Partnership in Troubled Economic Times

There certainly is no conventional wisdom in today's economy on the depth, length, or severity of the current recession. Firms are actively engaged in significant analysis of economics and profitability management, expenses, marketing, and personnel.

Many law firms have announced and implemented cuts in both lawyer and staff personnel, and there is reason to believe that our economy may well worsen. In addition, as to existing lawyer populations, firms have had to eliminate or diminish associate bonuses, freeze salaries, cease or modify otherwise usual and customary hiring, delay start dates for associates to whom commitments have already been made, and generally reduce the scope and magnitude of all lawyer-related expenses.

However, many firms have used the recession as an excuse to review the breadth and depth of the expertise in practice areas and aggressively recruit as equity partners attorneys (who may or may not be equity partners in their firms) who possess expertise and/or control work of clients in practice areas that are strategically important. Similarly, many smaller and mid-size firms have successfully recruited attorneys from larger firms' attorneys (who were not partners) who controlled a certain amount of client business that was insufficient to become a partner in the large firm, but more than adequate to become an equity partner in smaller or mid-size firms.

Coupled with all of the issues law firm owners have to deal with relating to the operation of their firms is the fact that even with careful management, there is increasing evidence of reduced partner income in many sectors of the legal marketplace. Firms must therefore examine the wisdom of creating new partners.

It is vitally important that partners examine the culture of their firm before making “blanket” modifications to the partnership structure/admission practices simply to satisfy the current, and perhaps short-term, economic issues. First, assure that the firm has carefully analyzed the various components of the its economics and taken appropriate steps to improve its financial health. Then, conclude whether the firm's partnership structure/admission practices are a root cause of the economic problem. For example, what changes/modifications to partnership admission will be beneficial?

Consider modifications to existing criteria established for partnership admission and an increased length of time to partnership. It might be advisable to review associates with a more critical eye, so as to determine more quickly the lawyer's suitability for continuation. This will probably lead to increased terminations, but also avoid dealing less objectively with associates who have expectations based in significant measure on longevity. Ascertain whether it is timely to seek withdrawal of uncooperative/underproductive partners and/or whether there are candidates for early retirement.

What adverse effects will result from seeking modifications to the existing culture for economic reasons? Resignations of associates who are displeased over the changes in required service or protocol and feel that their trust in the firm has been misplaced; inability to replace defections in a timely enough fashion to provide continuity of service; loss of revenue; loss of clientele, and morale depression.

Partnership Criteria

The firm must examine the process as well as the criteria for partnership carefully and, before modifications of any sort are made, a consensus of the partners should be reached. There are issues to be considered and addressed by all partners; they will undoubtedly view them in part on behalf of the firm and in part as potentially affecting each of themselves. Criteria must, for each potential partner, include:

Client origination. The ability to develop and originate new clients for the firm is one of the most significant criterion to be considered. Although this criterion is certainly important, it is not, in and of itself, a condition precedent for elevation to partner status. It is generally recognized, however, that the ability to originate new business is a much-desired attribute.

Economic consideration. A law firm must be able to justify the progression of associates to partner status on an economic as well as a professional basis. Factors that must be considered when determining the feasibility of adding another partner include: 1) the present and projected strength of the practice area (or whether the department can sustain another partner); 2) the individual's historical productivity level (billable hours history); 3) the individual's ability to sustain a high-productivity level at a partner's billing rate; and 4) the individual's ability to support himself or herself as a partner.

Collection of hours billed, realization on hours billed. This is certainly as important as the number of hours billed. Although billing 1,750, 1,800, or 1,850 hours in one year reflect dedication, hard work, and devotion to the firm, nevertheless, realization on only 40% of the hours billed adversely impacts on the bottom-line productivity of the substantial investment of time made by the billing associate.

Client relations. Most firms encourage associates to establish a professional relationship with clients. Thus, the ability of the associate to relate and interact with a client is an important factor to be considered.

Handle complex matters with minimal partner supervision. The demonstrated ability to handle complex matters and to function effectively without close partner supervision is another key factor. Associates wishing to be elevated to partner status must demonstrate their ability to manage, service, and relate to clients without substantial or significant input from the originating partner.

Professional skills. Associates on the partner track must develop a “professional identity” within and outside of the firm for skill in their specialty areas, and possess a breadth of skills or the ability to transcend a narrow specialty, if needed. Also, candidates must obtain strong marks in legal analysis, writing, oral communications, negotiating ability, the sound exercise of judgment, and so on.

Cooperative spirit. Every attorney should be a team player. Each attorney desiring elevation to partner status must demonstrate a willingness to participate, cooperate, and get along well with clients, other lawyers, and staff in all aspects of the firm. In today's economic environment, reinforced by downsizing of firms and cross-fertilization of attorneys, the willingness to accept assignments from other attorneys, regardless of who originated the client, is an important consideration.

Community involvement. Most firms encourage attorneys to become involved in community and outside activities. Participation in community activities neatly dovetails with marketing and client origination.

Personal presentation. Most firms do not possess any hard and fast dress codes. However, image often is perceived as being important. And personal presentation projects an image.

Non-billable hours. Promotion to partner status requires more than simply billing hours during the work week. Non-billable time is a yardstick by which the firm can measure an associate's level of interest in the success of the firm.

Classes of Partners

Given the need for more careful analysis before making new partners as a result of the economy and shrinking profits, it is also timely to give thought to different classes of partners.

Non-equity partners are generally characterized by a “guaranteed” draw but with no right to share in the firm's profits. While this is potentially beneficial in the short term, issues that can arise relate to the partner's desire and expectation that there will be an opportunity for advancement to equity status. So as not to disincentivize further initiative, clear criteria must be established that identify the basis for progression to equity status.

Contract partners are similarly salaried, perhaps with bonus arrangements predicated on performance. These are frequently lateral partners, whose attraction may be an existing book of business or a needed expertise in a particular field of law. Some firms have trepidation about engaging contract partners, since they may, without qualification, be inclined to move for more money, made easier by their not having been inculcated into the firm culture.

Part-time partners. Many practitioners are concerned about whether and how to advance the careers of less than full-time lawyers. There are still many law firms that would find it problematic to consider part-time lawyers for partnership, irrespective of their age, experience, and/or the quality of their performance. It has been this author's experience that the long-held view by many/most law firms is that a part-time lawyer lacks commitment. This, coupled with the fact that part-time work is not often well-defined, results in a perception that less than 24/7/365 involvement severely limits advancement and career options.

Factually, surveys have shown that flexible work arrangements are sought and considered to be more desirable for women lawyers. Therefore, if women are not encouraged to balance their family and personal lives with their careers, there is a far greater likelihood that they will seek other opportunities, resulting in very expensive attrition. Replacing a seasoned, third-year associate will cost hundreds of thousands of dollars in training and indoctrination. Firms face increasing pressure from clients and lawyers alike to maintain a diverse workplace. Client relationships may be adversely affected as well, particularly if the departing lawyer has had positive experiences with the client.

As a result, a firm that is unwilling to address a more heterogeneous work environment will likely not be attractive to future hires; “word gets around.” Just as important as all of the objective considerations is the importance of a value system that respects family and quality of life commitments.

Every law firm faces voluntary and involuntary separations of partners through retirement, lateral movement, and death. It would therefore be sensible, particularly given the evident changes in our society, e.g., desire for more relaxed lifestyle, diversity, and balance, to consider the advancement of part-time lawyers to partnership. Clear and distinct guidelines must be established for ascension by part-time lawyers to partnership. Although consistent with all lawyers considered for partnership, existing partners will undoubtedly be watchful for:

• A fixed, required annual hours' production, which is consistently met;
• Evidenced determination to advance and to distinguish oneself as a lawyer;
• The ability to develop and maintain clients in a substantial way, resulting in the buyers' having a substantial practice;
• Interpersonal skills that result in harmonious relationships within the workplace; and
• Demonstrated loyalty to the firm and the partners ' a subjective, but rather easily detected characteristic.

Details of a part-time partnership should be in writing and made known to associates who identify their need for such consideration on a going-forward basis. They would clarify, among other things:

• Expectation of and commitment to a predetermined number of both billable and non-billable hours;
• Base compensation that is consistent in its comparison to full-time partners, with the difference in required annual hours; and
• Incentivized bonus compensation similarly must be addressed but may be more subjective in its determination.

Conclusion

While developing strategies to cope with the recession, lawyer management must understand their partners' expectations so that the former may develop and begin to implement strategies to reduce costs and enhance the volume of profitable business, which, in turn, leads to increased revenue per lawyer and profits per partner. Lawyer management in the better-managed firms recognizes opportunities, implements action plans, and assumes risks that will provide their partners and associates with the framework for building stronger and more successful law firms.

Joel A. Rose, a member of this newsletter's Board of Editors, is president of Joel A. Rose & Associates, Inc., a firm of management consultants headquartered in Cherry Hill, NJ. He may be contacted at [email protected] or 856-427-0050.

There certainly is no conventional wisdom in today's economy on the depth, length, or severity of the current recession. Firms are actively engaged in significant analysis of economics and profitability management, expenses, marketing, and personnel.

Many law firms have announced and implemented cuts in both lawyer and staff personnel, and there is reason to believe that our economy may well worsen. In addition, as to existing lawyer populations, firms have had to eliminate or diminish associate bonuses, freeze salaries, cease or modify otherwise usual and customary hiring, delay start dates for associates to whom commitments have already been made, and generally reduce the scope and magnitude of all lawyer-related expenses.

However, many firms have used the recession as an excuse to review the breadth and depth of the expertise in practice areas and aggressively recruit as equity partners attorneys (who may or may not be equity partners in their firms) who possess expertise and/or control work of clients in practice areas that are strategically important. Similarly, many smaller and mid-size firms have successfully recruited attorneys from larger firms' attorneys (who were not partners) who controlled a certain amount of client business that was insufficient to become a partner in the large firm, but more than adequate to become an equity partner in smaller or mid-size firms.

Coupled with all of the issues law firm owners have to deal with relating to the operation of their firms is the fact that even with careful management, there is increasing evidence of reduced partner income in many sectors of the legal marketplace. Firms must therefore examine the wisdom of creating new partners.

It is vitally important that partners examine the culture of their firm before making “blanket” modifications to the partnership structure/admission practices simply to satisfy the current, and perhaps short-term, economic issues. First, assure that the firm has carefully analyzed the various components of the its economics and taken appropriate steps to improve its financial health. Then, conclude whether the firm's partnership structure/admission practices are a root cause of the economic problem. For example, what changes/modifications to partnership admission will be beneficial?

Consider modifications to existing criteria established for partnership admission and an increased length of time to partnership. It might be advisable to review associates with a more critical eye, so as to determine more quickly the lawyer's suitability for continuation. This will probably lead to increased terminations, but also avoid dealing less objectively with associates who have expectations based in significant measure on longevity. Ascertain whether it is timely to seek withdrawal of uncooperative/underproductive partners and/or whether there are candidates for early retirement.

What adverse effects will result from seeking modifications to the existing culture for economic reasons? Resignations of associates who are displeased over the changes in required service or protocol and feel that their trust in the firm has been misplaced; inability to replace defections in a timely enough fashion to provide continuity of service; loss of revenue; loss of clientele, and morale depression.

Partnership Criteria

The firm must examine the process as well as the criteria for partnership carefully and, before modifications of any sort are made, a consensus of the partners should be reached. There are issues to be considered and addressed by all partners; they will undoubtedly view them in part on behalf of the firm and in part as potentially affecting each of themselves. Criteria must, for each potential partner, include:

Client origination. The ability to develop and originate new clients for the firm is one of the most significant criterion to be considered. Although this criterion is certainly important, it is not, in and of itself, a condition precedent for elevation to partner status. It is generally recognized, however, that the ability to originate new business is a much-desired attribute.

Economic consideration. A law firm must be able to justify the progression of associates to partner status on an economic as well as a professional basis. Factors that must be considered when determining the feasibility of adding another partner include: 1) the present and projected strength of the practice area (or whether the department can sustain another partner); 2) the individual's historical productivity level (billable hours history); 3) the individual's ability to sustain a high-productivity level at a partner's billing rate; and 4) the individual's ability to support himself or herself as a partner.

Collection of hours billed, realization on hours billed. This is certainly as important as the number of hours billed. Although billing 1,750, 1,800, or 1,850 hours in one year reflect dedication, hard work, and devotion to the firm, nevertheless, realization on only 40% of the hours billed adversely impacts on the bottom-line productivity of the substantial investment of time made by the billing associate.

Client relations. Most firms encourage associates to establish a professional relationship with clients. Thus, the ability of the associate to relate and interact with a client is an important factor to be considered.

Handle complex matters with minimal partner supervision. The demonstrated ability to handle complex matters and to function effectively without close partner supervision is another key factor. Associates wishing to be elevated to partner status must demonstrate their ability to manage, service, and relate to clients without substantial or significant input from the originating partner.

Professional skills. Associates on the partner track must develop a “professional identity” within and outside of the firm for skill in their specialty areas, and possess a breadth of skills or the ability to transcend a narrow specialty, if needed. Also, candidates must obtain strong marks in legal analysis, writing, oral communications, negotiating ability, the sound exercise of judgment, and so on.

Cooperative spirit. Every attorney should be a team player. Each attorney desiring elevation to partner status must demonstrate a willingness to participate, cooperate, and get along well with clients, other lawyers, and staff in all aspects of the firm. In today's economic environment, reinforced by downsizing of firms and cross-fertilization of attorneys, the willingness to accept assignments from other attorneys, regardless of who originated the client, is an important consideration.

Community involvement. Most firms encourage attorneys to become involved in community and outside activities. Participation in community activities neatly dovetails with marketing and client origination.

Personal presentation. Most firms do not possess any hard and fast dress codes. However, image often is perceived as being important. And personal presentation projects an image.

Non-billable hours. Promotion to partner status requires more than simply billing hours during the work week. Non-billable time is a yardstick by which the firm can measure an associate's level of interest in the success of the firm.

Classes of Partners

Given the need for more careful analysis before making new partners as a result of the economy and shrinking profits, it is also timely to give thought to different classes of partners.

Non-equity partners are generally characterized by a “guaranteed” draw but with no right to share in the firm's profits. While this is potentially beneficial in the short term, issues that can arise relate to the partner's desire and expectation that there will be an opportunity for advancement to equity status. So as not to disincentivize further initiative, clear criteria must be established that identify the basis for progression to equity status.

Contract partners are similarly salaried, perhaps with bonus arrangements predicated on performance. These are frequently lateral partners, whose attraction may be an existing book of business or a needed expertise in a particular field of law. Some firms have trepidation about engaging contract partners, since they may, without qualification, be inclined to move for more money, made easier by their not having been inculcated into the firm culture.

Part-time partners. Many practitioners are concerned about whether and how to advance the careers of less than full-time lawyers. There are still many law firms that would find it problematic to consider part-time lawyers for partnership, irrespective of their age, experience, and/or the quality of their performance. It has been this author's experience that the long-held view by many/most law firms is that a part-time lawyer lacks commitment. This, coupled with the fact that part-time work is not often well-defined, results in a perception that less than 24/7/365 involvement severely limits advancement and career options.

Factually, surveys have shown that flexible work arrangements are sought and considered to be more desirable for women lawyers. Therefore, if women are not encouraged to balance their family and personal lives with their careers, there is a far greater likelihood that they will seek other opportunities, resulting in very expensive attrition. Replacing a seasoned, third-year associate will cost hundreds of thousands of dollars in training and indoctrination. Firms face increasing pressure from clients and lawyers alike to maintain a diverse workplace. Client relationships may be adversely affected as well, particularly if the departing lawyer has had positive experiences with the client.

As a result, a firm that is unwilling to address a more heterogeneous work environment will likely not be attractive to future hires; “word gets around.” Just as important as all of the objective considerations is the importance of a value system that respects family and quality of life commitments.

Every law firm faces voluntary and involuntary separations of partners through retirement, lateral movement, and death. It would therefore be sensible, particularly given the evident changes in our society, e.g., desire for more relaxed lifestyle, diversity, and balance, to consider the advancement of part-time lawyers to partnership. Clear and distinct guidelines must be established for ascension by part-time lawyers to partnership. Although consistent with all lawyers considered for partnership, existing partners will undoubtedly be watchful for:

• A fixed, required annual hours' production, which is consistently met;
• Evidenced determination to advance and to distinguish oneself as a lawyer;
• The ability to develop and maintain clients in a substantial way, resulting in the buyers' having a substantial practice;
• Interpersonal skills that result in harmonious relationships within the workplace; and
• Demonstrated loyalty to the firm and the partners ' a subjective, but rather easily detected characteristic.

Details of a part-time partnership should be in writing and made known to associates who identify their need for such consideration on a going-forward basis. They would clarify, among other things:

• Expectation of and commitment to a predetermined number of both billable and non-billable hours;
• Base compensation that is consistent in its comparison to full-time partners, with the difference in required annual hours; and
• Incentivized bonus compensation similarly must be addressed but may be more subjective in its determination.

Conclusion

While developing strategies to cope with the recession, lawyer management must understand their partners' expectations so that the former may develop and begin to implement strategies to reduce costs and enhance the volume of profitable business, which, in turn, leads to increased revenue per lawyer and profits per partner. Lawyer management in the better-managed firms recognizes opportunities, implements action plans, and assumes risks that will provide their partners and associates with the framework for building stronger and more successful law firms.

Joel A. Rose, a member of this newsletter's Board of Editors, is president of Joel A. Rose & Associates, Inc., a firm of management consultants headquartered in Cherry Hill, NJ. He may be contacted at [email protected] or 856-427-0050.