COVID Crisis Management

Denial and a brutal end – Why cutting partners is still taboo

The issue no law firm leader wants to address right now is whether partner ranks need to be thinned. Polite conversations continue while everyone studiously avoids the issue everyone knows needs to be discussed.

First published on:
11/5/2020

The issue no law firm leader wants to address right now is whether partner ranks need to be thinned. Polite conversations continue while everyone studiously avoids the issue everyone knows needs to be discussed.

Why?

Early in my career I heard a story of a partner who sat in his office with the door closed – and recorded not a single chargeable hour – for over two years. Nowadays we would probably identify a mental health problem. In those days, it sparked fierce debate between partners who thought enough was enough and the camp who believed a partner was for life. Unbelievably, the compromise was to pay him off with seven years’ money. Those attitudes linger, albeit in less extreme form.

Political risk

Then there is political risk. Few firms confer unfettered power on leaders to exit partners. Partnership deeds often provide equity partners can’t be removed without a partnership vote – 85% in favour is not uncommon – or give rights of appeal to the partnership.

So, does that make it impossible to ask an equity partner to leave? No. The system has a MAD balance – Mutually Assured Destruction. Both sides, leaders and partner, know going to a vote carries a high risk of calamity. For the individual partner, do you really want a dossier of your alleged inadequacies presented to fellow partners? Will it stay private? Can you possibly win a debate with the entire partnership that pitches you against the managing partner?

Vote of Confidence

For the leader, this is a vote of confidence. Lose and you’re neutered. You will probably have to yourself resign. Certainly, you forfeit your ability to compel any partner to leave ever again. Putting their own career on the line to remove a partner is hardly an appetising prospect for any chief executive.

There’s also cost. Typically, partners are entitled to 6-12 months’ notice. With the repayment of capital, unused holiday/sabbatical and share of undistributed profits, departure cash costs can easily exceed $2m per partner at top firms. $2m here, $2m there and soon you’re talking serious money.

Leaders have some levers to pull. Leavers can be incentivised by a financial package that exceeds the minimum on the table if voted out. Release from non-compete covenants. Agreed public statements and reference. Support for the transition. In practice, these typically persuade even the most recalcitrant partners to go quietly.

However, some suggest this balance is getting out of kilter. The options for leavers from top firms are simply not as plentiful as they once were, as mid-tier rivals have become less willing to hire low-profile partners on the strength of their previous platforms. So, partners being asked to leave are digging in deeper and putting up more of a fight.

Mutual trust and confidence

There’s the question of impact on other partners. Typically, the key issue for leaders is not dealing with the partner in question, it’s bringing their colleagues along with the decision. Partners have many reasons to support a partner under threat. Personal relationship. Friendship. Loyalty. Interdependency of their practices. Fear they might be next. They might not be the best performer but they’re part of the social glue that binds the group together.

In practice, it’s hard to remove a partner who commands significant support among influential fellow partners. And that is probably right. A partnership is rooted in mutual trust and confidence. But no partnership can survive for long when that breaks down. At an individual level, lack of support for a partner is a sure sign something is going badly wrong.

So why would any law firm leader even think about asking partners to leave?

The long-term success of the firm depends on it. In an increasingly competitive marketplace, there is less margin of tolerance for under-performance and mediocrity. In days gone past, when legal markets were less competitive, fat profit margins meant there was generally enough money to keep everyone, if not happy, at least appeased. High-performing partners accepted dilution of earnings by less able colleagues because of social pressure and lack of alternatives. This still holds in many smaller jurisdictions but has become much less true in bigger, more intensely-competitive legal centres, particularly London and New York. Those days are gone or are fast disappearing.

Why partners underperform

Every firm will, from time to time, have a proportion of underperformers who drag on overall performance of the firm. They may be an ‘Extinct Volcano’ – a partner past their prime. A specialist marooned by a sudden change in market, tax or regulation. Someone whose practice has branched into non-core areas that would suit a different platform. Or someone who has gone through life-changing circumstances in their personal life that has sapped energy, health or motivation. Poor standards of behaviour or addiction problems can happen. Or someone who has simply plateaued. Someone who can’t build a team or upsets clients. Or simply someone who just can’t deliver on the primary responsibility of equity partners – to generate sufficient profitable revenue.

Partnership in a top law firm brings huge rewards of money and status. Ultimately, that is not an entitlement. It has to be earned and what you do has to strategically fit.

At this point many leaders conclude the answer is to pay them less, rather than go through the pain of exiting them. That can work but often is a short-term fix that stores up problems. Once compensation is cut, the spell that compels partners to work extraordinarily hard for super-sized rewards, is broken. Partners often bear a grudge, lose motivation and productivity plummets. Cutting compensation can be the right answer but not if it’s done primarily to avoid a necessary hard exit decision.

Although it rarely feels like it at the time to a partner asked to leave, such people are ultimately relieved, happier and less stressed when the decision is made, and they move elsewhere. And the firm is usually better off without them. It releases energy. Unlocks hidden barriers that sprout new client relationships and improve staff retention. It wins buy-in from the big producers.

Of course, most firms would instinctively understand the importance of giving struggling partners time to fix the problem. Rightly, firms usually have a high degree of tolerance for issues caused by personal tragedies, accidents or ill-health. In an ideal world, appropriate conversations would be held with struggling partners to identify the problem, agree on a pathway to rebuilding success, set a timetable and provide support. Warnings would be given with a clarity of message that no-one could deny. Time would be allowed to effect a cure.

Why things go wrong

In practice, many firms fail at the first hurdle. Conversations are avoided. Messages fudged. Problems ignored. Misdiagnosis of the problem is rife. Remedial support is too little, too late. Since many underperforming partners lack self-knowledge, they can be blissfully unaware of their sinking reputation and support. The end, when it comes, is all the more brutal.

But the end must come. Few firms can afford to carry many expensive passengers, especially not in a post-COVID world where competition is intense, fees are under pressure and demands from more successful partners for action grow louder by the day.

Yes, partnership creates a unique working relationship between skilled, autonomous knowledge workers like lawyers. Yes, asking partners to leave potentially tears at the fabric of the firm and can trigger destructive, self-preservation behaviours among those who remain.

But in the end, leaders have to face this reality for the long-term good of the firm as a whole. The nettle has to be grasped. Done with compassion, dignity and determination, both the individual and the firm will be better for it.


Contact David

david@dhmorley.com

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