More Law Firms Open to New Partnership Models

  • February 13, 2014
  • Daryl-Lynn Carlson

More Canadian law firms are revising their partnership arrangements in ways that bring them closer to their American counterparts.

The trend follows challenges faced by law firms in ensuring their partnership models remained profitable during the economic downturn of late 2008 and 2009.

But it has also been driven by a new generation of lawyers who are more concerned with lifestyle than investing capital and putting in the long hours to achieve traditional partnership status.

The primary change in partnership structure has been the introduction of ‘non-equity partners’ at a number of law firms in Canada inside of the past year.

The ‘non-equity partner’ is a model that previously, only a small number of firms had embraced, says Robert Denney, of Robert Denney Associates, Inc., a strategic management, marketing and strategy consultancy based in suburban Philadelphia, Pa.

“This non-equity trend or status really has gone off and on for years, but in the last few years, it has increased dramatically,” he points out.

“One reason is to lengthen the track to equity partnership to give young lawyers more time to develop their skills and particularly for marketing and business development.

“It also enables the established partners to postpone their decision on who can join them, while preserving the profits for those who’d invested capital in the firm years earlier.”

‘A new generation thing’

Yet the title of equity partner has advantages for both the firm and associates, observes Denney, author of a widely-read annual report on legal-sector trends, “What’s Hot and What’s Not in the Legal Profession?”

“You can retain associates or younger lawyers who will not become equity partners by the firm’s choice and yet are very viable, but who would leave the firm if they didn’t have the partner title” after the requisite wait period of six to nine years, he says.

As well, he notes, “There are many young lawyers today who just don’t want to become partners. There are additional responsibilities, they have to work longer hours and are required to make capital investment. I think a lot of young lawyers just wrap that up and call it quality of life.

“It’s a new generation thing.”

So how does a law firm strike a happy medium to make both associates, and partners, happy?

Denney admits there’s no easy answer.

“Our recommendation to firms really depends on the case at each firm and what their issues are although, overall, I favour the concept of non-equity partnership,” says Denney.

“That’s been a change in our firm’s thinking over seven or eight years ago, but it could be used as a temporary step or a permanent step to keeping everyone happy,” he says.

Ian Dantzer, managing partner at Lerners LLP in London, Ont. says his firm has introduced a non-equity partnership option which is working out well. “It’s harder for people to develop a practice than it used to be. The sheer number of lawyers is one reason,” he says of the legal sector.

“I think also associates are asking just to become involved, to gain a sign of recognition, get a marketing tool (with a partner title) and know they have can achieve progress.” He adds, “In the short term I think we’ll see the two-tier structure being used more often.”

Adam Pekarsky, President of the Pekarsky Group, a legal consulting and recruitment firm based in Calgary, acknowledges the typical track to partnership has changed, particularly in the time frame it takes associates to achieve the status. The historical path to partnership has been pushed out.

“A few years ago, the typical normal course to full equity partnership was seven years,” he says. “But I would say now the typical track, and obviously there are exceptions, is probably about nine or 10 years. It is simply a way for the law firm to get the benefit of a couple of more years of leverage on people and at the same time, it allows those people to market themselves to the clientele of the firm under the moniker of partner,” says Pekarsky.

‘All that should matter is the clients’

He notes that the non-equity designation can be a tough sell.

“If you’re not making a capital contribution and not pulling up the profits, are you really a partner? Technically no, so that’s why they call them non-equity partners or income partners.

“But there’s nothing disingenuous about that, it’s just a title and clients are going to give more credence and likely pay a higher rate to someone who is called a partner rather than associate.”

He says law firms are still inviting performers to become full partners after proving themselves under the non-equity title. But for associates who’ve achieved the status of non-equity partner, in the interim, the title is something to take advantage of.

“When a client says to a lawyer, ‘Are you a partner?’ that lawyer needs to look the client in the eye and say ‘yes’,” says Pekarsky. “All that should matter is the clients.”

James Cotterman of international law firm consultancy Altman Weil, Inc. says he has mixed sentiments about non-equity partnership, based on the experiences of law firms he has observed.

He says within the legal profession in the United States, the non-equity partner has been “the fastest growing segment of the marketplace, which is interesting, in a way, because there’s a lot of debate as to whether that growth has been good growth for firms.”

He attributes the growth in non-equity partnerships to most law firms’ inability to recognize just what to do with their top performers who aren’t quite good enough for full equity partnership status.

Law firms recognize “we have lots of great lawyers, but they’re not quite up to snuff as equity partners so what do we do with them,” he observes.

He believes the trend is perhaps more prevalent because of a generational focus on lifestyle.

“If you have a rising star, you can give them a mantel that they can go out and market themselves as a partner and see what they can do with it.”

But he says that law firms are not reaping the benefits financially. “What we found is these positions were created to manage earnings. But if I call the bottom rung of my partners ‘non equity’, and they’re my lowest-paid partners, have I changed anything fundamentally about the economics of my firm? No, I haven’t. But it looks good in the lead forms.”

Jerri Cairns, managing partner at Parlee McLaws LLP in Edmonton, says her firm has recently undertaken a review of its partnership criteria.

The firm has traditionally enabled associates with six to seven years of experience apply for traditional partnership status, but determined it was time to revisit its structure.

“We recently struck a committee to look at our criteria. A lot of firms across North America are doing this as more of a management driven process,” she says.

“We haven’t looked at this for some time and my thought was we should look at it in terms of what other law firms were doing and see how we compare with the financial criteria.”

The firm formed a committee and its members have invested their own time to contact competing law firms to determine how best to revise its partnership structure.

The committee’s recommendations have been tabled and Cairns says it will be another month or two before the partners vote on their acceptance.

Daryl-Lynn Carlson is a freelance writer.