Law firm partnership: in name only?

By Yves Faguy Winter 2017

Lawyers can be fiercely independent. It's hindering their ability to change.

Law firm partnership: in name only?

 

The law firm partnership model has been at the heart of the legal profession’s prosperity for much of the last century. But after decades of enviable growth, it is showing signs of wear. Now, as the legal industry faces major challenges on several fronts, the question is whether it can evolve with the times.

“I just don't think it's going to happen,” says Jordan Furlong, the Ottawa-based legal industry analyst. “The vast majority of law firms are incapable – not necessarily unwilling, though many are – of addressing the fundamental flaws at the heart of their model and making significant structural changes to address them.”

Furlong is not alone in doubting whether the old model can weather the combined forces of technology, globalization and a shift towards a buyer’s market for legal services. “What you’re seeing now is that the strains on the industry are revealing the issues that come with partnership,” says Janet Stanton, a partner at Adam Smith Esq, a New York-based consultancy for the legal industry. Stanton even challenges the notion that partnership was ever all that great a success. “Frankly, everybody was making a lot of money, so it didn’t really matter how they were organized,” she says.

Almost a decade has passed since the global financial crisis, and stagnant or declining profit margins are still a major concern for law firms understandably worried about lower earnings in the future. Meanwhile, they are losing market share to in-house legal departments, to new legal upstarts focused on technology and niche legal services and even to the Big Four accounting firms, who are at once boldly and surreptitiously making a push into the legal space.

Traditional law firms are finally coming to the realization that if they want to become more responsive to modern commercial realities they must become more efficient, more responsive across jurisdictions, more reliant on technology, more collaborative, and less homogeneous.

Easier said than done, especially in a profession with a bias for autonomy. “Lawyers are culturally bred to be much more resistant to direction, much more resistant to being told what to do,” says Furlong. “Some of this is because of personality type. Part of it too, I think, is based in this idea that a lawyer must be independent, and cannot have any outside influences.”

There are two other major impediments holding partnerships back, says Bruce MacEwen, president of Adam Smith ESQ and commentator on the legal industry.

First, for tax reasons, law firms retain little of their earnings. At the end of the fiscal year, partners typically pull all the profits out in the form of annual draws, leaving virtually nothing for research and development. “That’s a huge problem if you are trying to invest in a future for change,” says MacEwen. Any sincere effort to modernize requires first convincing reluctant partners to give up some short-term gain and bet on potentially higher earnings in the future.

Second, there are restrictions on non-lawyer ownership. In most jurisdictions in North America, law firms cannot attract other highly prized professionals with an equity interest, something any corporation can give in the form of stock options and incentives. “So right there, you’re disabled from hiring some of the most capable business professionals which you need to run a business on the scale of some law forms today,” says MacEwen.

The homogeneity of law firm talent – and leadership – is compounded by a third factor, says Anders Spile, a management consultant based in Denmark. Organizational structure is often determinant of a business’ ability to innovate, he explains. “If you look at some of the most innovative companies in the world like Google, Intel and Dell, what most of them have in common is that they have quite flat business structures,” he says. “But law firms probably have one of the most hierarchical business structures you can find.”

At some point, says Spile, we will see flatter corporate structures become more prevalent as alternative legal providers take greater market share. “But in order to actually innovate in the larger law firms, I think you have to be realistic as to what is actually feasible in that structure and then see what you can do internally.”

For inspiration, traditional firms can look to the accounting firms who have evolved from local offices servicing clients into international, professional multidisciplinary services firms.

The Big Four have achieved this all the while retaining a partnership structure, albeit with new levels of governance, directed from global headquarters that coordinate national jurisdictions and take the lead on global strategy. KPMG, PricewaterhouseCoopers, Deloitte and Ernst & Young are brands under which member firms, forming networks, offer their services. They are either structured under a Swiss verein association model or coordinated by a private company limited by guarantee under English law. Equity partners own and manage their national firms and generate the client work. The last decade has seen a few global law firms adopt similar models.

No one is suggesting that the Big Four firms would have designed themselves from scratch this way. But they have succeeded, organizationally, by encouraging their professionals to support their colleagues in diverse practice groups and in different locations, thanks to some purposeful design features.

“It’s not the partnership model that is problematic,” says Dominic Jaar, a Montreal partner and National Leader of Advisory Services (Clients & Markets) at KPMG. “What’s important is how you run the business within that partnership model.” Jaar, who is also a lawyer, goes even further, suggesting that with the right culture, a partnership can be a more effective vehicle for innovation. “To innovate, a corporation is going to need to go to a bank and get a loan, give guarantees, do a number of things before you’re able to take that money and invest it in R&D or in an acquisition or whatever it may be. Within a partnership you’re with a group of business-savvy people, sitting around a table and saying, ‘Hey people, do you agree that this is where the market is going? Do you agree that we should take $2 million of our money and acquire a company or do an alliance with that other company in order to do what needs to be done to survive in this market?’”

These discussions rarely take place in a law firm setting. Admittedly, business acumen may come more naturally to accountants than to lawyers who may or may not have been fortunate enough to follow a course in basic principles of finance at law school.

But culture might also have more to do with it. In the professional services firms, varied expertise is part of the fabric of partnership. “We have partners who are accountants, MBAs, PhDs, people who are music specialists,” says Miyo Yamashita, Managing Partner, Talent at Deloitte Canada. “They’re literally from all over the place. We have partners who have never worked in management consulting or leadership development until they came to us as a senior hire, and are perhaps from industry.” That produces a range of diverse views of what might be needed to protect the future of the firm, “because they see things from a whole bunch of different angles,” she adds.

A few jurisdictions – most notably Britain and Australia – have liberalized their legal industries by allowing alternative business structures, or ABS. The Canadian Bar Association’s 2014 Futures report recommended allowing lawyers to practise in business structures that permit fee-sharing, multidisciplinary practice, and investment by non-lawyers

And there have been discussions at the law society level where a timid recognition is taking hold that new vehicles are needed to enable innovation in the delivery of legal services.

But change on this front has been slow. And even in Britain, the level of outside investment in law firms since reforms were introduced remains relatively low. A sense of urgency has yet to translate into a noticeable shift toward diversifying expertise industry-wide.

Until that happens, MacEwen advises law firm leaders to be wary of a culture where lawyers think they are free agents who hang their hat somewhere. “That’s not a way to build an enduring organization,” he says. “One of the reasons that businesses can run as businesses is that the people who work there understand that there is social contract involved in working there. They have obligations to the firm just as the firm has obligations to them.”

This is true especially for the partners, who must be committed to putting the interests of the firm ahead of their own. “Partnership is hard,” he says. "You see a lot of them that are partnerships in name only – we refer to them as PINO.” The firms that truly are partnerships, he says, tend to shy away from absurd business origination rules. “They make sure that the best lawyer is servicing the client on any given matter – and not let one person hoard the business so that they reap the rewards of all the origination.”

Ultimately, he says, “partnership is about subscribing to a belief in stewardship,” a belief drilled into partners at the large professional services firms. Being perceived as a weak team player is clearly frowned upon, says Jaar. “You’re expected leave it in a better state than it was when you joined.”

The recent implosions of venerable firms like Heenan Blaikie in Canada and New York mega-firm Dewey LeBoeuf ought to stand as warnings to those who don’t share that belief.

“There is a platonic ideal partnership which works astonishingly well,” says MacEwen. “But it comes with obligations. You know, it’s a jealous god. You can’t do whatever you feel like doing when you feel like doing it.”

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