11/5/13

Ryan Picks a Fight with the Non-Partner Gang (Toby, Jordan, and Susan)

In the grand tradition of bad prison movie "wisdom", I'm walking confidently into the yard and picking a fight with the biggest meanest gang I see, in this case, Toby, Jordan, and Susan.

With all due respect, you are all missing the point.  The problem is not what you call non-partners, or how you recruit them, or train them, or whether they exist at all.  The problem is the partnership itself.

I attended a conference last year in which a panel was discussing how they would design a firm if they were starting from scratch today.  Over an hour into the conversation someone asked, "What about a Limited Liability Partnership of owners?"  Two of the three panelists were partners in their firms, but when everyone was done laughing, they all agreed that partnership is a terrible business model and no one would build a firm that way today if given the choice.

Look at the new Alternative Business Structures in the UK and Australia, that allow firms to pursue outside investors and allow non-attorneys to be owners.  Admittedly, I haven't been following too closely, but I haven't heard of any investors clamoring to stick their money in traditional LLP law firms. If you look at new firms, and non-firms providing legal services, that are nipping at the heels of BigLaw, how many of them have a partnership structure? Why would they? How much time does Axiom spend trying to figure out what to call their non-partner-track attorneys?

Maybe the reason we are struggling to define non-partners, is because Partnership itself is limiting way beyond just liability.

OK. I'm ready to take my beating now...




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11 comments:

Susan Hackett said...

You're dead on, Ryan. So let's forego the beating and dig right into planning our prison break. Since the law firm is a prison of our our making, and we all have a key to release ourselves, right?

We talk about law firm business models because that's what the relevant framework has been, but the more relevant conversation, as you say, may in the end be one that simply talks about better business models, and opens a larger consideration of what works best in any given setting or for any group of providers or clients.

-Susan
(PS - does being a heavyweight in a gang with Toby and Jordan make my butt look big? :-)

Anonymous said...

For twenty years, I've asked people in businesses other than law if they ever would design a business that looked like a traditional law firm. I have heard something on the order of 50 different reasons why the answer is a resounding no. From a business standpoint, the law firm model is beyond silly.

The fight we face is that those wedded to it not only want to stay in such a system, they want everyone else to use the same model. They are afraid of changing themselves, and they are afraid that if others change , they will be exposed as dinosaurs. So the US state bar associations and the ABA resist allowing the influx of capital into a system that so desperately needs it to allow better outputs for clients.

I wish it was easy to change what he'll we have wrought, but it won't be easy. The fight, when it happens, will be ugly and bloody. But the change is inevitable.

Jordan Furlong said...

Ryan, I think you're entirely correct on this. My general guideline is that partnership is an excellent business structure for any law firm where the lawyers can be counted on two hands. Beyond that, you need to seriously consider other models. "Partnerships" of hundreds of even thousands of lawyers are simply absurd.

The discussion about the role of associates still needs to happen today, because law firm employees' status can be changed more easily than that of law firm owners, and firms need to work through present challenges with what they've got. You can't replace the floor while you're trying to renovate the walls.

But down the road, those terms -- "employee" and "owner" -- need to come into vogue when talking about law firm business structures. They're clearer, more modern, and easier to work with. In the commercial world, very few "employees" ever become "owners," and very few "owners" are also workers (outside of small businesses). These two longstanding, habitual mindsets of law firms need to be among the first to go.

Toby Brown said...

In a previous life I work for a bar association - which are non-profits. We had a saying, "Non-profit is a tax status, not a business strategy.

I think the same applies here. A Partnership is an entity type - not a business model. You three nincompoops are mistaking a corporate entity structure for a business model. You can address all the issues discussed in this dialog and remain a partnership. Partnerships can take on debt, delegate decision making to an executive team, rewards owners and workers in proportion and innovate.

If I waved a magic wand and turned a firm from a partnership into a C Corp, they would still struggle pretty much like they are now. The real challenge is how one earns ownership interest in a firm. And this shouldn't come from being a good worker and probably shouldn't be limited to lawyers.

PS: Susan I checked and my butt does seem bigger :D

Ryan McClead said...

Toby,
If you "waived a magic wand and turned a firm from a partnership into a C Corp, they would still struggle pretty much like they [do] now" precisely because they are treating partnership as a business model. The whole point of this ongoing "argument" about what non-partners should be called, or how they should be treated, or what track they should be on, is about how we recruit, train, and keep our future owners. For years we have enticed young, deeply indebted law students, with the promise of “riches and ownership" and then worked them to death to benefit the partners. Clearly, in our current market, that model (what else would you call it) is not sustainable. To mis-quote Jordan, “the [profit] pie is shrinking, and the slices are becoming thinner than many partners want.” So they start to redefine the goal and change the rules for joining their club. There’s a name for an organization that is temporarily sustained by continually recruiting new members at the bottom through false promises of future riches, while using the value of new recruits to enrich those who joined earlier. Even I, at my most provocative and outrageous, would never go so far as to actually call BigLaw partnerships a Ponzi Scheme, however, when you take away the promise of “riches and ownership” as an enticement to new recruits, how long do you think you the old LLP entity type/business model can survive?

Trick question. Other factors will force the model to change long before new law grads catch on. :-)

Toby Brown said...

And I thought it was about how we "recruit, train and keep" and reward talent (versus owners).

Ryan McClead said...

Let's face it, Toby, when most firms say "Talent" they mean "Future Owners". How much money or intellectual capital is expended on average to actively recruit, train, and keep Sr. Counsel?

Susan Hackett said...

I was chatting yesterday with a great guy who's been in-house as a GC for most of his professional life, and has recently affiliated with a law firm. He loves this firm and he loves the people he works with, but his one frustration is the slow pace of decision-making/change due to the business model for operations in the firm - even in a firm that is as progressive as the one he's joined up with. Moving anything through a large firm partnership today is glacial, it's inefficient, and the process is overwhelmed by the partnership's inability to nimbly execute (think: turning an oil tanker in a bathtub).

So my point is that even if the best partners in the greatest firms have embraced super-valuable ideas to pursue transformative business strategy, their partnership model will continue to throw up operational barriers to their ability to implement change.

As Jordan notes, in larger firms, the partnership model doesn't motivate behaviors as it might have been envisioned to do in a smaller firm environment. Instead, it creates a super-class of owners whose sole common ground is the maintenance of the status quo and rewarding short term financial returns. They hold the power to make decisions for the whole, but they don't operate in the interests of the whole - whether the whole is defined as the entity's current sustainability and future prospects or the long-term development and interests of the majority of firm workers.

I don't know if this is a result of the law firm partnership business model run amok in larger firms, or just (as my Grandma used to say) "Plain Ol' Greed" too long rewarded. But the fact is that partnership models in large firms punish and frustrate the efforts of strong leaders to execute better business decisions for the firm's long-term health. And that includes better decisions about hiring, training, cultivating rising talent, and compensation: all based on value to the firm and to clients, and connecting performance to business goals.

Large firm partnership models allow for "super minority" packs of powerful, self-interested owners to hold captive the larger interests of firm and its future constituents. I live and work in the Washington, DC area - there's an excellent example of such irrational dysfunction under a dome just a hop and a skip down the road from my office.

PS - Toby: I have it on good authority that they throw people out of Texas for using terms like "nincompoop" in public. Let's work on a better handle at our next outing, preferably only after the second round. I'm sure we can come up with something that doesn't include a potty word that's equally offensive but that all of us who love breaking eggs can wear with pride.

Did I hear you say that Jordan had volunteered to buy? Ryan sounds very thirsty.

Jordan Furlong said...

As Susan alludes, the partnership structure in many larger firms has bred a dangerous "inner circle" situation, where a small number of influential lawyers can (and often do) take advantage of the complacency and/or financial illiteracy of other lawyers to their own benefit. But in this, as in other matters, partnership structure is a symptom, not a cause, of the problem.

Lawyers like partnership. I expect they prefer "partnership" to "corporate" as an entity structure because the former maximizes their personal autonomy -- you can tell an employee what to do, but you can't tell an owner what to do. I sometimes think that half the appeal of the fabled "brass ring" to young associates is the subconscious thought, "Once I'm a partner, they can't tell me what to do anymore." That frequently turns out not to be the case.

Many law firm partners, I might even venture to say most, should never have been offered partnership and should never have accepted, because they lack the skills and temperament to be owners. Equity partnership in a law firm ought to signify an enthusiastic interest in growing a business, along with the rewards and responsibilities that that brings. Solos have that; most small-firm lawyers have that. Many lawyers in midsize to large law firms lack that, and it's exactly why they chose those platforms in the first place. These lawyers really want to be employees, grinding though work that someone else gives them. But then they were offered partnership, and they figured they were supposed to accept, and their world changed without them fully realizing it. If you hold equity in a law firm, and you like receiving work from others more than providing work to others, then you have a serious problem right now.

Anyway, it's safe to say that the ways in which lawyers (both partners and associates) are deployed and utilized in law firms are far, far from optimal. Better structures that utilize lawyers more effectively will help. At some point, hopefully soon, debates about "partners" and "associates" will simply trail off into irrelevance.

The only thing I'm buying is a new Captcha system for this blog. Half the time, I have absolutely no idea what letters and numbers are being displayed. (Note: I am not actually buying a new Captcha system.)

Anonymous said...

Who would think it's a good idea for the pencils to run the pencil factory?

Gemma said...

http://www.thelawyer.com/analysis/the-lawyer-management/abs-news-and-analysis/knights-investor-james-caan-sets-out-lofty-ambitions-to-break-into-uk-top-20/3007661.article - check this out Ryan (et al), an investor ploughing some of his cash into a law firm - do you have Dragon's Den equivalent in the US?. Also in the UK there I certainly know of a few instances of non-Legal staff ie Finance & IT Directors becoming Partners in an LLP (though I've a feeling that in an UK LLP Partners are called Members - could be me imagining this - though it's undoubtedly to cause confusion)

 

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