Partnerships Aren’t Doomed To Failure

In writing about the collapse of “Big Law”, Yglesias blames their stagnation on their outmoded partnership model.  As he says, “People sometimes assume that the legal profession is organized the way it is because of something having to do with the economics of legal services. But there’s no business reason for it”.  Yglesias is often quite smart, but is flatly wrong here.  How do we know?  Because other firms in similar lines of work (B2B professional services like accounting or consulting) are also mostly organized as partnerships even without similar regulatory barriers.  There are some public consultancies such as Accenture, but most professional services firms remain as partnerships for a wide variety of reasons – mostly quite good!  The reasons work even better for law firms:

  • False confidence keeps the peons motivated. It’s not easy for most corporations to keep everyone working hard, but you don’t have legal associates slacking off.  Why? Most people are prone to believing they are better than average, an effect likely even stronger with the high-achieving students of top law schools who man the bottom ranks of Big Law.  While not everyone can aspire to be CEO, every single legal associate can believe they will be one of the 10% of associates that make partner.  It’s cheaper to pay associates with false hope than hard cash.
  • Up-or-out builds the brand.  The partnership model not only selects for the best partners, but it also generates a lot of alumni.   These alumni serve two valuable purposes for the firm even after they’re gone.  First, they make sure others know how selective the firm is – and thus signals that those who remain are the best lawyers out there.  Secondly, the alumni often work as in-house counsel at potential clients and are often positively disposed towards their former employers.
  • Law firms sell people, not products.  Corporations are centralized and hierarchical for many reasons, of which the big ones are to ensure quality and consistency amongst their products and to streamline their sales, marketing, and operations.  Those all sound fairly ridiculous when applied to law firms.  They sell via personal relationships.  Service delivery isn’t consistent and standardized, it’s (ideally) meant just specifically for their client.

There are good reasons to have partnerships, and their persistence outside law suggests the form isn’t just a regulatory artifact. We should look instead at what distinguishes law firms from other professional services firms, which are doing just fine.

The main and most relevant difference is that  lawyers aren’t businessmen.  They are not necessarily formally trained in issues like financial management or forecasting, and many of the problems they have dealt with are related to that.  They are poor at managing their hiring, and often overhire at precisely the worst times.  They do not always have a keen grasp on technology and how it might affect their operations.  And they don’t necessarily appreciate which portions of their billing are seen as essential by their clients versus superfluous.  Rather than looking to become “Law, Inc”, they might just want to bring in some non-lawyers to run their C-suite.

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