Sometimes large changes break across the landscape like summer afternoon thunderstorms, seemingly coming from nowhere and definitely getting everyone’s attention: And sometimes they steadily and stealthily accumulate over time, perhaps without anyone ever intending to transit from where we were to where, when we look around, we find ourselves today.
Today we’re talking about Type 2.
Hazard a guess for me: How has the number of equity partners in the NLJ 250 firms changed over the last 10 years (2002—2012, the most recent figures available)? Up, down, sideways?
And, how has the number of non-equity partners in the NLJ 250 changed over the same period?
As they say on TV, more after the break.
Here are the numbers:
- Equity partners grew from 32,900 in 2002 to 33,400 in 2012, or +2%
- Non-equity partners grew from 9,700 in 2002 to 20,700 in 2012, or +112%.
No, I didn’t see that coming either: At least not to that extreme degree. When you stack this up against the total change in headcount in NLJ 250 firms, you find:
- Equity partners in 2002 were 32,900 out of 102,533 total lawyers, or 32.1%
- In 2012 they were 33,400 out of 126,293, or 26.4%—down 18% in relative share.
- Non-equity were 9,700 out of 102,533 in 2002, or 9.5%
- And by 2012 had grown to 20,700 out of 126,293, or 16.4%—up 73% in relative share.
First let’s talk about why this might be happening and then let’s talk about the ramifications.
I nominate the following suspects:
- Clients are increasingly pushing back against paying for associates, but seem more willing to pay for partners. The realization rates on the average hour of partner billing time is higher than the realization rate on the average hour of associate billing time, and clients like the “aura” of advice and attention from a partner.
- Non-equity partners are:
- cheaper than equity partners
- easier to “make”
- and easier to un-make, and even to get rid of.
- In the late 1980’s and early 1990’s many firms—about 80%—switched from single-tier (equity partners only) to two-tier (equity and non-equity). This was typically undertaken on the belief that doing so would increase leverage and hence profitability for the remaining equity partners. The story the numbers tell on that score is actually rich and complex and it’s not at all clear that higher profitability was ultimately served by this switch (consider simply that the firms with the highest year-in-year-out profitability are still single-tier), but quite a switch it was. Still, introducing the new breed into the mix—non-equities—was seen and felt, accurately, to be a marked departure from decades and decades of prior custom, so it probably took the passage of time before growing the ranks of the non-equity class substantially was even in the cards.
The result is simple: We see many firms moving from a pyramidal to more of a diamond-shaped personnel-structure model, with proportionately fewer full equity partners and young associates in the mix, and higher headcount in the middle ranks. This seems eminently rational and, indeed, seems to be responsive to clients’ expressed preferences for more experienced lawyers whose rates are still kinder and gentler than the real meat-eating go-to partners at the very top. I understand.
Now, the ramifications.
To be more specific, I worry about the long run.
Immediate compulsory disclaimer: None of what follows is meant as a critique of non-equity partners, all of whom we can stipulate are hard-working, God-fearing, eminently competent, and some of whom are my best friends. We can also stipulate that the choice non-equity partners have made—to take a very comfortable salary (one 95% of Americans would envy), without pressure to relentlessly build their “book,” is utterly rational. They are consenting adults accepting an attractive offer extended to them.
So, to all the non-equity partners in the crowd, this is not about you. Rather, what follows is written from the perspective of someone who thinks a lot about the industry’s long run.
One of the strongest indices of organizations’ competitive strength over time is the ability to align and renew itself faster than rivals. As Scott Keller and Colin Price wrote in Beyond Performance: How Great Organizations Build Ultimate Competitive Advantage (Wiley, 2011):
Organizational health is about adapting to the present and shaping the future faster and better than the competition. Healthy organizations don’t merely learn to adjust themselves to their current context or to challenges that lie just ahead; they create a capacity to learn and keep changing over time. This, we believe, is where ultimate competitive advantage lies.
This is about, in a word, people.
We know talent matters, we pay through the nose roof for headhunters to deliver lateral upon lateral, the statistical majority of whom will disappoint, we recruit the “best and the brightest” from law school (the statistical majority of whom, etc.), and yet when it’s time for our organizations to be agile and responsive to changing client expectations and market conditions, we find ourselves throttled. How can this be?
Change—real not superficial, meaningful not trivial, lasting not flavor-of-the-month—requires people to go above and beyond. It’s not comfortable, and comfortable people won’t do it. This is where, I believe, the performance hazard of too many non-equity partners in a firm begins to come in. From Keller and Price again (emphasis mine):
When it’s time to get moving, pilot programs are almost always the right way to start working on performance. If things go well, successes can be replicated elsewhere; if they go awry, you can confine mistakes to a small area. Early results also help to build your employees’ motivation and appetite for change. One key to successful pilots, we’ve found, is conducting them in two stages: first, a standard proof of concept and, second, a proof of feasibility, which will ensure that you have a replicable means of capturing the value you’ve identified across your organization. Too many companies don’t take the second step and find that they can’t build on their initial success.
But even the most carefully constructed pilots aren’t enough. Lasting, healthy change also requires an organization motivated to go the extra mile over and over again as employees carry out their routine, day-to-day tasks while fundamentally rethinking many of them. The whole process can feel like trying to change the wheels of a bike while you’re riding it. Not surprising, most companies find this difficult: one of our surveys found that only some 30 percent of all executives who had been through a transformation thought their companies had been completely or mostly successful at mobilizing energy in it.
This is demanding: Indeed, the odds against you are high, and you need every advantage you can muster.
This brings us back to the growing ranks of non-equity partners. I worry that if we as an industry continue down the path of this quite marked demographic change, we will be putting more obstacles between ourselves and the high-performing organizations we all envision.
Maybe a simpler way to present what worries me is this:
|Short Run Benefits/I understand||Long Run Problems/En garde|
|Non-equity partners are easy to make and to un-make
|Since when is simplifying management’s life a criteria for selecting and promoting talent?|
|They get things done with minimum learning required
|Mid-level and senior associates are deprived of experience they need|
|High realization, profitable rates
|Maybe, but who’s going to “own” the client relationship going forward? Not the non-equity people (that’s why they’re non-equity to begin with)|
|Not driven in the same way partner-track associates and equity partners are|
|Solid “B” players, which every organization needs
|You also need, if you want to stay in the Major Leagues, as many “A” players as you can get your hands on. Too many “B”‘s and soon your entire firm is a B team|
|Provide genuine client service||And what happens in ten years?|
As I said at the beginning, this has changed subtly and unseen by most people. My biggest fear is that we haven’t decided intentionally to do this and we’re only now beginning to live with the consequences of what has largely been a heedless development.
Nothing, repeat nothing, does more to determine an organization’s future success than the DNA of its talent pool. If I’m even half right about the challenges I outlined in Growth Is Dead, and if Keller and Price’s estimate that 70% of firms attempting serious change fail, we will need as hard-working, committed, and ambitious a group of professionals as we can find.
Finally, for many firms outside the fortunate precincts of capital markets centers, or whose practices have no natural competitive barriers to entry, getting close to your clients—bordering on intimate—has never been more critical. Lawyers without powerful instincts for client relationship management may become a luxury you can no longer afford.
In the long run, that is.
Of course, you are managing for the long run. Right?