A partner split is like a marital split – expensive and hard to get over.
Also like a marital split, it can often be avoided by knowing the elements that cause it and taking steps not to go down those roads, says Robert Denney, a Wayne, PA, management and planning consultant for professional offices.
Why do partners split?
For a number of reasons, he says. But money is usually at the heart of it.
The pay schedule is at the top
Partnership compensation is tops on the list.
The partners see what they consider inequality in who’s getting paid what, “and they get this whole feeling of ‘I’m not being paid enough and this other partner is being paid too much.’”
There are two basic types of compensation systems.
The first is formulaic, or based solely on numbers, and the outcome is predictable. The partners who bring in the most money make the most money.
The other is also based on money brought in but adds to that weighted factors such as amounts billed, amounts collected, who’s handling the biggest clients in terms of fees, and who’s bringing in the most new business.
That’s the approach most firms use, and it’s also the one “where the most unhappiness develops,” because there’s a subjective factor to it. Somebody has to make the call on which numbers get what weight, and the people who do the deciding often rely “a lot of their gut feeling.”
One of the main spots of dissatisfaction is business origination. A partner originated a client 10 years ago and still expects credit for it now even though other attorneys are doing the work and are responsible for the fees. And the fight is on.
Paying for the retiring partner
More dissatisfaction comes from unfunded pension plans.
It’s not uncommon for the partnership agreement to call for a certain payout at retirement. But neither is it uncommon for a firm to distribute all the income year after year without holding out any money to fund the plan.
Then a partner retires and there’s no money in the till, so everybody else has to foot the bill. And the remaining partners “get really annoyed when they are still paying a partner who retired five or 10 years ago.”
Who wouldn’t think about splitting?
De-equitization: splits and suits
Money is at issue again when an equity partner is demoted to a salaried position. That not only sparks splits but can bring on discrimination claims as well, Denney says.
De-equitization generally happens for a valid reason – the partner’s performance is declining. It’s no longer equitable for that attorney to participate in the profits everybody else is generating, so the firm drops the partner to a salary.
It’s a bitter pill, and understandably it creates anger and disappointment – sometimes extending to the other partners who remain loyal to that partner. And firms have split up because of it.
Equally as dangerous, however, is that the demotion can bring on a discrimination claim. The former partner, who is usually older, has now become an employee and as such sues for age discrimination.
There’s no way to make de-equitization pleasant, but there are protective measures to take.
To protect against the dissatisfaction, set standards in both performance and billed income for maintaining equity status. Make those standards part of the partnership agreement. Then when someone is demoted or even when a partner wants to work part-time, it’s possible to “step out the equity role but still have a place in the firm.” And to clients and to the outside world, the attorney is still a partner.
To prevent discrimination claims, add a provision that a demoted attorney can retain the title of partner.
“It’s a pride thing,” he says. No partner wants to admit the demotion to social and business contacts. A lot of conflict can be avoided just by allowing the individual to maintain the appearance of status quo.
A good biller but a poor leader
Beyond money, leadership failure is often at fault.
Change in leadership is going to happen as some point, Denney says, whether the managing partner dies, retires, or moves on. Or the firm might routinely change managing partners.
The problem occurs when the departing leader has been strong, has made decisions, and has been able to build consensus among the rest of the partners and the new leader comes in without those skills. Then the fights start about everything from compensation to the number of secretaries.
What’s most often the cause of leader failure is the fact that firms tend to give the leadership role to the highest biller.
Denney’s advice: Being a good rainmaker is one thing; being a good leader is another. Having the biggest book of business doesn’t make anybody managing partner material.
Watching the clients leave
Client loss can cause splits, and often unnecessary splits. Often the loss comes on gradually, “and over a period of a year or two, the firm just sinks.”
It can occur when a key partner leaves. Or it may be the client company is sold or merges with another group that uses a different firm.
“That can blow a firm apart,” he says. The work can’t support the overhead, and the firm has to shrink.
The firm can’t prevent a client company’s being sold, but problems with client satisfaction “can be caught” in time to save the business.
Talk with the main clients at least once a year and ask “how are we doing?” and “what are we not doing?” and correct the problems before they think about leaving.
More advice: holding on to a dying practice area leads to a dying practice. Be willing to move into different practice areas when a current area starts losing business.
He gives the example of one firm that did mostly bankruptcy work but also some estate planning. When the economy was good, the bankruptcy work began to fade, but the firm didn’t shift those attorneys into other more profitable areas – such as the estate planning
it already had on board and which they could easily have taken on. The firm ended.
That issue ties into the need for a strong managing partner, Denney says. “When a partner keeps plugging away at a practice area that is fading,” the managing partner needs to have the foresight and strength to step in and say “Attorney A, your practice is dwindling, but we need help in this other area and you could make the shift.”
The merger that shouldn’t be
Mergers too can precipitate splits. Whenever there’s a merger that should not have happened, count on a split, usually sooner than later.
The doomed merger is the one that’s completed with “huge issues” still undecided.
The turning point is usually partner compensation. Once under the same roof, the partners of one firm find out their counterparts in the other “are making a lot more money than they are.” And the news causes the firm to break up – “as it should,” Denney says. “The two should have never merged to begin with.”
Murderous too is the issue of work ethic. He cites a Chicago merger where he was a consultant. In one firm, the attorneys averaged 1,400 billed hours annually; in the other, they averaged 2,000 a year.
His advice was “don’t merge,” and the firms agreed. “Nothing was going to change the culture of either side,” and the attorneys were not going to be able to merge their philosophies.
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