Legal Business Blogs

Comment: The road to equity – a difficult journey, an uncertain destination

The legal profession is going through a period of dramatic and profound change, and the forces driving these changes are having far-reaching consequences on the industry. The roles and responsibilities of the equity partner are not immune from these forces, and are evolving and expanding in response. For many this is creating great ambiguity, while others are seizing the opportunity.

What are the forces in play? To name but a few, law firm clients now articulate their requirements more clearly than ever before, with the value proposition delivered by law firms constantly under review. The financial and economic stresses on the business of law are visible and demanding – profitability and margin pressures are extreme with billing rates subject to compression, while inflationary forces on the law firm cost base remain a constant threat. Alternative fee arrangements are commonplace and clients often have an expectation or requirement that law firms will join them to share in the commercial risk of a transaction. New models emerging for the organisation and structure of law firms are constantly being developed and implemented, with onshoring, offshoring and outsourcing constant themes changing the traditional shape of firms. In today’s world, where disaggregation of legal matters is becoming the norm, legal instructions must be analysed, unbundled, re-engineered and project-managed.

Leverage models are evolving rapidly and the composition of the fee-earner population is increasingly fluid. Notably, paralegal staff numbers are expanding at a healthy pace and in a recent survey of the top 100 UK firms by The Royal Bank of Scotland (RBS) over 30% of firms reported plans to grow their non-legally-qualified fee-earner population next year. Beyond this, more firms are building teams of part-time qualified lawyers so as to create more flexibility in the leverage model, more agility in response to client needs and more variability in the law firm cost structure. Finally, deep, broadly-based and vibrant client relationships are the jewels in the crown of a successful law firm and, driven by partners, firms require a relentless passion for building and managing substantive client relationships. The role of law firm partners in responding to all these forces is central to both the success of partners and their firms.

The business of law has never been more interesting, while the role of an equity partner has become more complex and demanding. It requires a deep knowledge of more and different skills, embodies more quantifiable targets, and is less forgiving of underperformance. Partner performance, management disciplines and techniques have become much more visible in recent years, particularly since the downturn in the market in 2008. Both on a quantitative and qualitative level, partners are held accountable for a broad and diverse range of measures and the performance of their practice according to well-defined and agreed criteria, representing a significant shift in the historical practices concerning partner performance utilised by most firms.

For those trainees who aspire to appointment as equity partners, be careful what you wish for. The roles and responsibilities of an equity partner have changed, probably forever.

But attaining equity partner status has become significantly more elusive in recent years as the velocity for advancement of associates’ careers has been slowed by many of the forces described above. The changing landscape for the legal sector has suppressed the rate at which equity partner roles are being created and prolonged the period required to achieve this goal.

One alarming trend for aspiring equity partners is the contraction in equity partner numbers made up in the UK since 2008. Many firms have evolved tightly funnelled bottlenecks at the entrance gates to partnership. It is materially more difficult to get through. According to Legal Business, the top 20 firms collectively made up 111 partners in the UK in 2013 (excluding foreign offices), one less than in 2009 when revenues collapsed as a result of the disruption following the financial crisis and the resulting recession. The figure is a 15% drop on 2012, when the top 20 firms promoted 131 new partners in the UK. International partner promotions were also down compared to last year.

As the trend for disaggregation of legal instructions builds momentum and firms improve their analysis in unbundling instructions, this trend will only accelerate. It is clear that work will need to be more thoughtfully allocated among fee-earners and more work will need to be delegated to associates to deliver advice cost-effectively to clients and profitably for the firm. Partners will need the necessary skills to achieve this, but in the final analysis perhaps not as many partners will be required in the process.

The law firm model continues to be re-engineered. These requirements suggest the need for a more flexible approach, driving firms towards business models with greater potential to flex fee-earner capacity without building substantial fixed overhead. The market has yet to adjust and fully embrace this model and all its consequences. As a result, the profession remains over-lawyered despite the significant restructuring that has been completed in the sector over the past five years. In my discussions with managing partners they consistently despair at excess capacity challenges in the sector, with all the consequences, and especially the adverse impact on billing rates and drag on profitability. Beyond this, my review of law firm financial data related to performance also confirms this. In particular, fee-earner utilisation remains relatively soft, indicating the availability of significant capacity well in excess of the demand, despite a modest recovery in transactional activity.

So, the role of the law firm partner is increasingly complex and demanding. This trend is firmly established, and looks set to continue until the legal market normalises and works out many of the excesses and inefficiencies still embedded in its structure. It is clear that this process is progressing, and many managing partners are focused on the competitive advantage they anticipate will be available to the firm from their early response to these issues and the delivery of resulting successes. The challenge for existing and future partners is to recognise the changes taking place, and embrace them and make them a business norm.

Much of the work completed in a law firm office is not a reserved legal activity under the provisions of Section 2 and Schedule 12 of the Legal Services Act. It will be increasingly recognised that most lawyers don’t undertake reserved work, raising the prospect of alternative providers of these services or different techniques for the organisation and execution of these legal instructions. At the same time, there will also emerge alternative providers of reserved activities and the Legal Services Board’s recent approval to authorise The Institute of Chartered Accountants in England and Wales to license its members to conduct probate work is a good example.

The recently announced Finance Bill 2014 may create the perception that the market can support growth in equity partner numbers and opportunities. This is nothing more than an illusion, with the fundamentals driving law firm performance remaining unchanged and constraining the expansion of the equity partner population.

The order of the day for the successful modern law firm will be far better management of margin, increased use of paralegals, more delegation of work and use of trainees, solicitors and paralegals – not expanding the ranks of equity partners. Partners will be forced to push more work down to the level of qualified fee-earner where the work can be executed most cost effectively and efficiently. Hoarding work to keep busy is a dying strategy for underperforming firms and partners.

But does any of this matter? Is equity partnership what associates want today? While once the holy grail of a career in the law, research suggests that for a large population of associates, alternative career choices are more attractive than the journey to partnership. Holding equity is not the career aspiration of most trainees. The increasing demands, complexities and challenges of the role, lifestyle choices, work-life balance considerations, in-house alternatives, corporate and government sector opportunities all present viable career options. In addition, with continuing evidence of the emergence of modest economic recovery, the financial services sector may return slowly to source talent from the legal sector.

And for those trainees who aspire to appointment as equity partners, be careful what you wish for. The roles and responsibilities of an equity partner have changed, probably forever. The bar has never been set higher. The demand for a consistent level of high-quality performance is increasing and will be ever more unforgiving. The era of performance-driven cultures is overtaking the historically paternalistic cultures of the traditional City law firms. There is nowhere to hide and law firm management will not be discouraged in their pursuit of superior performance. If partners fail to deliver, recognise that underperformance is no longer an option and not sustainable. Managing partners with whom I speak are unwavering in their goals for – at a minimum – keeping up, but preferably staying ahead of their competitors.

The road to partnership – long, very uncertain, and not necessarily what you expect upon arrival.

The author of this blog, first seen in the Dissent column of the March issue of Legal Business, is James Tsolakis, head of legal services in the corporate banking team of The Royal Bank of Scotland.