Is the partnership model in decline?

At Hive Legal, a commercial firm in Melbourne, there are no timesheets, no personal KPIs and, crucially, no partners. One of the principals is a non-practising lawyer and the firm has a model of profit sharing available to all staff. The internal culture values collaboration over competition, and flexible working arrangements predate the pandemic.

Since its founding in 2013, Hive Legal has operated as an incorporated legal practice – and one of the first firms in Australia to challenge the traditional mode of being a law firm.

“You won’t get good work, you won’t be able to get good people, and you won’t make any money were three of the biggest concerns that people would share,” explains principal Joanna Green.

“We’ve got amazing people, most of whom have come from top-tier working environments,” Green says of the firm’s 40-person team. “We work for all the same clients that we did in the top-tier firms, and here we are, nine years later, so we must be doing something right in relation to finances and making money.”

Partnership at a firm was once the holy grail – and only legitimate career aspiration – for lawyers. But dramatic changes to our relationship with work, which accelerated during the pandemic, increasing frustration with the amount of time it often takes to make partner, and ongoing problems with staff retention and workplace culture within firms are slowly chipping away at one of the key foundations of the profession.

Indeed, a growing body of research shows that for more and more young lawyers, partnership is no longer a key career aspiration. A 2022 report by legal recruitment consultancy Mahlab found the sentiment persists among “well-paid” lawyers and senior associates who value work-life balance over the long-term prospect of partnership.

Is the partnership structure so central to the running of a law firm faltering? Is it set to be replaced, or at least challenged, by less siloed and arguably more dynamic corporate-style models of ownership?

From competition to collaboration

It’s no secret that poor staff retention and workplace culture are major concerns for many law firms and the profession at large. Green says swapping the competitive, pyramid-like structure of traditional law firm ownership for a flatter, more corporate model encourages collaboration as a key method of working, which has important flow-on effects.

“There really is no competition between our teams – it doesn’t make any difference who brought the client in, who’s the client relationship partner, who’s supervising the work or anything like that. It really is about finding the best person to do the job, so we share resources between our teams,” she says.

“It’s really interesting to see the trickle-down effect that has on our culture, on what it’s like to work here, and also how our clients experience our services. Everyone who works here really loves working here. It’s not always perfect but the vibe is very different to working in traditional private practice.”

It’s a similar story at Law Squared, also an incorporated legal practice with 40 staff who work across offices in Melbourne, Sydney, Brisbane and, as of last year, London. “I operate as a CEO-equivalent or a managing partner-equivalent,” explains founder Demetrio Zema. “We have five business units, and unlike traditional law firms we don’t have fee earners and non-fee earners – everybody has a valuable contribution to make within our business.”

Because the firm doesn’t impose or measure individual financial contributions, “we fundamentally require our teams to work together to achieve client outcomes and to therefore achieve team budgets,” Zema says. “If somebody is a solo player, they don’t work in our business.”

He says operating as an incorporated legal practice is a paradigm shift in the way law firms retain staff and promote inclusive, collaborative cultures. Instead of fostering individualism and a one-eyed focus on acquiring partnership, Zema says his model rewards lawyers who want to do interesting work in a supportive working environment.

“In a partnership environment, the responsibility all sits with a partner. A partner’s worth and positioning in the business is only as good as their balance sheet. So, there’s an incentive for them to build a better balance sheet of their own clients, team and billables so they can position themselves in a position of strength when it comes to discussions around partner profits and distributions, and pull within the firm,” he says.

“It is no secret that those environments breed and foster ego, competitiveness and negative cultures. We also know that 95 per cent or more of lawyers who leave private practice leave because of financial pressures, budgets, competitiveness and the fact that the law firm requires them to want to become a business owner to be successful.”

Veering off the partner track

Further shaking the traditional partnership pillar is its decreasing appeal among lawyers who desire – even if they’re reticent to express – that oft-repeated mantra: better work-life balance.

Mahlab managing director, Lisa Gazis, says more and more lawyers are eschewing striving for partnership in favour of special counsel roles. “They’re happy to climb the ladder but they don’t necessarily want to be responsible for a situation where there might be a lack of work pipeline, or where they’re responsible for running a profitable business or practice group. Their priority is work-life balance and having good quality work,” she says.

In a profession known to be risk-averse, Mark Humphery-Jenner, an associate professor of finance at UNSW Business School, says choosing not to aim for partnership can be the result of careful calculation.

“Lawyers see how much work partners often need to do and how much risk partners bear, because if the partner isn’t bringing in money, they’re often not going to own terribly much even though they might be exerting tonnes of hours,” he says. “These lawyers might be thinking: do I really want to do those hours or bear that level of risk and responsibility?”

Then there’s the sheer amount of time it takes to become partner, ballooning from five to seven years in the days when firms were smaller, to as many as 15 to 20 years in today’s larger firms, says Fionn Bowd, CEO of legal recruitment firm Bowd.

She says there are two significant contributors to this phenomenon: senior partners who are less likely to agree to their equity being diluted as they approach retirement, and increasingly disloyal clients, which increases the risk of taking on more partners.

“The current model is broken. The vast majority of people will not make partner, but they are required for the machine of the firm,” Bowd says. In pursuit of a prize they realise they may never win many lawyers simply leave – the firm or private practice altogether.

“Working in firms for five, 10, 15 or 20 years without any kind of control or say over how anything happens and without any financial reward is why so many people leave,” Bowd says.

“They can see all these things that could be better but there’s no way of bringing any of that about, because even if their partner agrees with them, they’ve still got another 200 partners that they’d need to convince to get anything to change.”

Exploring new approaches to profitability

Rethinking lawyers’ working relationship with time is common among firms exploring new approaches to ownership and profitability, explains Zema. For many, the sweet spot lies in the shift away from billable hours and towards value-based pricing, despite the increased risk.

“How do we make money? We’re an entirely fixed-fee business, and we have a legal subscription for our in-house counsel work,” he says. “We have a very robust pricing model and process within the business. All our lawyers have specific training around pricing, around conversations of pricing with clients, and we have very upfront conversations with our clients around fees and fee expectations.”

And because the firm doesn’t provide fee estimates, it doesn’t have to deal with cost disputes. “Our clients are always aware of what their legal cost exposure is, irrespective of the type of engagement that they have with our firm,” Zema says.

Likewise, Green says Hive Legal offers alternative fee arrangements that aren’t tied to time recording, which she says is a more complex yet accurate approach. “It’s not about rewarding time at your desk, it’s about the value and the outputs that you deliver for clients. We’ve never done timesheets,” she says.

“How do you know if you’re making money when you don’t bill by time and when you don’t know how long you spend on things? It’s a fallacy and it just doesn’t make any sense at all if you tear it all away and understand how pricing works.”

And instead of individual bonuses, the firm’s employee share scheme ensures “everyone is aligned to collaborate and bring each other up”, Green says. “The longer you’re with Hive, and the more you contribute to everyone doing well, everyone benefits.”

Going several steps further, Humphery-Jenner says “listing on the market is an incredibly desirable alternative to the traditional partnership structure because it can give people an employee stock option program, and you can track the corporation’s performance much more easily than you can with the traditional partnership model.”

Despite concerns that lawyers would be beholden to shareholders and violate their duties to clients or the court, he says, “if the law firm doesn’t satisfy its duties to clients or to the court, then it won’t be able to function as a law firm for very long, which would ultimately undermine shareholder wealth.”

For firms less eager or able to disrupt the traditional partnership model but keen to provide agency within it, Bowd suggests a profit-sharing approach starting after three to five years with the firm where “lawyers are given some amount of equity, and with that equity some amount of voting over how the firm is run”.

“So they’re not just on a salary – they’re also getting profits of the firm. The partnership would always be able to band together and outvote the employees, but the employees should be able to come together over key issues and bring a lot of pressure to the partnership, and if any partners side with them bring about change.”

She says sharing pieces of the pie with early-career lawyers is critical for retention and productivity. “We’re never going back to the way it was and none of the future generations are going to tolerate these kinds of conditions and this kind of pay without any kind of recognition.”

That said, Zema concedes, “the partnership model is not dead”. “The partnership model will continue as there will always be a client base for the partnership model and there will always be a certain type of lawyer that is driven by the partnership model.”

Gazis agrees that “there will always be people who will be happy to sacrifice work-life balance and do the partnership run. They want to achieve partnership and view it as the pinnacle of their career.”

The difference is that it’s now a choice to aim for partnership rather than an obligation.