A Layered Pie of Partnership

Rubric: Uncategorized

While some partnerships are planning and implementing the transfer of power to the younger generation, others are still contemplating about growth to be done in-house or by lateral hires.

The evolution of national market of legal services was accompanied by evolution of partnership relationships, even though the development was erratic both in terms of time and geographic spread. My personal understanding of the structure and internal relationships within partnership have also evolved.

When I started my career at the legal market in 2004, I have seen partnership as a clear, black and white picture: partners – are the only full-right stakeholders (they make key business decisions and share the profit). After three — four years I started to spot the shades of grey. By 2010, I was able to see a full-coloured picture (multi-layers, diversity of different types of relationships between various levels of partners, access/no access to decision making and profit distribution).

This evolution was obviously influenced by purely subjective and absolutely objective factors. The growth of markets during pre-downturn period (especially in 2005-2007) speeded up the process of partners growth, and the term “partner” became one of the mechanisms for “talent” preservation within a firm (or fetching them from the other employers). The crisis made its influence, i.e. existing partners started to think how to slow down the promotion of talents with no personnel resource loss. The approach to partner-candidacy selection has changed: the downturn became a sobriety cold shower for some partners leading them to become aware of the level of responsibility for a business they are carrying, and for some partners it was a refreshment shower encouraging successful start-up for a number of legal firms at the market.

Meanwhile, I would like to stress that the only internal factor that defines partnership development is readiness (or not) to give up some part of the power as a pay-off for responsibility distribution within a firm, for its development and growth, distribution of risks and ultimate success of the firm. The reality is such that in most cases partners-founders are not ready to share their power. Expectations of potential discomfort coming from the need to change something in the familiar set-up and to negotiate new partnership terms in the new system of coordinates takes over the expected advantages of growth.

Although, the search of compromise between the reality which forces inevitable choice “grow or die” and internal “view of the world” of founding partners, – by a simple copying or truefalse attempts – still leads to standard and world accepted types of partnership structuring.

Obviously, attempts to create your own national bicycle have been made by the market pioneers, but everything has been already invented and it falls into either one of three categories of partner relationships or, so-called layers:

1) Equity Partners =  share – holding partners, full-right owners;

2) Semi-Equity = partners which partly take part in decision making or profit distribution;

3) Non-Equity or Salary Partners = not holding a share partners or salary partners.

Personally, I am a fan of the model where equity partnership is a final destination goal, and all other forms of partnership are the intermediate check-points. Nevertheless, I have to admit that all of the mentioned above categories of partnership remain to be working instruments for “layering out” partnerships in the modern legal firms (even if achieving equity partnership is not considered as a final destination).  Multilayers partnerships have became a strong trend of a national segment of the legal market. Obviously, this model allows to prolong a period of dominating partners-founders in the process of strategic decision making.

This specific model is very popular among relatively small regional partnerships (2/3 of which are mono-partnership), which came very close to the turning point of growth. This step is justified by the want of partners-founders to distribute the workload, and also by the need to quickly demonstrate the client new products/services of a high quality according to a quickly changing reality.

I would like to mention a number of nuances, which are important for selection and implementation of the mentioned categories for each specific partnership:

1) It is possible to stay flexible with profit distribution and vote ratio in frames of one layer: here the approach to partnership can incorporate other possible indicators like the number of years working in the firm, etc ;

2) Built boundaries in partnership provide a ground for a safe and productive co-existence of various categories of partners (equity and semi-equity). That is why it is important to formalize the number of issues, for cases when the decisions are taken solely by the partners-owners.

3) One ambiguous issue of all times remains the issue of remuneration to non-equity partners, both semi-equity and salary partners. Such difficulty is also contributed by the variety of ways to identify the base for calculations, even if KPIs are clearly stated. The most questionable indicators, to my opinion, are (1) defining the amount of income, which a partner is paid a remuneration from, and (2) expenses allocation and especially general company costs (it is the time when the senior partners demonstrate more love to marketing and personal brand and company’s brand promotion, and experiments in launching new products/and practices).

4) The unconquerable urge (I would even call it a mania) of the senior partners to monetize their past investments or their previous contributions to the firms success, which are speculatively are referred to as the “firms brand”. Speculation in its essence is caused by emotional approach to the issue which naturally causes rejection by the younger generation. This issue is easily solved by formalizing the conditions for entering or exiting the partnership, equity partners at the first place.

5) My perception of the status of the non-equity partner is very clear: it is a highly qualified executor with purely marketing status without any influence on formulating the agenda for own practice and respectively for own remuneration. It has all the consequences for involvement and motivation of the current specialist. I think it is a prerogative of the large-sized firms located in the capitals. When they take a new partner on board (still wanting to limit hisher influence on own managerial comfort), partners-owners are expecting that a new partner take a part of client-service and new client engagement role, as well as organizational managerial load (for example, exclusive development of young partners at least in frames of their own practice. Obviously, such expectations will be fulfilled only if they will involve remuneration scheme.

Obviously, evolution and partnership development at our young market have reached the level, when it can not be done spontaneously. These processes require clear formalization and setting the rules for cooperation within each layer and between the layers.  Thankfully, this fact is accepted by the majority of players at the national market and causes senior partners to be looking for the answers to all of the above questions when building stable and competitive business.

Here is a story to rap up, once a year my grandmother was cooking her own specialty layered pie for a Christmas dinner. One of the major secrets of this recipe was her approach to dough – it was a simple yeast dough made of water and flour where each layer has to be rolled as thin as possible, but not to cause breaks. Each layer was buttered which prevented them from sticking to each other. The edges of the pie have been rolled in so the butter and filling would not leak.

This pie recipe metaphorically describes an approach to partnership, i.e. simple, known and understandable approached, will give a needed result. If to take care of the quality approach to the search of boundaries and distributing responsibility between difference categories of partnership preserving the wholeness of a partner entity.