Biglaw, Partner Issues, Partner Profits

The Evolving Law Firm Partnership: Divergent Perspectives

Should Biglaw firms become more like corporations, or should they return to their roots as partnerships?

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climbing corporate ladder making partner partnershipWhat’s the best way to structure a law firm? I fall back on the lawyer’s favorite answer: “It depends.”

The optimal structure for a law firm turns on a whole host of factors, including the size of the firm, its goals, its culture, and the market segment it belongs to. But even if there’s no one-size-fits-all answer to firm structure, it’s still fun to argue over the different approaches.

That’s what five experts did this morning at the Thomson Reuters Law Firm Leaders Forum. The panel, “Long Day’s Journey into Night: The Evolving Law Firm Partnership & Strategic Models,” featured the following participants:

Beau Grenier, visiting New York from Birmingham, Alabama, kicked off the discussion with a folksy quip: “Saying that managing lawyers is like herding cats is an insult to cats everywhere.” Given the challenges facing the large law firm today, what is the best governing structure for a firm?

Bruce MacEwen, a longtime observer of the legal profession and author of Growth Is Dead: Now What? (affiliate link), said that he’s never been so worried about the legal industry — and he placed much of the blame on the partnership model. It’s a good model for maybe 10 or 15 large law firms — places like Slaughter and May, where each partner has a cubbyhole for her napkin in the firm dining room — and bad for the rest.

Partnership “deludes equity partners into thinking they have a veto over almost everything,” MacEwen argued, even though large firms with multiple offices really need strong, top-down management. His solution: law firms should follow the lead of Wall Street investment banks, many of which have evolved into C corporations.

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Steven Harper, a former Kirkland & Ellis partner as well as an author, staked out the opposite position. Echoing themes from The Lawyer Bubble, he cited the many virtues of the partnership model — teamwork, collegiality, a sense of ownership a dedication to excellence — that so many firms have sadly moved away from. While acknowledging that large law firms with thousands of lawyers across dozens of offices may need to adopt some attributes of a corporation, he argued that the partnership model still has much to recommend it.

Harper recalled wisdom that he received as a summer associate from legendary litigator Fred Bartlit, back when Bartlit was a K&E partner (before he left to start Bartlit Beck). Beck explained to Harper that under Kirkland’s compensation system at the time, which had a partner pay spread of around 3 or 4 to 1, Bartlit was effectively maxed out (i.e., at the top of the pay scale). “So the only way I can make more money,” he told the young Steven Harper, “is to make you a better lawyer.” That’s what true partnership is about — improving one’s individual lot by growing the pie for everyone.

Alas, that’s not how so many Biglaw firms work today. Partner pay spreads have exploded; at some firms, such as Dewey & LeBoeuf before its collapse, the highest-paid partner earns twenty times as much as the lowest-paid partner. That’s not a real partnership, Harper argued, but a partnership within a partnership. (Fun fact: Harper mentioned his next book will discuss the rise and fall of Dewey & LeBoeuf, a cautionary tale about what happens when a firm abandons its partnership ideals.)

Another problem with the structure of many Biglaw firms today: super-high leverage (i.e., “the ratio of all lawyers (minus equity partners) to equity partners”). Decades ago, most firms had leverage in the 1.5 to 1 range; now the average is around 3.5 to 1, with some firms going as high as 8 to 1. The message this sends to the next generation of lawyers, according to Harper, is that they’re not as deserving of partnership as their forebears.

Roger Meltzer of DLA Piper offered a qualified defense of the status quo. He noted that he, unlike MacEwen and Harper, still toils in the trenches of Biglaw, and it’s a lot easier to offer criticism from the outside than to deal with problems from the inside. He pointed out the many challenges facing large law firms today, including anemic demand, a shift in leverage from firms to clients, and a dramatic rise in lateral movement (i.e., the “free agency” model of partnership). The golden age for law firms, in which demand growth concealed a whole host of weaknesses, ran from about 1985 to 2007; it has been over for almost a decade.

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Meltzer still believes in the partnership model, “with tweaks.” With more than 3,000 lawyers, DLA Piper can’t function as a pure democracy. Instead, it needs strong leadership — but those leaders, Meltzer included, rule by the consent of the governed. If they lead their firms well, they will remain in power; if they stumble, they will be removed.

A major challenge for law firm leaders right now, according to Meltzer, is the sense among many lawyers that the social contract has been broken. Many partners feel that their firms won’t stand by them in tough times, and many associates feel that they don’t have a path to partnership, to say nothing of firm leadership.

For a partnership to work, Meltzer argued, partners need to feel they have “skin in the game.” This is why DLA Piper revamped its partnership about eight years ago, requiring income partners to put capital into the firm. Some observers at the time viewed this as a cash grab by DLA during the downturn, but that wasn’t it at all, according to Meltzer; it reflected his belief, from his years at Cahill Gordon before joining DLA, that a single-tier partnership better aligns the interests of individual partners with the interest of the firm (as opposed to a two-tier partnership in which income partners get guaranteed salaries, regardless of firm performance).

Bruce MacEwen agreed that it’s important for lawyers to have “skin in the game,” but partnership isn’t the only way to do that. Law firms can and should structure themselves more like corporations or consulting firms like McKinsey, where employees can, over time, move up through a series of tiers (e.g., analyst, associate, vice president, managing director). This incentivizes lawyers better than the current binary system, where — here MacEwen seemed to channel Donald Trump — “you’re either an equity partner or a loser.” A more flexible organizational structure also appeals to millennials, a growing segment of the law firm workforce.

Ah, millennials. At this point in the discussion, Roger Meltzer went into curmudgeon mode: “I question whether millennials are prepared to do what I had to do.” There’s a huge amount of sacrifice that’s required in order to succeed in Biglaw, and Meltzer said he’s not convinced that millennials are prepared to make the same commitments to the practice of law and the legal profession that he and his contemporaries made back in the day.

(Meltzer sounded a bit worried before he launched into curmudgeon made — he asked if any members of the press were in the room — but I wasn’t shocked or troubled by his comments. Complaining about millennials is a favorite pastime of baby boomers, and Meltzer did so in entertaining fashion. I’ve seen him on a number of panels over the years, and he always brings a refreshing candor to bear on discussions. Also, he was looking impressively tan for a law firm leader.)

Do millennials have enough “fire in the belly” to succeed in Biglaw? Dr. Larry Richard, a psychologist as well as a lawyer, shared some research he conducted while at the Hildebrandt law firm consultancy. Back in 2007, Hildebrandt conducted a study and concluded that only 23 percent of associates would qualify in psychographical terms as willing to do whatever it takes to succeed at their firms. The number today is probably even lower, he added, because most millennials don’t want to become “lifers” in their organizations.

What can firms do to retain their millennial lawyers? According to Larry Richard, millennials (and employees in general) look for four things from their jobs:

  • Autonomy: On a day-to-day basis, people want to have discretion in terms of how they perform their jobs; they don’t want to be micro-managed.
  • Meaning and purpose: People want to feel that their work makes a difference, that it matters — and this is doubly true for millennials.
  • Social connection: People want to build friendships in the workplace, and they want to feel included in a larger enterprise.
  • Achievement, competency, and mastery: People want to feel that they are good at what they do and continuing to get better.

Bruce MacEwen agreed that law firms need to give their people, regardless of role, a sense that they are building something together. Yes, the Biglaw bucks are nice — and you need to pay your best performers what they’re worth on the market, or else they’ll leave — but while undercompensating your people can kill your firm, paying people properly isn’t enough to keep your firm alive and thriving.

Surveying the Biglaw graveyard — Dewey, Howrey, Bingham, Brobeck — MacEwen noted a common thread. At firms that have failed, at some point key people woke up and asked themselves, “What am I doing here?” The inability to come up with a good answer spelled doom for their firms.

21st Annual Law Firm Leaders Forum [Thomson Reuters]

Earlier: 5 Tips For Improving Law Firm Profitability
The Sad Truth One Stat Reveals About The Legal Industry
The Two Faces of K&L Gates

David Lat is the founder and managing editor of Above the Law and the author of Supreme Ambitions: A Novel. You can connect with David on Twitter (@DavidLat), LinkedIn, and Facebook, and you can reach him by email at dlat@abovethelaw.com.

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