Why Two-Tier Partnership Structures are the Right Solution
KAL SHINER, CPA
With many law firms’ high-performance expectations, demanding workload and long hours, some of today’s lawyers are searching for a better work/life balance. The partnership track is not the lure it once was. However, your firm may be turning away profitable legal talent if it continues to phase out associates who don’t fit the partnership track. The solution is a two-tier system of equity and non-equity partners.
Looking at the Numbers
The two-tier concept has continued to gain in popularity. According to Altman Weil, Inc., a legal consulting firm, the number of non-equity partners in the 200 largest law firms rose to about 42% percent in 2017. This system is attractive not only to the attorneys seeking to become non-equity partners, but equity partners, as well.
It’s no secret that there are more law-school grads than partnership-track positions. Not every lawyer is owner material, but many are capable of making significant legal and financial contributions. In addition, many younger attorneys reject the idea that their job is their life—they seek to find a work/life balance much different from those on an equity partnership track. They refuse the late nights, frequent travel and mental pressure generally associated with equity partnership tracks. Similarly, some lawyers simply want to practice law, not generate new business or assume management responsibilities.
Current equity partners can take a bigger slice when their firm has fewer of them. With increased operating costs, intense competition and budget-minded clients, limiting the number of profit-sharers may keep current equity partners satisfied and engaged.
Hiring midcareer lawyers is increasingly common. But despite having high expectations for such lateral movers, firms may be wary of offering untried attorneys full equity partnership. Offering these lateral hires a non-equity stake to begin with is a good way to make sure the relationship will last before offering an equity stake.
Adding Non-Equity Partners
Some firms have created permanent associate programs, placing non-partnership-track attorneys in satellite offices with lower-profile, less-challenging work. But if you try this, be careful. Such permanent associate programs can create a demoralizing “second class citizen” environment that discourages attorneys from producing their best work.
Non-equity partnerships offer an alternative for attracting and retaining talent. Lawyers in this tier enjoy the title of partner, but firms typically compensate them with a combination of salary and performance bonuses, not profit shares. In fact, one of the advantages of adding non-equity partners is the flexibility to determine the best means of their compensation.
Non-equity partners do not make capital contributions to the firm or assume personal liability for debts. But, they may be granted limited voting rights and participate in partner meetings where strategic decisions are made.
Finding the Right Candidates
Do not use non-equity partnership positions to dispose of underperforming lawyers who traditionally would be asked to move on to another firm. Instead, reserve them for high-billing senior associates who desire a 9-to-5 workday, or unproven lateral hires.
Also, consider this track for older equity partners whose business development activities have slowed or for experienced lawyers with valuable niche knowledge who have no desire to be owners. Keep in mind that some of these non-equity partners may eventually become equity partners. Nevertheless, it’s important to make your non-equity track a respected and professionally challenging alternative to equity partnership so that lawyers will remain loyal to your firm.
For most ambitious young attorneys in private practice, equity partnership remains the ultimate prize. However, the organizational structure that once supported this goal has become less viable in the 21st century. Firms looking to remain competitive should consider exploring if including non-equity partners is right for them.
Transitioning to a two-tier partnership system can be complicated. Be sure to consult your financial and law firm management specialists to help define your non-equity partner position and set compensation rules.
Unlock the Door to Success: The Importance of Key Performance Indicators
JACQUELINE JANCZEWSKI, CPA, MBT
Successful law firms know that long-term sustainability requires constant self-examination and evaluation. These firms often rely on key performance indicators (KPIs) to help them make more informed decisions when charting their futures.
Financial KPIs to Consider
For many firms, the biggest consideration is financial performance. KPIs that will help shed light on your firm’s financial health include:
How much revenue does your firm collect compared with its billings (net realization), and how long does it take to collect that revenue? Determine how the amount billed compares with the amount of time worked (billing realization).
- Unbilled Days
How long does it take to bill clients for work? Compare the fee portion of unbilled work-in-progress with the average fee billings.
- Uncollected Days
This is the ratio of the fee portion of accounts receivable to average fee billings.
- Profitability per Attorney and Client
You need to know how individual attorneys and clients are affecting your profits when you are making decisions about compensation and client relationships. Also, look at profitability for each type of matter when considering which types of work to pursue.
Beyond the Financial
It is admittedly hard to shift your focus away from billing-related metrics, but you also need to consider other KPIs that are specifically aligned with your firm’s strategic plans and goals. After all, strong profits per partner are no guarantee of continued success.
For example, you can’t afford to overlook client development. To measure your firm’s performance in this area, you could look to the number of new clients per month compared with the total number of active clients, matters per client and attorneys with time on a client’s matters (or practice areas per client). Evaluate your firm’s marketing and client initiatives to determine which are working and which should be refined or discarded. This might involve measuring, among other things, the cost of client acquisition.
Additionally, make sure that you don’t overlook client satisfaction. Satisfied clients are returning clients and referring clients. Firms are increasingly turning to the net promoter score (NPS) to measure satisfaction. They ask their clients a single question: “On a scale from 1 to 10, with 1 being not at all likely and 10 being extremely likely, how likely are you to recommend the firm to family, friends or colleagues?” Clients who reply 1 to 6 are “detractors,” and those who say 9 or 10 are “promoters.” Calculate your NPS score by subtracting the percentage of detractors from the percentage of promoters.
Once you have decided to implement a KPI program, what’s next? Four steps can have you on your way to an effective KPI program:
- Select KPIs
Select quantifiable KPIs linked to your goals. For example, if your goal is client growth, you might look at your rate of converting consultations into clients.
- Set Targets
Establish targets for your KPIs that tie into the goals, perhaps based on comparable peer benchmarks. Using the example above, you might target a conversion rate of 50% to 60%.
- Monitor KPIs
Track relevant data and measure the results against your targets. Keep in mind that you generally need several months’ data to detect trends.
- Act on KPIs
Use the information to make solid decisions.
Be sure to cycle through the steps regularly. By doing so, you might find that some KPIs are no longer relevant and could be replaced with more suitable metrics.
Knowledge is Power
The adoption of innovative technologies over the past decade has provided law firms with a wealth of available data. Your financial advisor can help you wade through it to select the most appropriate KPIs for your goals and then evaluate and act on them to position you for the long haul.