Partners in time

I always smile when partners complain about how radically different things are from a decade ago.

What they’re really talking about is their reliance on their BlackBerrys, not a fundamental structural change.

Take our findings on equity partner ratios across the top 100 UK firms. The way some lawyers talk you’d think there were only seven equity partners per firm supported by armies of helots, but as our findings demonstrate, the decline in the number of equity partners at the top 100 firms has tailed off. This implies that, as law firm profitability stabilises, so has the upheaval at the senior end of the legal profession, with all its cultural after-effects.

The long-term trend may be downwards, but things won’t change dramatically any time soon. And here’s why: capitalisation. Firms rely on retained earnings, bank borrowings and partner capital, but many of them have stretched out ­partner distributions as much as they can, and banks are hardly falling over themselves to offer new ­facilities. This means partners have to stump up a lot more cash, which, apart from in the bulge bracket where fifty grand is a mere bagatelle, involves a lot of ­management persuasion. After all, many mid-tier firms have not had drastic ­restructurings at the ­senior level because they haven’t been able to afford it, not least because departing partners would want their capital back.

This is a situation that will be much relished by all those wanting to provide outside capital once the Legal Services Act comes into force, but the argument for external funding is still not won. ­
I think the partnership model should be cherished. Even Peter Crossley, who has emerged as a trenchant advocate of tighter equity, would baulk at restricting full ownership to a handful of individuals.

Managing partners who want to squeeze the ­equity should be warned – in focusing more on average profit per equity partner (PEP) than ­average earnings per partner (EPP), they may be making a rod for their own backs. Fewer ­partners means more in capital contributions, and those same partners are going to want to see a lot more return on their investment. That will in turn put pressure on the management to retain PEP as the governing metric. Is that really healthy?