Profits vs. Partners

Getting billed by the hour can be expensive for clients, who get stuck with an unexpectedly big tab if a matter turns out to be unexpectedly time-consuming. Alternatives to the billable hour are gradually emerging, such as flat fees for handling a matter from start to finish; percentage fees, in which the firm’s fee represents a cut of the total amount involved in the matter; and discounted billing rates, if the company sends the law firm a large volume of work.

The upshot: law firms are finding it increasingly difficult to treat clients as gravy trains.

As clients become more hostile to fee increases, law firms are responding by focusing on so-called “premium,” “high-value,” or “rate-insensitive” work—matters that the client will pay a king’s ransom for, without complaint.

Such work doesn’t grow on trees. It grows on business-generating partners—the rainmakers. So firms are increasingly preying upon one another for superstar lawyers, who have cases and clients, or “books of business,” that they take from firm to firm.

“There’s a tremendous amount of movement [by partners] between law firms. The competition for senior talent is very high,” said Mr. Hildebrandt. “You used to go to a law firm and you’d stay for life. That’s just not the case any more. Lawyers change jobs in the way that businesspeople change jobs.”

Statistics bear this out. Every year, The American Lawyer reports how many partners at the 200 largest law firms jumped from one firm to another. In recent years, the total number of such lateral partner moves has consistently been north of 2,000 a year.

If a firm wants to lure top rainmakers, it needs robust profits per partner. “PPP is the closest thing we have to share price,” said one young partner at a national firm. “It’s the best way to signal to lateral partners that your firm is financially strong and has upside potential.”

There are two ways for a firm to increase its profits per partner: It can grow its profits or reduce its partnership. Several prominent firms have picked the latter option. They can effectively fire underperforming partners, by “counseling” them to go elsewhere. Firms can also “de-equitize” laggard lawyers—demoting them to the status of non-equity partner, so they retain the title of “partner” (good for cocktail parties), but without sharing in the firm’s profits.

This process of “de-equitization” was once highly unusual and quasi-scandalous, given the traditional understanding of law firm partnership. “Making partner was like becoming member of a fraternity,” said Mr. Bower. “You couldn’t be kicked out of the fraternity unless you killed another member. Now there’s no tenure. It’s ‘What have you done for me lately?’; it’s ‘Eat what you kill.’”

Although de-equitization has yet to take hold among the most elite Gotham shops, it is being adopted by national firms with sizable New York offices. Several months ago, Mayer, Brown, Rowe & Maw, a national firm headquartered in Chicago, used it to get rid of 45 partners. One of its Chicago rivals, Jenner & Block, plans to de-equitize 15 to 20 partners by the end of 2007.

Times have changed from the days when, once you made partner, you were guaranteed a lucrative job for life—and might even get home in time for dinner while the associates stayed late at work. “Today, partners work harder than associates,” said Mr. Zeughauser. “The demands of partnership are immense, in terms of developing business and helping run the firm.”

As a result, partnership doesn’t have the same allure it once did, despite being more lucrative than ever. Law firms arguably have taken some of the traditional perks of partnership—job security, collegiality, work-life balance—and traded them in for more pieces of silver.