Giles Murphy looks at how many firms are getting tougher on partner performance and moving individuals from equity to salaried status.
The harsh economic environment of recent times has put professional firms under increasing financial pressure, resulting in big changes to practice management at many of the larger firms. One of these changes has been to look more closely at performance management and, in particular, partner performance.
In response to weaker trading, de-equitisation of partners has become commonplace, especially among larger practices. This was confirmed by Smith & Williamson's Annual Survey of Law Firms 2011, in which half of the UK's top 30 law firms said they are looking to de-equitise partners.
Who is de-equitising?
Closer examination revealed that 9 of the 15 firms from the UK's top 30 that took part in the survey were already in the throes of de-equitising partners or had recently done so, while the remaining 6 were considering it. These results are part of a broader survey of 126 law firms of which half came from the UK's top 100. The level of de-equitisation among the top 30 practices appeared to be substantially higher than among the total sample group. Among larger firms more than 4 in 10 firms had already de-equitised partners, compared to 1 in 10 smaller firms (less than 25 partners).
Usually, no-one beyond the partners in a practice knows if individuals are moved from equity to salaried status. So these statistics are very revealing and indicate that de-equitisation is now a commonly used tool among larger firms. They are grasping the financial reality that some partners have either been over-promoted or 'gone off the boil'. These individuals may still hold value and the firm may wish to keep them on, but at a level of remuneration that more accurately reflects their contribution.
The survey also showed that the proportion of profits shared on a discretionary basis by most firms is relatively low, but it is widely anticipated that a greater element of profit share will shift from a lockstep system to a discretionary basis in the next few years. Presumably, this is also in response to varying partner performance.
This trend demonstrates a general move towards tighter practice management and a more corporate attitude. The larger firms face competition from each other and frequently also from well-positioned niche practices, and they have no option but to manage their top and bottom lines very carefully.
Where management teams have introduced tighter working practices and disciplines they should be in a better financial position to take advantage of the challenges ahead. However, managing a firm in a period of huge economic uncertainty, which coincides with a period of major change in the legal sector, will keenly focus the minds of individuals and management teams leading these firms. Poorly managed and poorly performing firms may well struggle to continue, but many believe that 'survival of the fittest' will result in a more healthy, successful professional services sector, as and when the economy recovers.
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