A blog by Joel Barolsky of Barolsky Advisors

Seven fresh insights from the 2022 AFR Partnership Survey

In Articles, Commentary, Legal Technology on 21 July 2022 at 6:33 am

The full (slightly edited) text of my opinion piece first published in the Australian Financial Review on 14 July 2022.

The list of top 20 firms in the latest Australian Financial Review Law Partnership Survey shows is strikingly similar to that of 2012. The quantum of new partner and senior associate promotions and graduate hires reflects a mood of confidence rather than existential threat.

The predictions of the demise of BigLaw at the hands of NewLaw or technology are either premature or plainly wrong.

There are seven other takeaways from the survey worth noting.

Slow growth at the top

The table-topping HWL Ebsworth added 112 new partners from July 2013 to July 2019. Since July 2019, the firm has added just 11.

HWLE may just be taking breath, or perhaps its need for growth has diminished given its IPO is off the table. Another explanation is there are fewer opportunities to hire lateral partners in a booming market.

Winning the talent war

Hamilton Locke must be doing something right to expand its partner cohort by 79.2 per cent over the past year. The next highest is just 17.1 per cent.

The firm’s public statements reveal two interesting insights – every employee holds equity and the firm plans to list on the ASX at some stage. It makes the employee value propositions at other firms seem a little mundane.

Gender rebalancing

The survey shows most firms are making huge strides in promoting females to senior ranks. No firm reported less than 45 per cent of their senior associates – the traditional stepping stone to partner – as female, but a number of firms risk overshooting in their gender-rebalancing efforts.

Ten firms have 75 per cent or more female senior associates. One firm reported 91.4 per cent.

Given the current velocity of partner promotions, it won’t be long before these firms have a big diversity problem, but of a different nature to the past.

It’s also worth noting that a growing number of people don’t identify as either male or female, which will hopefully be evident in future surveys.

Small big four

In February, PwC announced it had acquired the specialist tax practice Greenwoods & Herbert Smith Freehills.

The current PwC Legal website lists these 15 new Greenwoods partners as well as another 17 existing partners. These numbers imply the size of the non-tax PwC Legal team has reduced substantially in recent years. KPMG Legal and EY Law partner numbers have stayed in the mid-20s for the past few years, and Deloitte Legal does not make the top 50.

Even if the big four legal teams combined into one firm, this entity would only be 14th in the survey.

Legal companies

The Law Partnership Survey does not include law companies that operate with a different model. Brands such as LegalVision, Lawpath and Sprintlaw don’t have traditional partner roles, but they are important players in the Australian legal landscape.

These companies are mostly expanding the legal market by servicing start-ups and SMEs that previously would not have paid for professional legal advice. Lawpath, for example, reported last month that it had acquired its 300,000th small business client.

Not so rosy

The January 2019 Law Partnership Survey listed Norton Rose Fulbright as the sixth-largest firm in the country with 145 partners.

The current survey has it ranked 11th with 125 partners. This effectively means its partnership has reduced by 14 per cent in less than four years. This might be part of a deliberate realignment of strategy, but in the context of a growing market it represents a major loss of market share.

Bigger not always better

There are some excellent firms that sit outside the top 15, such as Gilbert + Tobin and Arnold Bloch Leibler, that are powerhouses in their chosen markets.

Many global firms with small local offices, such as Clyde & Co, Jones Day, White & Case, Squire Patton Boggs and Allen & Overy, seem to compete successfully despite higher rates and global overheads.

In conclusion

Strategy textbooks suggest that mature fragmented markets will experience consolidation and the evaporation of those supposedly stuck in the middle.

Given the range of firms and relative stability of the legal market, this conventional theory might require a rethink.

The legal world is about to enter a new era of standing up for principles

In Articles, Commentary on 11 June 2022 at 12:11 pm

The full text of my opinion piece first published in the Australian Financial Review on 9 June 2022. The article was #3 Most Viewed in the Companies Section on afr.com on day of publication.

The legal world is about to enter a new era.

Until the late 1990s, it was common for law firms to be identified by a strong affiliation to a particular religion, political party or ideology.

We had “Catholic firms”, “Labor firms” and “union-bashing firms”. These labels were reflected in the make-up of a firm’s partner group, the type of clients they served and the work they did.

Over the past two decades, many of these firms have tried to dial down these affiliations and present themselves as agnostic. This has meant changing the partnership cohort to include people from diverse backgrounds and taking on a wider range of clients and matters.

However, there are signs we are about to commence a new period where firms will be forced to take a position on a range of issues, especially in the ESG area.

They are already being asked by their staff and others where they stand, and will be judged by their willingness to uphold these principles.

To illustrate, a law firm that actively supports a shift to carbon zero may come under enormous pressure to “live” these principles and refuse briefs from fossil fuel clients. This might include not working for banks and financiers that provide capital to these same clients.

At the recent Australian Financial Review Banking Summit in Sydney, the CEOs of the Commonwealth Bank and NAB were greeted by protesters chanting about “bastard” banks funding coal and gas projects.

Christopher Black said in a letter to NAB chief executive Ross McEwan: “I am a 15-year-old climate disaster survivor. I’m in Year 9, and I live in Forestville, and I am very concerned about the climate crisis. For me, this is a very personal issue, which is literally a fight for my future.”

Law firms already have quite a few Chris Blacks working for them. If the recent election is anything to go by, they will become the majority over the next few years.

It should be noted that law firms and the profession have been grappling with ESG-related issues for some time.

Key presentative bodies like the Law Council of Australia have been strong advocates on a range of social issues, including refugee rights and access to justice. Almost all major law firms have comprehensive pro bono programs that focus on community work and addressing social ills.

Law firm leaders were active campaigners for same-sex legislative change in 2017 and will likely be so for the Indigenous Voice as it heads to the referendum promised by the Albanese government.

Hip-pocket consequences

What’s different about this new era is that the focus of change is not within the broader community or legislation passed in Canberra, but rather directly on how the firm itself operates.

In some instances, it could have serious hip-pocket consequences. Having to drop all its coal clients could be fatal for a resources-focused firm.

Another aspect of this new era is that firms may be forced to be more public on their specific policy on a particular issue. The pressure will come from external stakeholders such as clients, referrers and regulators, but more especially from staff. If the war for talent continues, employees will have more leverage and be a powerful catalyst for principles-led change.

The first step every firm should take is to identify ESG-related risks that may affect a firm’s social, and internal, licence to operate.

There will be a number of relatively simple and cheap things the firm can do to reduce some of these risks. For example, firms can work towards having a carbon zero, or carbon negative, footprint.

For other issues, firms should consider establishing new governance entities or roles that focus on ethics and principles-led decision-making.

Law firms need to be better prepared for these difficult ethical choices. The Chris Blacks in their ranks will be demanding it.

The challenges keep rising for overburdened partners

In Articles, Commentary on 13 May 2022 at 7:18 pm

The full unedited text of my opinion piece first published in the Australian Financial Review on 12 May 2022.

The partner role in law firms has always been a ‘stretch’ job – complex, demanding and business-critical. It’s also extremely well paid and prized by many. Most equity partners in Australia’s top 25 firms will earn over $1 million in 2022.

Looking ahead the partner role is only going to get tougher.

It started with Covid

The step-change in the role of partner can be traced to the start of the pandemic. 

A decade’s worth of pre-Covid records analysed by Thomson Reuters Peer Monitor showed that associates had around 10 more billable hours per month on average than partners in the same firm. However, in April and May 2020, this long-term trend reversed and partners recorded more billable hours than associates. 

The reasons cited for this shift were that clients demanded more direct access to partners to address their most pressing issues and remote working made delegation more clunky.

Two years on and the data suggests both partner and associate billable hours have gone up. Partners are still recording more hours than their associates, although the gap has narrowed.

What’s clear is that the supply side of the legal market is really stretched and a lot of the burden is falling on partners’ shoulders.

Rising expectations

Looking ahead we see client demand remaining strong. While there’s uncertainty as a result of the war in Ukraine, inflation and supply chain issues, the predominant mood is still bullish. 

At the coalface this means most partners will have to do more with the resources they have, at least in the short-term. As one partner recently commented, “when that urgent client matter arrives on my desk after a busy week, I find it really hard to ask my exhausted associates to work on it. What typically happens is that I take it home and do it all myself.”

A high demand market has put pressure on salaries and people are transitioning more frequently. One inevitability of high staff turnover is that partners spend more of their scarce time in recruitment interviews, onboarding and in ‘stay’ conversations. 

One of the solutions to address high turnover is for partners to develop deeper relationships with their team members.  They are expected to engage with team members more meaningfully regardless of where and how they work.

Leading a flexible team also brings new operational challenges. One partner I’m aware of spends around an additional 30 minutes a week configuring workload, arranging desk space, meetings and collaboration events. 

Team of the future

Over the next decade partners will not only need to become better people people but also better tech people. In the first half of 2021 over $US1.4 billion was invested by venture capital firms in legal technology. Most of this investment is in new tools to assist lawyers in doing their work and to provide better client service and value. 

Partners will have to be digitally literate to stay competitive. This means being aware of latest software most relevant to their practice, and when and how to deploy it most effectively.

Allied to the advances in technology is the growth in diversity of legal teams in terms of age, identity and ethnicity. One partner I spoke with recently commented on the challenges of leading a team of five generations: “The Boomers, Gen Xs, Ys and Zs in my team have each have their own expectations and idiosyncrasies. Tailoring the messaging and engagement approach can be exhausting and I often get it wrong.”

Create the capacity

The most obvious strategies for firms to deal with increased role complexity is to provide their partners with better support, coaching and training. 

I think this response will only get firms part of the way. 

A more profound examination of the role, and in particular the financial expectations of partners as producers, will create the capacity for them to be [1] healthier, and [2] better leaders and managers. 

The partner role is a stretch job, but stretch it too far and it might break.

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