In Up or Over
It's Up or Out No More as Alternatives Shake up the Traditional Partnership Model
It's Up or Out No More as Alternatives Shake up the Traditional Partnership Model
By Janet Ellen Raasch
There is no doubt that the partnership model is continuing to change in firms of all sizes-with multiple consequences. Among them is a trend toward fewer homegrown associates achieving equity partnership. But the changes are also leading to an unprecedented range of alternatives to traditional partnership.
In the 1920s Cravath, Swaine & Moore became the first law firm on record to openly recruit from law schools with the express understanding that many of the young lawyers it hired would not make partner. Those associates who did not make partner with the rest of their class were expected to leave the firm.
However, those deemed best among the associates, who did the necessary work and stayed on track for the requisite number of years, could expect to become stakeholders, earn lockstep increases in compensation, and enjoy lifetime employment in the firm.
This "up or out" model offered obvious benefits, giving associates a defined career track to partnership (usually six to eight years) while providing profitability for partners based on leveraging the time of succeeding classes of associates (the pyramid structure).
"On the downside, many firms ended up making the 'wrong' lawyers partners simply on the basis of longevity," says Gerry Riskin, a firm management consultant and principal of Edge International.
Until about 20 years ago, the Cravath model reigned supreme. But the tide has since shifted against longevity and other historical factors involved in partnership, mainly because increased competition has pressured firms to make changes to the traditional model.
"Some see these changes as positive and leading to a stronger business model for law firms," says Thomas Grella, chair of the ABA Law Practice Management Section and managing partner of McGuire, Wood & Bissette. "Others see them as negative and driving away valuable talent."
Whatever one's perspective on the issues, there is no doubt that the partnership model is continuing to change in firms of all sizes—with multiple consequences. Among them is a trend toward fewer homegrown associates achieving equity partnership. But the changes are also leading to an unprecedented range of alternatives to traditional partnership. The following hits the highlights.
One concern centers on how far to split the profit pie—and who you choose to split it with. "Many modern law firms are operating more like businesses and less like traditional partnerships—with partnership decisions made for more strictly business reasons," according to Richard Gary, principal of Gary Advisors and a former chair of Thelen Reid & Priest. "As a result," he says, "it is not only harder to make partner, it is harder to stay partner."
A highly publicized case in point is Chicago-based Mayer, Brown, Rowe & Maw, which in early March of this year shocked the legal community by announcing that it would eliminate more than 10 percent of the firm's 427 equity partners. About half were demoted and half fired.
Incoming chair James Holzhauer actually referred to this move in terms of protecting the high price of the firm's "stock." Law firms are not public companies, of course, but Holzhauer's use of this term says a lot about law firms' perspective in the 21st century. What he was referring to was profits per equity partner (PPP), a ratio used to calculate AmLaw rankings. Despite the fact that neither the numerator (net operating income) nor the denominator (number of equity partners) of this ratio is strictly defined, law firms that want to be competitive consider PPP important—both to attract and retain high-value talent and to impress prospective and existing clients.
So what happens when the slices of the pie look too thin? "When professional services firms get too 'happy' with their promotions to partner, leverage and partner compensation suffers," wrote one anonymous individual in a comment to the Wall Street Journal legal blog post on the Mayer Brown story. "Under these circumstances, the firm has three choices: Keep doing the same thing and watch its top performers move on to other firms in search of higher compensation; stop promoting new partners and lose its most promising senior associates; or cut or demote the weak performers."
"The choice is a no-brainer," said the commenter, "and fulfills the fiduciary duty to the firm as an institution."
Mayer Brown is not alone in decreasing the ranks of nonproductive partners, although most other firms are taking a more incremental approach. Moreover, while this trend is most obvious at large firms, it is moving steadily through the industry to affect small and midsize firms as well. After all, the smaller a firm is, the more its profitability is put at risk by less-productive partners.
The upshot for associates reaching for the brass ring? "Law firms of all sizes are being much more selective about who makes partner in the first place," says John Sapp, senior partner at Michael Best & Friedrich. "In the past, 'good work' and the requisite number of years were enough at most firms. Today, candidates for equity partner almost always need to be rainmakers with a good book of business—so that they can contribute their share to the firm's PPP."
Another issue is the expansive firm growth being fueled by the addition of high-value lateral lawyers, practice groups and even entire firms—and their ready-made books of business.
"This kind of lateral movement was almost unheard of 20 years ago," says Susan Manch of consulting firm Shannon & Manch, who specializes in law firm recruitment, retention and career development. "Many lateral lawyers today are wooed with the promise that they will soon join the acquiring firm's partnership ranks—which further decreases the partnership chances for 'homegrown' senior associates."
At the same time, there is an increasing demand for entry-level associates to fill the bottom ranks of the pyramid. According to a National Law Journal study, the number of associates hired by the 250 largest law firms increased 76 percent from 1996 to 2006. Simultaneously, the number of law school graduates increased only 7 percent.
Although the hiring numbers at small and midsize firms are not as dramatic, competition at large firms certainly affects the new talent that is available to them. Consider that to compete, large law firms have had to steadily increase associate salaries—$160,000 for first-years in New York and $145,000 for competitive firms in other parts of the country.
Although these salaries have not "trickled down" to most small and midsize firms, they are starting to appear in specialty firms—such as intellectual property or litigation boutiques—that compete with larger firms for bet-the-company business.
To earn these salaries, associates are expected to work even more billable hours than their predecessors. In addition, thanks to the advances of the information age, they are expected to produce far more work in the same amount of time, as partners pile on the assignments in a never-ending effort to boost PPP. And this often happens, according to associates at firms of all sizes, without the partners providing direction, feedback or guidance on their development. When leverage was one-to-one, mentoring was part of the process. At higher levels, it becomes less likely.
"At most firms, associates spend much more time interacting with their computers and other electronic devices than they do interacting with clients and mentors," says Gary. "Most associates do not find this a very satisfying way to work."
Associates at highly leveraged firms face another impact: While higher leverage tends to make a firm more profitable, it also means less opportunity to become a partner. In a firm with three associates for each partner—which is considered the "sweet spot"—two of every three associates (regardless of their talent) will not make partner. Many highly profitable firms have four or five associates per partner; some consultants are predicting eventual levels of 10 to 1. At smaller firms, the ratio is closer to 2 to 1.
Many associates are seeing the writing on the wall and taking their career prospects into their own hands. The National Association for Law Placement Foundation reports that the rate of associate attrition is the highest it has ever been—37 percent of associates leaving within the first three years and 77 percent leaving within five years. And the senior associates are leaving when they are most valuable to their firms—when they have enough experience to know what they are doing and when their rates are profitable. It can cost $300,000 or more for a firm to replace each one.
Some, of course, truly want to be law firm partners and are doing whatever it takes, or going wherever it takes, to achieve the goal. Others, however, simply want to pay off their school loans and add the name of a reputable firm to their resumes so they can decamp to a less stressful environment. This "free agent" attitude is part and parcel of the Generation X mentality.
Most associates today are members of Generation X, which as many commentators have observed, are known to be "dual-centric." They are hard workers, but they also seek a life outside of work—for family, community and personal development. They are focused on balancing both sides of their lives, and are not willing to sacrifice one for the other. Working at a law firm is less of a lifetime commitment, they believe, and more of a current economic arrangement. When their work or life goals are thwarted, they are very comfortable marketing their skills elsewhere.
"Even some talented senior associates on track to make partner do not want to assume the financial and time obligations that this title currently requires," says Manch.
So, absent options within their current firm environment, senior associates will leave for friendlier pastures, which in many instances presents opportunities for small and midsize firms that promise better work-life balance and the chance to develop skills. "Many of my current partners previously worked at big firms in big cities," says Grella. "They made the move to our firm not for money, but for values."
In other cases, senior associates go in-house with clients, into public service, to work for investment banks, into academia, to start a solo practice, or take any of countless other options where they can use their law degrees—or they simply leave the law for another career.
Law firms across the country are considering how to turn the tide—and, again, in ways that are altering the meaning of partnership as well as the terms "associate" and "partner."
In recent years, law firms of all sizes have developed a number of new alternatives designed to retain talented senior associates who are either not ready to become partners or not interested in making partner.
One approach has been to lengthen the partnership track to 10 years or even 12 years. "With this option, the firm gets more time to evaluate each attorney," says Manch. "Associates get more time to prove themselves and also more time to determine whether partnership is the right goal for them."
Some firms are adding a new category like "senior associate" toward the end of the track. Once named to this group, the associates are considered to be potential partners and given additional training to prepare them for the business development and management responsibilities of equity partnership.
Other firms have created a permanent associate track for those who wish to stay with the firm, especially those who offer a particular technical expertise. Keeping them on as contract lawyers is another option. At Denver-based Holland & Hart, for example, 70 of the firm's 355 lawyers are contract lawyers. "This approach has worked very well for us," says managing partner Lawrence Wolfe.
In addition, titles like counsel, of counsel, special counsel or staff attorney can be used for lawyers whose status is in transition with a firm. The titles seem to vary from firm to firm, and from lawyer to lawyer, depending on negotiated preferences.
To help keep talent in the fold, more firms have adopted "alternative scheduling" approaches to address the work-life issue as well. At some firms, use of these options can take a lawyer off the partnership track, at least temporarily. At other firms, though, alternative schedules are available to those on the partnership track, and to the partners, too.
At 400-lawyer Dickstein Shapiro, for example, attorneys who work a 50 percent or greater schedule may remain candidates for partner, usually after the equivalent of eight years of legal experience. "Anyone interested in this option can consult—confidentially—with an adviser who is herself a partner working a 75 percent schedule," says firm chair Michael Nannes. "Since we started this program in the 1990s, about 40 lawyers have taken advantage of this opportunity," he adds, "which enables us to tap into an exceptionally capable, committed and grateful talent pool."
Among the most notable trends is the increasingly common use of nonequity partnership—also called salaried, tier or income partnership. This can be a temporary or transitional title for someone whose status is uncertain, or it can be a permanent career position. Nonequity partners are not included when calculating a firm's PPP, allowing a firm to reserve equity status for only its strongest performers.
Today, 80 percent of the firms in the AmLaw 200 follow this two-tier model, and more than half of firms in the 20-to-100-lawyer range report using this approach. Others are exploring it as an option. At Holland & Hart, says Wolfe, "We are currently a single-tier system that uses a lot of contract lawyers, but...it can be very time-consuming to manage 70 individualized lawyer contracts each year. To study our alternatives going forward, we have created a task force on partnership structure."
On the negative side, two-tier systems can lead to the perception that the nonequity partners are "second-class citizens" within the firm. Managed properly, however, the structure can help firms to retain talent and provides lawyers with a healthy base salary and benefits without the demands of full equity partnership. Importantly, too, they can use the title "partner" instead of "associate" in the world outside the firm, for business development, network building or even job-hunting purposes.
"Second-tier status provides a convenient transition for partners either new to the firm or newly elevated from the associate ranks, or for former equity partners whose performance no longer justifies equity participation," says Gary. "It is also a permanent resting place for lawyers who don't meet equity-partner performance standards but are important firm resources nonetheless—often because of a unique technical proficiency."
Some firms pay nonequity partners a straight salary; others follow a formula (often with a fixed base amount); and still others pay a fixed amount plus a share of firm profits and responsibilities. Because he feels that it promotes teamwork and
firm unity, Gary recommends the third alternative.
Clearly the past 20 years have brought many changes to the traditional partnership track and to associates' perceptions of partnership. Whether it's for better or worse is, in many instances, a matter of opinion. But some level of balance does seem to be resulting.
"Law firms can make partnership decisions that consider their business needs," says Manch. "Associates who want to stay within a law firm environment can explore an increasing range of internal options as an alternative to the traditional 'up or out' model."
Of course, many profitable law firms are still committed to the traditional partnership track. These firms feel that the possibility to make full partner is an important part of their culture—a part they are not willing to leave behind.
"Some of the strongest law firms of all sizes are single-tier firms," says Gary. "They have found a way to make the hard choices up front—hiring the right associates and then investing in their development for the long term."
Although to ensure a strong, long-term fit between law firm and lawyer, it is equally important that each new recruit conduct in-depth due diligence on a firm and its partnership culture prior to accepting a position.
"From day one—and even sooner—even the youngest associate at a law firm should have a specific individual career plan in mind," says Manch. "If you wake up at year six and start to think about your career in the law, you have waited far, far too long."