Why The Partnership Model Is Broken

Only one person I can think of from my graduating class of 2005 is a Partner at a law firm. Of course, there might be more that I haven’t kept in touch with, but it is an interesting anecdote. A number of them became Partners at a firm for a couple of years, but they have all (with that one exception) since moved on. Some have gone to the bar or in-house roles, but the majority have done the same thing: they have started their firm. In my view, this is because the current partnership model is broken.

When I first started practice, I saw the tail end of the old partnership model. Under that model, a hard-working and talented solicitor gets to ‘Associate’ within 2-3 years, ‘Senior Associate’ within 5-7 years, and then joins the ranks of partner at 8-12 years. Then equity is bought into a few years afterwards. I recall in 2006 that the partnership admissions that I saw were at approximately ten years, in line with the previous expectations. The rule for budgets was 5x salary, and the jump from Senior Associate to partner was based on having your client base and the requisite technical skill. A starting solicitor might make less than they would at McDonald’s if they calculated hours worked divided by salary, but no matter because there were a generous annual salary increase and short road to sharing partnership spoils.

But I say that it was the tail end because, in subsequent years, the level of experience required before being admitted to Partner seemed to increase. To 12 years. To 15 years. More? And so too did time required for buying into equity. One might languish as a salaried partner for 10-15 years. This has even turned into somewhat of a running joke, with salaried partners referred to as PINOs (Partners In Name Only) or “Senior-Senior Associates.” Indeed many firms have added a new place to park solicitors before Partner level (and after Senior Associate) in the form of ‘Special Counsel.’ I guess that makes PINOs a Senior-Senior-Senior Associate?
By the time that they get to equity, the PINO is doing something odd: they are buying their goodwill. That is, they have developed their client base, which is attached to their goodwill, and then they need to pay the existing equity partners to share in the profits from that goodwill. Even for lawyers that are not mainly mathematically inclined, it is not too difficult to work out how to 5x their salary: leave and start their firm.

This extension in partnership periods has coincided with a dramatic reduction in the costs of establishing a new firm. No longer does one need to invest in an extensive research library when those databases are available online, free. There is a myriad of practice management software cheaply available, although frankly, many skip even that and settle with a Microsoft Office subscription, Xero for accounting, and something for timekeeping (I use Harvest). Most younger practitioners can touch type, but even if they do dictate then, then the software is either cheap or included as part of Office. Outsourcing specific tasks, either locally or overseas (say through Fiverr), has a negligible cost and is convenient. Essentially the setup costs are a laptop and insurance. And not only does the solicitor get to potentially 5x their salary, but they also are not burdened with debt from paying outgoing Boomer Partners for something those Boomer probably never paid for themselves.

It is therefore unsurprising that various law societies report that the rate of the new firm establishment has increased 2-3x in the past few years. And I have seen, again anecdotally, the age for which solicitors start their firm decrease. Instead of hitting 10-12 years, being a SA or a PINO and exiting stage left, I have seen several solicitors leave as soon as they have goodwill 2-3x salary, or even merely enough to be ‘ramen-profitable’ (i.e., enough to sustain necessary living expenses).
The prospect of solicitors up and leaving as soon as they can create a disincentive for firms to invest time into training young solicitors and helping them develop their client base. Why spend time and money sending them to networking events when you won’t see the benefit of that business development; better to lock them in a dungeon doing document discovery?
I propose that solicitor advancement should no longer be linear but instead broken up into three separate facets: 1. remuneration, 2. title, and 3. equity.

Remuneration is perhaps the easy one. It should be based on the revenue the solicitor generates for the firm. Whatever metrics the firm uses, be is 3x, 4x, 5x salary, or something else there should be a strong and direct relationship between revenue and salary. Where a solicitor goes above expectation, they should also get bonuses to keep that relationship there.
Titles should be based on the solicitor’s skill level. Clerk, Solicitor, Associate, Senior Associate, Partner should all denote competency levels. A Partner should be one who is fully competent in their area of practice. It should not be tied to their remuneration or practice size. In particular, a solicitor who works part-time (read: women with children) should be accorded the title of Partner if that is their competence level and should not languish as Senior Associates for a decade or more.
Equity should be granted at no cost in proportion to the goodwill of a solicitor. It is somewhat amorphous to measure, but by tracing client relationships, one should be able to get a reasonable idea. Almost all relationships are personal, and so even the largest clients at the biggest firms still have based on the goodwill of one or more persons – witness that partners leaving take large clients with them to new firms. (The idea of firm goodwill for services is massively overrated)

This granting of equity might mean that solicitors get equity as soon as they are Partner, or even beforehand – it depends on their client base. This, however, puts them in the same position as they would be if they started their own firm, but with the added synergies of a firm and little concern that time invested into their development will be wasted.

This three-pronged proposal does mean that there can be different paths to achievement in a firm environment. There could be the highly skilled technician who works on big matters but doesn’t have clients inure to them personally – they can achieve Partner and make good remuneration. Or there could be a rainmaker who is better at shaking hands than doing work and so takes a low salary but gets others to do work and has a profitable client base. Or a solicitor could develop all attributes equally as they might have been expected to in the past – no one is disadvantaged in their advancement.

Until next week, all the best,