Defining the Perfect Partner

Against the backdrop of uncertainty across legal services, two questions have structured my thinking in working with law firms as they review and update their approach to partner remuneration, profit sharing, and defining what it means to be a “perfect partner.”

First, will the challenges of the past three-plus years provide the necessary impetus for wholesale change? Emerging from the COVID-19 period, I had seen more openness to change in the previous three years than in the past 30. However, it is an open question whether this impetus for change carries over long term—especially given the record increase in profits experienced by most firms. Are we destined to go back to the future, or is real innovation here to stay? More specifically, are partners ready to embrace new performance indicators when defining and evaluating success—metrics that are less about finance and more about holistics?

Second, if the appetite for change is waning, do we really want to go back to where we were? The exceptional circumstances of COVID-19 reminded many of priorities outside work, be that family, friends, or personal health, after so many years of focusing on legal practice. Typically, partners were expected to “run at the same speed”—with the personal commitment that implies. What impact could calls for different approaches to work-life balance have on ownership and profit sharing? And what does that mean for our conceptions of who is the perfect partner?

The past few years of increasing business activity, challenging client needs, rising fees, and reduced costs resulted in high law firm profits. But more important, partners appeared more united than before and were more willing to align around shared objectives. As one managing partner reflected to a colleague at the time: “If I had told the partners to paint their front doors red, they would have done it.” But, as the storm ends—and the next inevitably begins—what will the appetite for change be going forward? In this article, based on exclusive data from a major International Bar Association (IBA) survey, I attempt to shine a light on one particular aspect of change. How do law firms define the perfect partner? What has changed? What needs to change? And how we will get there?

The path to the perfect partner

My work as a consultant involves assisting firms in better understanding the changing requirements of what I call the “perfect partner.” How are law firms defining partner contribution and the behaviors required to achieve it, and how are they developing a trusted system to evaluate partners and distribute profits fairly?

More than just looking at remuneration and profit sharing, we need to understand high-performing people: how far current incentives are motivating the right behaviors. From the leadership’s perspective, what are the levers that can be pulled to achieve that?

Earlier this year my colleague at Lexington Consultants, Stephen Revell, and I completed a survey of law firm remuneration trends for the Law Firm Management Committee of the International Bar Association. In June and July 2023 more than 100 law firms of the IBA’s Law Firm Management Committee responded. Law firms were asked about changes they were making in their partner remuneration, including the adoption of more-formal performance management with a move away from a reliance on purely financial metrics of success and more-curated career stages. Respondents originated from every corner of the world and represented many successful firms in their own jurisdictions. Their average size was 40 equity partners with an additional 12 salary partners. Twenty-two percent of responses were from law firm founders.

Given this data and the prospect of increasing uncertainty, I was interested in exploring how the expectations of partnership are changing. I was also curious whether the major changes I was seeing in my consultancy work for the “best in class” were being reflected among law firms more widely.

Understanding the partner paradox

Lawyers are facing a growing paradox in the way they practice together in partnership—it is striking how similar the survey responses are across all types of firms and in all parts of the world. Although we received a number of IBA responses from firms describing themselves as “black box” and “salary plus,” in this article I am focusing more on “eat what you kill” (EWK) approaches and lockstep as the most popular global approaches, although our research will show the extent to which the terminology is less relevant.  

While autonomy and personal independence have always been celebrated as cornerstones of the profession, law is increasingly practiced in larger and more businesslike entities. Although firms have traditionally placed a premium on the advantages of collegiality among partners, we need to better understand the ways in which they are actively working to change culture by developing more accountability and less autonomy within what are major businesses today.

Our starting point is, therefore, are law firms getting the behaviors they need or the behaviors they reward?

This is such an important question when working within the partnership model, though it would seem strange for the corporate world—to imagine that the behaviors of co-owners are not always aligned with the best interests of the business.

Implicit in the question are issues of fairness, as well as ensuring that partner rewards drive the “right” behaviors. The challenge is to develop an approach that allows everyone to express their personal interests within the framework of what is also desirable or possible for the firm. 

How many firms are guilty of saying that they want partners to collaborate by supporting one another in finding work and then passing it selflessly to the most appropriate lawyer while rewarding partners solely on individual and team financial metrics?

Recently a partner at a global law firm told me: “If I refer work to one of our international offices, it doesn’t count to my own numbers—much better to pass to a local firm where I can invoice the client receiving credit for all of it.” An extreme example perhaps, but we all recognize the symptoms.

In my experience, it is the minority of firms where the shared ambition of partners is clear—where they instinctively share a common understanding of what they want to achieve as a group. More common are the firms where partners function as a constellation of separate businesses.

Working as a group of solo practitioners, with each partner doing their own thing, is by no means a failure. Many firms are very comfortable with this approach, but without collaboration, where every partner is pulling in the same direction, many firms experience a drop in profits as they grow. In part this is due to the initial investment required within a larger entity—akin to developing an institutional approach. Also, without a common set of aspirations or shared objectives the day-to-day questions such as recruitment, work allocation, or promotion into the partnership can become toxic.

The question is: What are the positive behaviors that will help us achieve our objectives, and are there any negative behaviors that will hold us back? Above all, which interests should partners follow: short-term personal interests or longer-term firm interests? Growth is a common strategy for law firms, and for the majority this requires moving from a culture of “my client” to “our client.”

Five current trends

Let us start by reviewing the areas the survey respondents identified as currently deserving the greatest attention before looking down the road at what we should be expecting to hit us next.

1. Accountability still the major challenge

Implied in the partner paradox, law firms find even the simplest of tasks difficult, and understanding the consequence is central to partner performance. As we all know, even something as simple as recording the time taken on a specific piece of work, invoicing clients in a timely way, or following up on payments can be a challenge.

What law firm leadership bemoans as a lack of discipline is viewed from the partner perspective as “What is my motivation to do this?” Although leaving each partner to their own separate business is much easier than aiming to give a sense of direction to a group of senior professionals, the 2023 research tells us that defining and understanding the behaviors of an ideal partner is still the number one challenge for firms.

The key to aligning individuals around a group above personal interests is understanding what brought a group of people into business together in the first place, and what success meant not only to those individuals but to the firm as a whole.

I had heard the expression decades earlier: when a firm does not have a strategy, its remuneration model will define the strategy. What I hadn’t realized was the extent to which the power of individual incentives makes a firmwide strategy irrelevant. This leaves a vacuum when it comes to developing common approaches to client relationships and people across organizations that are now much larger and more sophisticated businesses.

2. Clearly defining partner contribution with formal KPIs

Over the past three years, I have run a number of workshops with law firms asking partner groups which metrics were perceived as being most important to the business in the past, and whether these would remain the same in the future.

In line with the results of the IBA survey, it’s clear that firms are rethinking what partner contribution means and updating their performance indicators (or key performance indicators, also known as KPIs).

Approaches are still led by financial KPIs, but there is a growing understanding of the importance of nonfinancials. Indeed, in our IBA survey, 57 percent of firms identifying themselves as EWK said they are rewarding partners on the basis of both financial and nonfinancial criteria. From the lockstep firms that award a bonus, 37.5 percent award these on financials only and 62.5 percent on a mixture of financial and nonfinancial KPIs. A focus on purely financial metrics is unwise—finding the right balance is key, as is using the correct financial metrics. This has spectacularly misfired in the firms using the wrong financial metrics, such as billable hours and income, as opposed to financial contribution and profit margin. (Overly focusing on billable hours can encourage some very bad habits: filling up on lower strategic work, lower pricing, and write-offs seriously damaging the profit margin.) In addition, it is now recognized that there has been an overreliance on personal, rather than team, practice and the wider firm financials.

In terms of leading a team, it would be difficult to argue that partners are not all equally responsible for developing their people. (In reality, of course, some partners find it more difficult than others.) I personally find it surprising when a partner says that their contribution is doing legal work and not selling it—and they would happily leave that to others. In my view, each partner shares the responsibility for building the business.

More than 30 years after David Maister popularized the concept that each partner could contribute in different ways—or as he said, “finders, minders, and grinders”—partners are today expected to comply with at least a minimum contribution across all areas. There are, however, two common exceptions.

First, some firms allow weighting, where partners have to comply with the minimum across each requirement but focus more on the areas where they, and the leadership, feel their contribution is most important (oversight of the firm finances or people are common examples).

Second, adding a further layer of sophistication, some firms are revisiting and redefining the contribution of partners at different levels of seniority. For instance, more-junior partners would focus on legal delivery, then on client relationships, before adopting an external ambassadorial role or mentoring and coaching colleagues as they increase in seniority.

In terms of the elite firms, it is unusual not to have a balance of financial and nonfinancial KPIs within a balanced-scorecard approach. The most common categories of nonfinancial performance are anchored around developing your people, stronger client relations, plus management and leadership. An increasing number of firms are now seeking to define the values required from partners—in effect, encouraging positive behaviors while dealing with any unacceptable ones.

Some elite firms also refuse to disclose specific aspects of their partner performance—only the leadership or remuneration committee sees the full set of partner results. Interestingly, 86 percent of IBA survey respondents have “transparent” systems while 15 percent don’t.

Of course, there may still be a strong element of smoke and mirrors. Despite the work invested in redefining performance indicators, financial performance is still the main driver for partner rewards. While firms are quick to highlight their work on defining the values required of partners—what is commonly described as a “no jerks” approach—in reality, it is difficult to say whether this has gone beyond just lip service and is actively being enforced. Indeed, enforcement can be a challenge. As case in point, less than 50 percent of IBA survey respondents agreed that a set of positive partner behaviors have ever been applied to them.

Performance indicators are great in practice, though difficult in reality. Change is especially challenging when it affects the money in our pockets. Support from the majority is required, plus determination from the leadership.

Lawyers like detail, and it is always tempting to overcomplicate this. As one managing partner told me, quoting the age-old aphorism: “Perfect is the enemy of good.”

Small steps are advisable: agreeing on general principles, introducing the first nonfinancial metrics, perhaps trying a “shadow model” for the first year to ensure systems are up and running. Let’s not forget that the financial success of a firm is merely an output of their people, clients, and effective leadership. The long-term benefits, including higher profitability, are clear.

3. Introducing guardrails within tighter performance bands

Agreeing on performance indicators is one challenge, but understanding how to manage them in a coordinated way is another. In addition to moving away from financial KPIs only, firms are adopting performance bands with guardrails, agreeing on KPIs such as minimum financial performance for each level.

The challenges of the EWK and lockstep approaches are today as clear as the benefits. In pure EWK approaches, partners are vulnerable to market changes—at a specific point in the economic cycle, real estate lawyers will find themselves out in the cold. The adoption of hybrid approaches such as using bands (as seen in lockstep firms) are more common. Avoiding the risk of a good or bad year, partners are assessed and moved up and down bands according to their three-year results—giving stability over career development with clarity over aims and expectations at each band.

On the basis that firms have already agreed upon KPIs for their partners, they can then use this as a guide for placing partners in each band, with specific criteria for promoting up or relegating down those bands.

Lockstep challenge?

In terms of managing performance, lockstep firms have their own particular cultural challenges. A pure lockstep automatically promotes each partner with an increased share of profits for each year of practice. This works on a simple assumption that with each year, the size and profitability of a partner’s practice will increase, which may not always be the case.

Leaders are expected to avoid profit dilution, ensuring annual profitability increases, but in many cases without the teeth to enforce this. Of course, they can appeal to someone’s better nature and ask them to move down.

Given the limited options for performance management, if interpreted in the purest sense they can be quite brutal. Forty-four percent of the law firms identifying as lockstep in the IBA survey describe their approach as “automatic progression up the lockstep based on years of service.” Lockstep is, therefore, best suited when partners and their practices have similar financial performances, or when partners agree on the strategic value of less profitable partners or practices and are comfortable with promoting them despite the hit on profit. If not, those unable to sustain the profitability required for their level should step down the lockstep or depart altogether.

Many pure lockstep firms are therefore introducing a bonus to reward their high performers (modified lockstep) and performance gateways—a formal review against agreed KPIs—say, every three years—before promotion to the next step (managed lockstep).

As with EWK bands, the priority is avoiding downward promotion, which can be demotivating. By including an annual bonus—often simply based on financials—lockstep partners are rewarded for an exceptional year (such as a one-off transaction or major litigation win) with a bonus, not a band promotion.

With EWK adding bands and lockstep firms adding guardrails, the difference in approach is narrowing, as borne out by the IBA survey. In the survey, the pure EWK firms listed introducing bands and placing a greater importance on nonfinancial KPIs as their most likely improvements, while for the pure lockstep firms, introducing gateways topped the list.

Whether bands or lockstep, promotion up and down bands allows partners to increase or decrease their share ownership—the equity percentages float freely based on the points given to a partner and the total number of points in issue. The allocations of existing equity partners need not be recalculated when initial additional partners are admitted, because all current partners are simply diluted pro rata.

4. The case for reinforcing governance

If the challenges of the pure EWK and lockstep approaches are clear, we should not underestimate their huge advantage: simplicity.

In addition, the inclusion of nonfinancial KPIs raises the question of whether they can ever be truly objective. Firms are investing in robust systems, which make for more-informed discussions, but in my opinion an element of judgment is required.

Reviewing a partner’s financial success is straightforward, but evaluating fellow partners over nonfinancials, such as motivating their team or building the firm reputation­, is more tricky. So even where wider partner contribution is recognized, there is still some reluctance to move away from financials on the basis that it necessarily requires judgment over fellow partners. Forty-six percent of IBA survey respondents said that they have a remuneration committee, 16 percent leave this role to current leadership, and the remaining said they are decided “purely on financial metrics only.”

The partner paradox is very clear—firms in which partners enjoy a high level of independence, light-touch management, and a “first among equals” approach to leadership have some difficult decisions to make. Collegiality can be a simple cloak for accountability and performance—“I won’t tell you what you do if you don’t tell me.”

Agreeing on KPIs and guardrails, without empowering leaders to enforce them, is a waste of time. Oversight is important, with a board or management committee reviewing decisions taken by the existing leadership (ExCo) or a separate remuneration committee (RemCo). Seventy-five percent of the firms surveyed allowed unhappy partners an appeal process, but those typically occurred only in exceptional circumstances.

For many firms this requires a transition from hands-off to more proactive management—not only agreeing on rules but empowering the leadership to enforce them. In our consultancy work, this is an area where leaders, especially in the lockstep approach, feel very vulnerable. Even in firms that have agreed on guardrails, they are sometimes ignored.

On average, survey respondents review the terms of their partner deed only every eight years, realizing either that it doesn’t reflect the firm’s growth or, if it does, that they have been standing still. 

5. Moving from partner evaluation to partner development

Given that the requirements of partners are being viewed more widely than purely technical skills, some firms are still failing to effectively prepare new partners. In my consultancy work, the frustration of new partners, who feel they don’t have the skills required to build their practice, is amplified by the frustration of their seniors, who see them as failing to move from being good technical lawyers to fully contributing partners.

Another unforeseen consequence of COVID-19 was the group of unprepared seniors who were sucked into partnership (for all the right reasons, such as busy workload, etc). As one managing partner explained to me: “It was like a train pulling into the station: we opened the doors and pulled the lawyers we relied upon into the train.”

This is a burning issue in many firms. On the positive side, they have invested financially in making up the next generation of partners—they now need to help them develop the wider skills and the level of profitability expected.

I appreciate that change is daunting, especially if leaders are neither recognized nor rewarded for driving the firm forward. Some firms take an even softer approach—working with their learning and development team (and not remuneration) when trying to train and develop the perfect partner. Under this approach, partner KPIs become the development competencies of the potential partner group and then selection criteria, hence avoiding any tension—or finger pointing—among partners when defining partner contribution. It is easier setting expectations for our juniors than ourselves before rolling this out as partner KPIs when the time is right.  

Three future issues

As we have seen, law firm leaders have a lot on their plate, reflecting the needs of an increasingly complex market, along with the KPIs required of the perfect partner. I wanted to finish by shedding some light on the areas that I believe are ripe for attention.

1. Same-speed or multispeed partnerships?

My opening question—“Do we want to go back to where we were?”—is framed differently in some firms as “Are we expecting all partners to run at the same speed?”

Partners have a difficult decision to make, namely, are they looking to recruit and retain partners who act and perform in more-similar ways, or in contrast, are they comfortable when partners say they would like to follow the fast, medium, or slow lane at different stages of their careers?

It is outside the scope of this article, but the answers have several consequences. With a balance toward financial KPIs, career flexibility could be simpler for an EWK firm—that a partner may choose to “eat less and kill less” is implied by the name if nothing else. Assuming they comply with the minimum financial floor, band systems allow for a stepping down—for a period—if agreed as being in the best interests of the firm.

Within a lockstep approach, partners are able, of course, to negotiate a “step down” in performance—although in my experience, encouragement may be required (surprisingly some partnership deeds don’t require an equal reduction in lockstep points when stepping).   

2. Aligning incentives to strategic opportunities

As firms see the benefits of more clearly defining partner KPIs within a more structured career development (such as bands), the longer-term opportunity is aligning a partner’s specific KPIs to their strategic objectives as outlined in their annual objectives. This does require additional layers of complexity and tailored annual KPIs for each partner, with an evaluation against that. In the IBA survey, around 60 percent of the respondents do not yet have a process for annual partner objective setting.   

The ability for partners to develop specific strategic objectives, typically in parallel to their learning objectives, then evaluating them against them requires sophistication beyond many firms. Sidestepping their existing remuneration model, however, many leaders have been successful in awarding a partner bonus against strategic objectives.

3. The future of law: If we aren’t selling knowledge, what are we selling?

The use of increasingly sophisticated technology is leading us to reassess the role of lawyers and the value of the services they provide. Many have assumed that the traditional role of a lawyer was applying legal knowledge. With new technologies such as generative AI and other AI-based products, enabling wider and simpler access to legal information without any need for lawyers, what value will lawyers provide? What will be the services and competencies that clients will be relying most upon from lawyers—dealmakers, project managers, risk limiters, or problem-solvers? It is curious that only 19 percent of IBA survey respondents reported that clients have asked about their approach to remuneration. In turn, 84 percent of firms are not asking clients for annual partner feedback.    

The answers aren’t yet clear, although the challenges are. Reena Sengupta and her team at RSGI are studying this in detail as part of their research for the Financial Times Innovative Lawyer. With an increasing use of AI, they are predicting a bigger “human premium”: Whom do clients want in the room at midnight when facing the most entrenched challenges and clashing personalities as the blood is literally running down the walls? It’s a tough call, but those answering in the positive will be increasingly valued.

Law firms are also seeking business professionals with the skills required—within both the current and new areas of management. Partnerships aren’t easy, and firms are offering higher salaries and partnership positions to those that are business critical. We are already seeing lawyers becoming a minority in some law firms. Is a dilution of partner autonomy (the challenges of the partner paradox we have seen) increasingly inevitable as lawyers welcome business professionals into the owner group?

Conclusions

In answer to my first challenge—”Will what brought us here, get us there?”—it is clear that many leading firms are adopting new performance indicators when defining and evaluating “success.” The move away from financial metrics only continues.

Defining “success” at both the partner and firm levels, with greater clarity over partner roles and responsibilities, is a good starting point while ensuring partners are truly willing to be held accountable—not faking it.   

While “best in class” is increasingly clear, Rome wasn’t built in a day. The final destination may be clear, but firms have to recognize that “we are where they are.” (As one managing partner put it to me, “If I wanted to get there, I wouldn’t be starting here.”)

Today’s requirement for performance management strikes at the very heart of the partner paradox—finding an acceptable balance between professional autonomy and the rights and duties of co-owners in a business.

Change is easier in the firm where “it’s all about the money,” although I see fewer of these than I would expect. Approaching change through the lens of lawyer development and partner selection is more palatable for some firms.

Despite the constant nervousness, law firms continue to do well. For 30 percent of the IBA survey respondents, the last 24 months have been “very good financially”; for 45 percent, “good financially”; for 19 percent, “the same as usual,” and the remaining 6 percent, “poor.” In terms of their level of confidence about the future, there was a very even split among those feeling “more confident,” “less confident,” and “the “same.”  

The second question, “Do we want to go back to where we were?”, and a discussion over multispeed partnership, is equally challenging, especially where partners’ expectations of one another aren’t aligned. Every firm has partners who can work 2,000-plus hours a year while building their team and client base, having a balanced life outside work, maintaining good health, and making it to the gym—that may be you—but what do we do about the rest?

Partnership is highly demanding. Does a tightening of KPIs lead to less collaboration—a temptation to refer less work to fellow partners or juniors where appropriate? In the IBA survey both EWK and lockstep firms said “no.” Of course, it will depend upon the KPIs you agree—many are designed to increase collaboration.

As we look to the future, is the force for change stronger than the inertia for the current position? Law firm leadership is far from easy; unlike a business CEO, they typically have responsibility without authority—only the very determined rise to the top.

Rather than pleasing any particular group of partners, the best a leader can hope for is annoying all the partners equally. Compromise is required, as doing the best thing for the firm may not necessarily be the best thing for them personally.

If your partners give you a clear mandate for change—full speed ahead. If change is not currently on the agenda—for example, the current winners can outvote the reformers—you may decide to invest your time in areas where you can make a real difference.

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Moray McLaren is a professor at the LawAhead Center for the Legal Profession, IE Law School. He has been advising partnerships for almost 30 years. A lawyer by training, he completed an MBA in legal services before assisting one of the London law firms on their global expansion. Today, as part of Lexington Consultants, he advises the top independent law firms as they review their practice focus, governance, remuneration, and ownership models. Many are coming to terms with the changing needs of their people and also their clients during what are increasingly unexpected times. Moray also assists the global law firms as they enter new markets. Many of his projects now involve the design and delivery of leadership programs and the facilitation of workshops and retreats.