Law360, Grand Rapids (July 12, 2017, 12:06 PM EDT) — BigLaw’s non-equity partner ranks grew at a faster rate than any other law firm job title over the past six years, but the trend appears to be reversing as some firms counsel out income partners in an effort to save on costs and boost profitability.
Income partner headcount at U.S. law firms saw a compound annual growth rate of 3.4 percent between 2010 and 2016, according to research conducted by Citi Private Bank’s law firm group, far outpacing both equity partner headcount growth, at 0.2 percent, and the annual uptick of 1.5 percent in the number of all other salaried lawyers.
But some large law firms are currently in the process of rethinking the growth in their income partner headcounts, according to several legal industry consultants who say the non-equity role has, in some cases, become a “dumping ground” for underperforming attorneys receiving outsized paychecks, which can act as a drain on overall law firm profitability.
Instead of adding, some law firms are “quietly counseling people out,” according to Kent Zimmermann, a consultant at the Zeughauser Group, while others are looking to better align income partner pay with the market and with the value they provide to the firm.
“In many firms, not all, the non-equity partnership tier has become a dumping ground for people who can’t meet the expectations of equity partnership and that group of non-equity partners becomes a bloated middle in too many law firms,” Zimmermann said.
As a result, many firms are working to reduce the size of their non-equity partner ranks to align them with demand, at times looking to either associates or contract attorneys to perform many of the same tasks at a lower cost.
“[Non-equity partners] have become an expensive form of leverage compared to other ways of getting the work done,” Zimmermann said.
Gretta Rusanow, head of advisory services at Citi Private Bank’s law firm group, said it is her impression as well that law firms have begun to move away from growing their teams of income partners, a move she says is often advisable.
“We highlight to law firms that you want to make sure there’s a good match between the cost of each lawyer category and the revenue they’re generating. For many law firms in the industry looking carefully at their income partner category is probably one of the biggest opportunities in front of them,” Rusanow said.
According to Citi’s research, income partners attract similar rates in the market and have similar levels of productivity to the counsel category — common at many law firms with one-tier partnerships — and yet there is a “significant gap” in the salaries of counsel when compared to their higher-paid non-equity partner counterparts.
While single-tier law firms have seen growth in the number of counsel they keep on, the movement appears to be “a more profitable alternative” to using a large number of income partners, according to Rusanow.
Consultants say two-tier partnerships aren’t all bad, though. Law firms stood to gain in several ways by moving from the traditional one-tier system to a two-tier partnership system, a transition that has happened over the past several decades.
According to Peter Ocko, managing director in the partner practice group at Major Lindsey & Africa, two-tiered partnerships allow younger lawyers, sometimes with a minimal buy-in, to achieve a professional milestone.
“The title can assist them with business development and a profile that indicates a certain level of experience and achievement to clients, with a runway to an ever-shifting equity goal line,” Ocko said.
In fact, according to Frank D’Amore of Attorney Career Catalysts, an increasing number of lateral partners tell him they don’t mind entering a law firm as a non-equity partner, with the option to move to equity partner status once they’ve got their bearings and better understand how the law firm is managed.
Having an income partner tier can be a useful recruiting tool for law firms, D’Amore said.
Jim Cotterman, a principal with legal industry consultancy Altman Weil, said law firms should examine the motivation behind why they’re growing or maintaining their income partner ranks.
Some good reasons for doing so, according to Cotterman, include using the tier as a “proving ground” for potential rising stars and lateral hires, using it as a career option for critically important senior advisers and technical specialists, and for retaining governance control among those who truly drive the success of the law firm.
Some less positive motivations, he said, include funneling lawyers to the non-equity partner tier in order to drive up profits per equity partner, doing so to avoid making tough choices about underperforming attorneys, and warehousing a large group of average lawyers.
Altman Weil’s annual Law Firms in Transition survey, released in May, revealed overcapacity among U.S. law firms that was especially pronounced when it came to non-equity partners.
When asked whether specific groups of lawyers in their law firm were sufficiently busy, 60.5 percent of survey respondents said non-equity partners were not sufficiently busy, more than any other group.
“This is a pervasive problem,” Cotterman said. “The decline in average billable hours from the 1990s to today is serious. And it has been largely camouflaged by increasing billing rates, at least until the recession when the market shifted in profound ways. There are too many lawyers in private law firms for the work that is available for them to do. And market signals for the future point to this problem becoming even more acute.”
At some law firms, income partners do produce more than they are paid, but it’s rare, according to Mark Jungers, co-founder of legal recruiting firm Lippman Jungers.
“At the vast majority of law firms you can go and camp in the non-equity tier and you’re not even trying to make equity partner anymore — you’re content making less and billing 1,600 hours,” Jungers said.
One of a few exceptions, according to Jungers and other consultants, is Kirkland & Ellis LLP, which he says has an “up or out” policy regarding its income partner tier.
“Until the point at which someone gets called into the managing partner’s office and has a meeting about making equity partner, they work like they’re going to make it, billing sometimes 2,500 hours,” he said.
The income partner category tends to work well when the title is a stepping stone to equity partnership, according to Rusanow.
“Productivity is high, as the non-equity partner is motivated, and with comparatively lower salaries than more senior non-equity partners, they are profitable,” she said. “On the other hand, where firms have de-equitized equity partners for performance reasons, their productivity is often low, and it’s not unusual to see that their salaries and overall cost to the firm exceed the revenue they generate for the firm, creating a negative contribution to the firm’s bottom line.”
By Aebra Coe
–Editing by Rebecca Flanagan and Emily Kokoll.