Are law partnerships in decline?

Jan 10, 2020

Written By Jan Hill

Although the partnership model remains dominant, change is in the air. We look at what this means for law firms in the UK and US

Law firms are typically organised around partners (joint owners and business directors of the firm), associates (employees of the firm who have the ability to become partners) and staff (employees who provide support services). Making partner has always been considered prestigious, particularly at large firms where competition can be fierce.

Partner compensation methods tend to vary widely among firms. At major firms, the “spread” between the highest-paid partner and the lowest paid partner can vary greatly, and higher spreads are intended to incentivise individual performance, while lower spreads promote teamwork and collegiality.

Although the traditional law firm partnership model has, for the most part, remained in place up to the present day, there is evidence that lawyers are finally starting to embrace the concept that firm structures need to reward collaboration, rather than just accomplishments of individual lawyers, in order to boost productivity and profits.

US partnership model

Fifty years ago, Shearman & Sterling, the largest law firm in the US, had 169 lawyers. Today, 29 law firms across the nation have at least 1,000 lawyers, and the country’s largest firm, Dentons, has 10,000 attorneys in 78 countries.

This, in a nutshell, describes how dramatically the US law firm model has changed since the late 1960s. A once tight-knit camaraderie in which partners rarely moved, job security was virtually guaranteed, and partners earned roughly equal paychecks has been replaced with a culture in which law firms are paying millions to lure rainmakers away from other firms, firms closely track how many billable hours each lawyer logs and how long assignments take, and the pay spread between partners is widening.

According to an August 2019 Wall Street Journal report, these changes have enhanced the profits of equity partners. At the nation’s top 100 law firms, average profit was $1.88 million in 2018, double that of 2004. At eight of those firms, the average was more than $4 million. These changes have increasingly widened the partner pay spread. At Kirkland & Ellis, the world’s most profitable firm, the gap between the highest and lowest paid partners was reported to be 43-to-1, which illustrates the efforts some law firms are making to hold on to their partners. The spread between equity partners at Kirkland & Ellis was around 9-to-1.

The future of the US partnership model is a much-debated topic, with the most important question being which firm (or service provider) will flourish in the digital age. The frailty of the partnership model was increasingly exposed by the global financial crisis of 2007–2008 and its aftermath. Although the traditional partnership model has not vanished, its lock on the delivery of legal services has definitely loosened. Diversification is now on the rise, with firms striving to become more flexible, collaborate for the benefit of clients as well as the firm, and reward output (efficiency and results) rather than input (billable hours).

UK partnership model

In the UK, there used to be a presumption that if a solicitor was intelligent, hardworking, loyal, outgoing (and being male didn’t hurt either), after a certain qualifying period, they would make partner. But today, a lawyer’s chances of partnership depend more on the strength of the business, not individual performance.

Partnership prospects generally vary from firm to firm, and a decade ago in the Top 25 firms, the typical road to partnership was seven to nine years of post-qualification experience (PQE). However, it is now rare for a lawyer to achieve partnership before ten PQE as the “Big Law” firm model partnership structure narrows to maintain profitability in the face of competition with new legal service providers.

Law firm partners in the UK typically fall into one of the three categories:

Full equity: pay is based entirely on the firm’s profitability and can be extremely lucrative, depending on the firm.

Fixed share equity (FSE): a larger base salary plus a smaller percentage determined by the firm’s profitability that has become increasingly common.

Salaried: a fixed salary with the potential for a bonus. Until recent years, this partnership level represented a major portion of the market, but numbers have declined significantly recently.

Partnership trends in the UK now reflect a movement away from large numbers of salaried partners toward the full equity or fixed share equity arrangements, and also away from pure lockstep approach (profit determined solely by seniority) toward a more merit-based system where advancement is determined by performance and length of service, or a combination of the two.

As firms have increased in size and global reach and abandoned the lockstep approach, the partnership culture in the UK has changed. UK law firms have reportedly increased pay (and hours) for newly qualified solicitors to compete with US firms, making the path to partnership more elusive and longer than it once was.

This culture comes at a price for some lawyers, particularly women. Less than 20% of partners at the top 50 UK firms are women, and the pay gap between male and female partners is estimated to be around 60%. This more intensive model will also likely drive away some talented, innovative solicitors who will eventually become qualified enough to pitch for the high-end business that has always been exclusively in the realm of traditional law firms.

When it comes to the future of the legal industry and partnership in the US and the UK, one thing is certain: it’s the model that matters.

Commercial Insights