I read with interest the news story on the front page of The Lawyer of 5 September about the rumoured thinning of Herbert Smith’s corporate department.
Mark Brandon – Law firm consultant and former legal journalist
Rather than address the specifics, especially as the firm flatly denies it, I’ll address the general idea of managing out corporate partners and, in my view, the possible effects that might have.
Ask any recruiter in the London market what every firm is always looking for and they’ll tell you: “corporate partners”. Corporate partners probably get more calls from headhunters than any other partners.
Corporate is not for nothing called the engine-room of a law firm. Clients of the corporate department are far more likely to use other lawyers in the firm, not just on deal-support work, and the fees can be considerable when a client goes on an acquisition-trail.
But corporate is difficult to plan, as the resource is essentially an ‘on-off’ switch. Either there’s a deal going – in which case all hands to the pump – or nothing doing. Corporate partners rarely know when the next deal is going to kick off, and the resource needs to stand ready. The farther up the food chain you go, and the larger the size of deal you need to sustain your practice, the more difficult it becomes to manage your resource profitably.
With the economy in a bit of a state, M&A activity is not at optimum levels, so there is some logic in thinking there is excess capacity at the top end of the market in particular, leading to under-utilisation in some firms. So the temptation may be to cut back capacity.
I’m presuming that what lies behind the thinking is that under-performing partners can be managed out to increase profitability, and that cut capacity can be replaced by recruitment if the market comes back, which it almost certainly will.
But recruitment of whom, precisely? As making up more associates to partner is hardly likely to boost your revenues in the short term – quite the reverse in fact – there are basically two options: take partners from larger, more profitable firms with bigger practices than the people you’re getting rid of, or the ‘stars’ from ailing practices.
Taking partners from bigger, better practices – “white knights” – is nice in theory, but why precisely are they going to come to you, perhaps to take a drop in income? They might do if they’re being managed out themselves, but do you really want them then? And what will be the reaction of your incumbent partners – probably unsettled themselves by seeing their colleagues axed – to the arrival of a new Big Cheese?
Partners from ailing practices of the right quality for you and sufficient practice to get you interested will be small in number – far fewer than you realise – and there will be a huge amount of competition for them, so your ‘sell’ will have to be really good. If you manage to get the reputation as the firm which has canned a bunch of corporate partners, that may put some people off: one man’s ‘efficient’ is another man’s ‘ruthless’. When they arrive, that partner will be under huge pressure from Day One, and may have difficulty transitioning clients to a higher fee environment, a potentially ugly scenario for all concerned.
Of course, excess capacity in a law firm quickly becomes unmanageable for a number of reasons, not least as regards partner compensation especially where you are effectively overpaying those higher up the equity at the expense of everyone else. So the nettle to be grasped is surely that one.
If you are rewarding your partners fairly for their contribution, pegged to their introductions, matter- and client-partner billings, it’s unlikely another comparable firm – working on pretty much the same cost-basis as you – will be able to pay them more without overpaying them, which they almost certainly won’t want to do.
Equally, if you cut the compensation for partners currently overpaid for their contribution, what are they going to do about it? They may want to leave for another firm but again, it’s highly unlikely another firm is going to want to overpay them either. Take a pay cut and stay? Take a pay cut and leave? I know which option I’d choose, and, cynically, one might say if they leave that’s fine, as you were going to manage them out anyway.
It goes without saying that lockstep inveighs against this, but honestly, what is the point of having lockstep – a collegiate compensation system – if you are not going to behave in a collegiate manner towards partners in an area that is having a bad time in a very difficult market?
A small number of firms successfully managed capacity during the recession by altering work-patterns and compensation, preserving the integrity of their resource and allowing them to react quickly when work-levels picked up. Firms thinking of cutting corporate should think carefully and creatively before taking the plunge, or they might live to seriously regret it.
Mark Brandon, managing director of Motive Legal Consulting