Winds of Change
The need for innovation has a significant impact on partnership structuring.
Partnership structuring has undergone a wind of change in the past decade the world over. While historic structures such as the percentage based, eat what you kill, simple unit and lockstep have all stood the test of time, changing times, partner aspirations as well as evolving revenue dynamics have all contributed towards innovative modifications, as well as the creation of new equity models.
This is especially true in countries where the legal industry is at a stage where the largest law firms are not large enough, and small law firms also have the ability to compete effectively for a share in the pie.
So what are some of the reasons why innovation has become inevitable in such situations?
The changing and varied roles of a partner make it important to reward contribution holistically, including business origination, execution, administration, management, brand building, client retention among other activities.
The increasing trend of partner movement, including lateral movements, breakaways as well as consolidation, has clearly resulted in firms being open to reexamine their partnership structures to ensure that structural rigidity does not dent an otherwise lucrative relationship.
The speed of transformation from a junior partner to a senior partner has also made innovation critical. At times there is a huge generational gap between partners at a firm. This may have at some point meant respect and hierarchical order. However, in today’s law firms it is fast changing due to the demand of age-equalization and the demand for larger rooms, name on the door and then the building, increased signing power as well as a more robust equity sharing system.
What are the firms doing then?
Firms that either followed or were looking at the traditional lockstep method have in the past as well as now looked at modifying the same through techniques such as introducing high-flying and performance related bonuses, managing gateways, introducing downward movements. On many occasions, we have set out to modify the lockstep and have ended up with a system that does not retain an iota of the fundamentals that a lockstep is based on.
Many firms are increasingly applying systems that are performance based. While this may give the indication that there is a movement back towards the traditional “eat what you kill” method, however as mentioned previously, “performance” has an expansive definition encompassing all aspects of performance which also include multiple firm-level initiatives.
Monthly partner drawings are also looked at with different motives and intentions. Certain firms use the same as a luring tactic by treating it as a minimum guaranteed amount, which while it will be paid out, may lead to a negative capital account balance for the partner. Some firms may also limit the monthly drawings to revenues that are generated for the month. Retaining a fixed percentage of all monthly drawings is also a trend firms use to both ensure continued commitment and investment as well as a shot in the arm for the firm’s cash flow.
The buzzword that is evident in all of this as well as the mandates being received from law firms is ‘Innovation.’ Every firm wants the right blend of a system that is tried and tested as well as unique to their firms and partner requirements. This combination of new and old has made equity structuring in today’s firms challenging yet extremely imaginative!
