. The pie will get bigger and we’ll all prosper. Play by the institutional rules, and we’ll protect you.” Historically, the guy who played by those rules was not merely told that he was safe; he was in fact safe. (He may not have been exceptionally well compensated, but he wasn’t at risk of being thrown off the team.)

De-equitization changes the game.

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If you’re at risk of being de-equitized, then it’s time to hedge against the risk. That means looking out for yourself, even if your self-interest doesn’t align perfectly with the institution’s best interest. When you read in the Journal about a new case, or a client contacts you about a potential big piece of business, it’s time to grab the opportunity and run. You may or may not land the business, but at least you’ve given yourself a chance. No more reporting up through the ranks, giving away the opportunity, and then being at risk that the firm will decide you’re superfluous.

The prevalence of de-equitization will thus change the culture of some large firms.

To be sure, de-equitization won’t change the culture of all firms. Some firms have been eat-what-you-kill for decades; those firms never asked partners to sacrifice for the common good. Some firms aren’t de-equitizing partners, so the rules of the game haven’t changed at all. Other firms are unique in their own ways.

But firms that asked partners to share individual opportunities with the institution to benefit the common good, and are now punishing partners who were foolish enough to play by those rules, may be facing a brave new world. It’s hard to cultivate loyalty to an institution that can’t be trusted to show loyalty in return.

Mark Herrmann is the Vice President and Chief Counsel – Litigation at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law (affiliate link).

You can reach him by email at inhouse@abovethelaw.com.

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