A blog by Joel Barolsky of Barolsky Advisors

Partners or owners: the law firm divide

In Articles, Commentary on 14 December 2020 at 9:40 am

The full text of my opinion piece first published in the Australian Financial Review on 11 December 2020.

One of the most striking statistics from The Australian Financial Review Law Partnership Survey is the wide variation in the ratio of equity to non-equity partners across Australia’s top 50 law firms.

In some firms, like Colin Biggers & Paisley and McCabe Curwood, only 20 per cent of partners have an equity stake.

At the other end of the spectrum, nine firms report that 100 per cent of their partners have equity. However, partners in these firms are often not on an equal footing. Newly minted partners in these firms can earn as little as 25 per cent of a full share. In other firms, individual partner earnings are based more on an assessment of their annual contribution instead of the level of their shareholding.

Further analysis of the survey data suggests there is no discernible factor that determines the equity ratio. Variations can occur within and across tiers, service range and practice area.

The role of non-equity partner was first introduced as a form of trial period to assess whether a candidate should be made an equity partner. The “partner” title would allow the candidate to command the respect of clients, peers and staff necessary to build a successful practice and prove their worth. Being extra cautious in the final step to equity was prudent given the complexities in dealing with bad choices or established equity partners leaving.

In a similar vein, firms used the non-equity partner role as an entry point for new lateral hires on their way to equity partnership.

Over the past decade, the non-equity partner role has evolved into a de facto career position in some firms with the candidate having little chance of being offered an equity stake.

A large non-equity partner cohort can improve profitability – by lifting leverage and average billing rates – help share some risks and distribute the management load.

Challenges

While there are these benefits, a tightly held partnership does come with potential challenges:

  • An “us and them” schism emerging between the two classes of partner;
  • Flight risk of those non-equities who feel they can get a better deal elsewhere;
  • A lack of drive among non-equities who feel their careers have capped out;
  • A perception of inequity when the firm records super-normal profits that accrue only to a select few;
  • A cynicism that the non-equity role allows the firm to achieve its partner diversity targets without the need to share power;
  • A narrower base of internal funders and underwriters;
  • Duplication of partner communications and meetings; and,
  • A smaller pool of partners to select from for senior leadership roles.

A widely held partnership, on the other hand, faces the risk of being too conservative and too slow to promote top talent. A burgeoning bottleneck at the senior associate level can set the scene for a feeding frenzy for aggressive competitors.

To create a sustainable business and a positive culture, it is critical to make all partners, regardless of stake, feel and behave like business owners. They should be guardians of the firm’s assets and values, while embracing the agreed principles and disciplines of partnership.

Financial gain or pain

With senior equity partners, the money does a fair bit of the talking. The prospect of immediate financial gain or pain can help facilitate a proprietorial mindset.

For those with a little or no equity, their voice is often a bit softer, the risk is a bit higher and the task is that much harder.

The determining factor is the quality of leadership.

It means working with each partner to align firm and individual purpose, communicate what’s expected, provide the requisite support, give and get feedback – and hold them to account.

Firms face danger if they stray too far from the core

In Articles, Commentary on 10 October 2020 at 12:24 pm

Full text of my opinion piece first published in the Australian Financial Review on 9 October 2020.

Establishing non-legal businesses seems to be back in favour among Australia’s larger law firms.

Minter Ellison was an early mover with acquisitions of an IT consultancy firm and an executive remuneration practice in 2017. Others include Corrs Cyber (data breach and crisis management), G+T (Gilbert + Tobin) Innovate (in-house legal transformation), Ashurst Consulting (board risk and governance), TG (Thomson Geer) Endeavour (public affairs), McCullough Robertson’s Allegiant (insurance broking) and Hall & Wilcox’s Global Mobility Services (migration, tax and relocation).

The rationale for these new non-law ventures is mostly centred on strengthening or defending the core business and making significant client relationships stickier. Some firms pursue these adjacencies to deliver new sources of profitable growth or to provide a hedge in the event of industry disruption.

Original AFR article

To increase the chances of success of these new ventures and others seeking adjacent opportunities, there are four key strategies to consider.

#Reinforce the core

Many adjacency failures can be put down to firms straying too far from their core business.

Woolworths’ foray into the retail hardware sector via its Masters business was an unmitigated failure. Masters did not reinforce Woolworths’ core grocery business or leverage existing customer and supplier relationships. While its retailing and property management capabilities were strong, they couldn’t outmuscle a formidable incumbent (Bunnings).

Success comes from investing in areas where there are substantial, measurable and mutually reinforcing economies between the current and the new.

#2 Align financial expectations

One of the main reasons law firms have not persisted with non-law businesses in the past is that they have simply not made enough money.

Well-run premium law firms are very profitable. Despite intense competition, the market price for specialised legal advice has increased significantly over the past 20 years.

Many of the new ventures compete in market segments where the price point for partner-level advice is 30 per cent to 40 per cent lower than law firms. Others are pitched at the ‘brain-surgery’ end of the market with relatively low leverage and utilisation.

The upshot is there is a significant risk regarding profit expectations. My advice is to ensure everyone is 100 per cent on the same page early on – and if there are irreconcilable gaps, walk away!

#3 Pre-empt cultural clashes

While great strides have been made in recent years on using the talents of those without legal qualifications, the lawyers still market – and see – themselves as the smartest people in the room.

So, it is vital that your cultural due diligence cover over things like common aspirations, values and standards. When it comes to adding advisors from non-law disciplines, there is an added risk of professional arrogance.

One of the keys to success is to pre-empt and address any cultural differences between the lawyers and those other idiots. Only joking!

#4 Ensure a founder’s mentality

Why is profitable growth so hard to achieve and sustain?

Chris Zook from Bain & Company researched this question and found that when firms fail to achieve their growth targets, 90 per cent of the time the root causes are internal and not market related.

He also found that firms experience a set of predictable internal crises, at predictable stages, as they grow.

Zook suggests that managing these choke points requires a “founder’s mentality”— someone with fire in the belly who is relentless in pursuing the business’ mission, adept at leading others through change and imbuing the firm with a strong client focus.

So, in summary, all it takes to succeed is to have a driven intrapreneur leading a new venture that is deeply connected to the core business – from a market, financial and cultural perspective.

It sounds easy. Until you try.

%d bloggers like this: