How Many Excess Partners Does Your Firm Have?

It is widely recognized that Big Law has surplus partner capacity. In a recent Altman Weil survey, over two-thirds of firm leaders reported their equity partners were not sufficiently busy; nearly 80% said the same of nonequity partners. What is less well recognized is just how massive this surplus has become, how unevenly it is spread across firms in different profitability cohorts, and what it portends for when the next downturn hits.

The last time partners were fully utilized was in 2007, the year before the great recession hit. In aggregate, the number of partners has grown by 21%. Growth of equity partners has been relatively modest (only 8%) while that of nonequity partners has been dramatic (45%). It is noteworthy that the highest profit-per-equity-partner (PPP). PPP in the 50 highest profit firms (PPP 1-50) have barely grown their equity ranks and that the PPP in the 101-150 highest profit firms actually shrank theirs. The second 50 highest profit firms (PPP 51-100) stand out as having grown both their equity and nonequity ranks considerably ahead of the other profitability cohorts.

We know this growth has resulted in more partners than can be kept fully utilized and thus that partner capacity has grown faster than demand. But how fast did demand grow? One proxy is to say that demand grows with the overall growth of the economy — 12% on an inflation-adjusted basis for the time period in question. This may be a slight overestimate of demand growth as new technologies are being used more broadly and clients have taken more work in-house. Nevertheless, this 12% number suggests that a useful benchmark for the number of partners (at full utilization) needed to meet current market demand can be calculated as: the 2007 number (i.e., the last time partners were fully utilized) plus 12% (to allow for economy-driven growth in demand). Partners above this level are surplus capacity.

Table 2, below, applies this benchmark to estimating surplus partner capacity by firm profitability cohort. The approach is applied to the total number of partners, rather than to equity and nonequity partners separately, as work can flow between the two groups.

The top 50 firms have kept their partner ranks essentially in balance with demand growth so that there is no surplus. So, too, have the third profitability cohort (PPP 101-150). However, there are 3,400 surplus partners in the second 50 cohort (PPP 51-100). That's a whopping surplus for a mere 50 firms (an average of 68 surplus partners per firm). It's particularly so in the eighth year of an economic expansion with a downturn overdue by historical norms.

The leaders of these second 50 firms are playing a dangerous game. When the downturn hits they'll be caught needing to outplace partners in such numbers that they simply won't be able to do it. Some unproductive partners will remain in place, dragging down the comp of the most commercially productive partners and forcing them to migrate to stronger platforms, such as those offered by the top 50 firms. The departure of strong partners will beget the departure of even stronger partners and, in a run-on-the-bank dynamic, the firm will be forced into closure, bankruptcy or uncomfortable merger. The same dynamic will unfold, albeit slightly less intensely, for firms in the PPP 151-200 cohort, with commercially productive partners migrating to the stronger platforms at the PPP 101-150 cohort. (Note: Figure 1, below, enables a determination of the number of excess partners at an individual firm.)

The inaction by leadership of some of these second 50 firms is befuddling. Year-by-year, they've seen weak partner utilization numbers and done nothing about them, presumably because each year's profits weren't so bad. They have failed to look ahead to the cyclical downturn and what it will precipitate. This is the boiled frog model of firm stewardship. It probably happens because the incentives of individual senior leaders don't align with what is best for the firm and particularly for younger partners: the burden of outplacing partners would fall on these senior leaders yet these difficult actions would make little difference to their personal income streams through to their relatively near-in retirements.

The remedy is clear: Stack the leadership teams with younger partners who have skin in the game and start moving partners out now. It's tough love: better to transition a partner today when the corporate world is hiring than await the downturn at which time the corporate world will retrench and be awash in exiting Big Law partners looking for new homes.

*****
Hugh A. Simons, Ph.D., is an ALM Intelligence fellow. He is a former senior partner, executive committee member and chief financial officer at The Boston Consulting Group and the former chief operating officer at Ropes & Gray. The ALM Intelligence Fellows Program is a collaboration between ALM and leading thought leaders in the legal industry. The program aims to foster the development of data-driven research on key topics related to the business of law.

It is widely recognized that Big Law has surplus partner capacity. In a recent Altman Weil survey, over two-thirds of firm leaders reported their equity partners were not sufficiently busy; nearly 80% said the same of nonequity partners. What is less well recognized is just how massive this surplus has become, how unevenly it is spread across firms in different profitability cohorts, and what it portends for when the next downturn hits.

The last time partners were fully utilized was in 2007, the year before the great recession hit. In aggregate, the number of partners has grown by 21%. Growth of equity partners has been relatively modest (only 8%) while that of nonequity partners has been dramatic (45%). It is noteworthy that the highest profit-per-equity-partner (PPP). PPP in the 50 highest profit firms (PPP 1-50) have barely grown their equity ranks and that the PPP in the 101-150 highest profit firms actually shrank theirs. The second 50 highest profit firms (PPP 51-100) stand out as having grown both their equity and nonequity ranks considerably ahead of the other profitability cohorts.

We know this growth has resulted in more partners than can be kept fully utilized and thus that partner capacity has grown faster than demand. But how fast did demand grow? One proxy is to say that demand grows with the overall growth of the economy — 12% on an inflation-adjusted basis for the time period in question. This may be a slight overestimate of demand growth as new technologies are being used more broadly and clients have taken more work in-house. Nevertheless, this 12% number suggests that a useful benchmark for the number of partners (at full utilization) needed to meet current market demand can be calculated as: the 2007 number (i.e., the last time partners were fully utilized) plus 12% (to allow for economy-driven growth in demand). Partners above this level are surplus capacity.

Table 2, below, applies this benchmark to estimating surplus partner capacity by firm profitability cohort. The approach is applied to the total number of partners, rather than to equity and nonequity partners separately, as work can flow between the two groups.

The top 50 firms have kept their partner ranks essentially in balance with demand growth so that there is no surplus. So, too, have the third profitability cohort (PPP 101-150). However, there are 3,400 surplus partners in the second 50 cohort (PPP 51-100). That's a whopping surplus for a mere 50 firms (an average of 68 surplus partners per firm). It's particularly so in the eighth year of an economic expansion with a downturn overdue by historical norms.

The leaders of these second 50 firms are playing a dangerous game. When the downturn hits they'll be caught needing to outplace partners in such numbers that they simply won't be able to do it. Some unproductive partners will remain in place, dragging down the comp of the most commercially productive partners and forcing them to migrate to stronger platforms, such as those offered by the top 50 firms. The departure of strong partners will beget the departure of even stronger partners and, in a run-on-the-bank dynamic, the firm will be forced into closure, bankruptcy or uncomfortable merger. The same dynamic will unfold, albeit slightly less intensely, for firms in the PPP 151-200 cohort, with commercially productive partners migrating to the stronger platforms at the PPP 101-150 cohort. (Note: Figure 1, below, enables a determination of the number of excess partners at an individual firm.)

The inaction by leadership of some of these second 50 firms is befuddling. Year-by-year, they've seen weak partner utilization numbers and done nothing about them, presumably because each year's profits weren't so bad. They have failed to look ahead to the cyclical downturn and what it will precipitate. This is the boiled frog model of firm stewardship. It probably happens because the incentives of individual senior leaders don't align with what is best for the firm and particularly for younger partners: the burden of outplacing partners would fall on these senior leaders yet these difficult actions would make little difference to their personal income streams through to their relatively near-in retirements.

The remedy is clear: Stack the leadership teams with younger partners who have skin in the game and start moving partners out now. It's tough love: better to transition a partner today when the corporate world is hiring than await the downturn at which time the corporate world will retrench and be awash in exiting Big Law partners looking for new homes.

*****
Hugh A. Simons, Ph.D., is an ALM Intelligence fellow. He is a former senior partner, executive committee member and chief financial officer at The Boston Consulting Group and the former chief operating officer at Ropes & Gray. The ALM Intelligence Fellows Program is a collaboration between ALM and leading thought leaders in the legal industry. The program aims to foster the development of data-driven research on key topics related to the business of law.