You may have heard about the Business Leadership Summit being organized by The Lawyer, taking place in London September 22—23. (More information here; registration here.)
The theme is “embracing change in the delivery of legal services,” and here are are a few of the highlights:
- The keynote speaker on Day 2 will be Peter Kalis, Chairman and Global Managing Partner of K&L Gates, speaking on “Leading through Disruptive Change” (Here’s his recent discursive, iconoclastic, and immensely literate interview in The Lawyer.)
- Panels and topics will include “The GCs’ Ten Commandments;” how traditional law firms, new law, accounting firms, and LPO’s can co-exist; implementing and adopting change across the firm;
- and much more.
I’m writing today to provide a preview of the panel I’ll be moderating on Wednesday 23 September at 4:00 pm: “If you were to build a law firm today, what would it look like?”
I’ve been giving this some thought and in that vein wanted to share with you one idea I think deserves to be part of the mix of discussion at the panel.
Abandon the partnership model
What follows is by way of advocacy: This is not the “on the one hand, on the other…” sort of column. So here’s why I believe this topic needs to be considered a serious contender as a piece of the answer to the question posed by the panel’s headline.
Before proceeding: If you think this notion is so radical that it, and its bearer (at the moment, that would be me) deserve summary dismissal, may I refer you to none other than Immanuel Kant?
Let me explain: I’m currently reading The Shape of the New: Four Big Ideas and How They Made the Modern World, which discusses Adam Smith, Karl Marx, Charles Darwin, and the Hamilton/Jefferson debates on democracy. It proceeds from the premise that the Enlightenment enabled all these ideas to come to light and gain currency, and for the sake of context, reproduces the key phrase from Kant’s 1784 essay, Beantwortung der Frage: Was ist Aufklarung (An Answer to the Question: What is the Enlightenment?), itself prompted by a dyspeptic query posed by the Prussian clergyman and official Friedrich Zollner doubting the very concept. The book takes it from there:
Kant did not merely provide a response but a call to arms: “Enlightenment is man’s exit from his self-incurred immaturity. Immaturity is the inability to make use of one’s intellect without the direction of another….’Sapere aude!‘ (‘Dare to know!’).
Our stage and our ambitions are substantially more modest, to put it mildly. But let us proceed in that spirit.
My partner Janet Stanton has proposed a thought experiment: How many $100-million, $500-million, or $1-billion revenue corporations would choose to convert to the partnership form and model? Now, I realize I’m swinging an analytic halberd at the Golden Calf of partnership, and if that offends you I strongly counsel you to stop reading right now; this will only get worse.
Think of the business advantages inherent in the corporate form:
- Elimination of the misleading and mischief-making fiction that each partner is an “owner” in a sense that has teeth on a day to day operational and managerial level. Rank and file partners
in almost any law firm that would flunk Amazon’s Two Pizza Rule* have a voice as “owners” in the same sense in which I have a voice as an owner of GE alongside Jeff Immelt because Vanguard funds I own hold GE shares. It’s a transparent, if quaint, legal construct which causes mayhem and paralytic chaos if pushed literally.[*Amazon’s Two Pizza Rule is
that no development project should include more programmers than could be fed in a meeting by two pizzas.] - Speaking of mayhem, one of the least amusing symptoms of the partnership virus run amok is the implied license some partners take to dictate the lives of business professionals in marketing, finance, IT,and so on, demanding that they immediately execute their capricious desire of the moment. If you can nominate a candidate for sapping the energy and enthusiasm of these professionals faster and more effectively—not to mention thwarting any purposeful concerted long-term initiatives the firm is pursuing in these areas—suggestions from the floor are now open.
- You have all heard the tiresome brain-teaser posed by people who think they’re being cute but are actually revealing their obtuseness: “Do clients hire the lawyer or the law firm? [Vocalized or implied, “A-ha!”]” The only mature answer is, “both of course.” But to the extent one can assign a priority ranking, the partnership model reinforces putting the lawyer first, the corporate model would reinforce putting the firm first. Loathe as we are to cast any shadow over the unique and sui generis talents of each and every individual BigLaw lawyer (all 150,000 or so of them), recent history in our industry has taught us that free agency among lawyers can be a menace to enduring institutions. And our assignment for today, lest you forget, is to hypothesize about the ideal design for the law firm of the future.
- Finally, the partnership form profoundly distorts the reported earnings of law firms since “profits” are calculated, in essence, before senior management (the partners) are paid. Among other things, this infuriates clients and reinforces the extreme short-termism endemic among firms.
A bit of elaboration on each point.
I’ve sometimes posited that large law firms should change to being C corporations, for reasons that you touch on.
1. Corporations have centralized management.
2. The owners won’t have any phantom income on which to pay tax.
3. Related to #2, the corporation can retain earnings to fund expansion (albeit with a tax cost that the partnership structure avoids).
4. The owners will receive salaries, so compensation cost will show up properly on the balance sheet.
5. The reward for working can be separated from the reward for investing capital.
6. Compensation can be disconnected from percentage ownership.
7. If management is really, really bad, or simply uncommunicative, the shareholders can revolt and elect a new board.
8. A lawyer at an Ohio office of an incorporated firm with offices in 30 other states won’t have to file income tax returns in those 30 other states, not to mention in foreign countries.
9. The shareholders don’t have joint liability for the debts of the firm unless they explicitly guarantee them.
I can’t see any difference between what big firm partners do and what the salesmen in “Glengarry Glen Ross” do. Except that maybe the “coffee is for closers” speech they get when they miss revenue targets is more collegial in tone. Selling land. Selling law. Could be selling cars. If they bring in clients, lawyers should get commission from the corporation. Otherwise, straight salary. Corporate management then makes sure all the trains run on time. Including making the lawyers accurately bill their time and timely submit bills.
Three things:
1. Ask any outside investor (non-lawyer) if they would buy into a law firm as it is currently structured.
Under consideration:
– Part time senior management.
– Partners (co-owners in this situation) more concerned about their own practice and own continued employment than what is best for the firm.
– Lagging business innovation.
– Lack of professional diversity in senior roles, all lawyers.
– Partners who ignore simple business concepts (e.g. meeting collection targets for services) that usually get other executives/professionals fired.
I’d be pretty interested in the range of answers, which may start with “I can figure better ways to invest my money…”
2. Innovation questions which include:
– If you are a competitor/competiting outsider, what would you do to tear down your own firm?
– (Peter Drucker’s famous queries) If you knew now when you started the firm, would you still do it? If not, what will you do about it?
3. The old Chicago Bulls/Michael Jordan question: Do organizations or players win championships? Truth is you need both, but the best organizations will find ways to succeed or grow even after the best players are gone. (See: GE after Welch, Apple after Jobs, Celtics after Russell.)
1. A point not talked about nearly enough. Even some younger lawyers are starting to wake up to the fact that law firm partnership is not the financial brass ring it is purported to be. Added to your considerations:
– No hard assets
– No real brand goodwill outside of a small handful of top firms
– Illiquid market/difficult exit
– Poor economies of scale
– Flat organizational chart with loose reporting strings
– Personal proportionate financial liability for debts of entity
– Can be stripped from you almost arbitrarily with certain procedural niceties
Any financial investor would require an extremely high risk premium on that sort of investment. But lawyers kill themselves for the chance to make it.
2. If law firms really want to be innovators on an enterprise level, I would think about two things as a start (which, to be fair, we are starting to see). One, embrace establishing a skunkworks or incubator. Have to have a place where the people responsible for innovation are free (or at least shielded) from the normal expectations and operational rigors of the business. Innovation, without fail, requires investment of time and money. You want innovation? Put your money where your mouth is law firms. Two, law firms have to get serious about creating their own intellectual property. Could be technology, could business methods type of stuff. If law is an ideas business, we should be all over this.
3. BigLaw tends toward organizations winning championships. Lawyers with practices of any size have a team, and even then regularly need individual talent beyond what their usual team can provide. And all of the top performing law firms (by any metric you want to use) have extremely tight, cohesive partnerships all pulling in the same direction almost all the time. It is no coincidence that they have survived multiple generations of leadership and varied economic climates, and still grow upward.