End of Days for Law Firm Partnerships?

I’ve been thinking a lot about the “end of days” for the traditional legal services provider – partnership law firms.

And I can already hear you grumbling. “How can there be an “end of days” for the current model of law firms? And don’t give us any of that, ‘UK Legal Services Act will change the world,’ crap. Kowalski, you’re crazy.”

Perhaps, but hear me out.

The partnership model of law firms is doomed to fail because of what Mancur Olson calls the collective action dilemma. Collective action dilemma occurs when you have a group of people all acting in a perfectly rational way for their own interests in the short term.

Sounds like a law firm, doesn’t it?

In a law firm, lawyers go out and do their own thing in their own self-interest, year after year. Getting clients where they can, billing time, collecting fees and taking out profits at the end of the year. And, if they do that, lawyers all believe that the firm will be in good shape; that their individual actions when put together will keep the firm afloat in perpetuity.

However in terms of long-term strategy, this is a completely irrational way to act.

The short term goals of individual lawyers do not automatically lead to the long-term viability of the firm because individual lawyers do not care what happens to the firm after they leave. The pursuit of short term goals is actually a disincentive for lawyers to act in a way that assures the long term interest of the firm, because acting in the long-term interests of the firm will reduce the amount of money that each lawyer takes home in the short term.

The partnership model is also doomed because of its lack of stability. How secure is it for a firm to take in a partner who has no loyalty to the firm – one who is only loyal to herself? A partner who, at a moment’s notice could leave with a number of associates and staff, thereby putting a hole in a firm’s practice group? Partnership is an extremely unstable form of business model for law firms. One that also creates a balkanized culture whereby departments fight over the pieces of the pie that they brought to the table, then split off to join another firm when they feel they are not making enough money.

Success only compounds the problem. When a law firm is successful using the partnership model, there is vindication of that model; each successful year perpetuates a sense that this is the correct model and that feeds itself in a closed loop. The motto, “we’ve always done this in the past and it works” reinforces the belief that it will continue to work in the future. In other words previous success reinforces bad models. George Soros would call this a double feedback, reflexive connection. Past success gives law firms a distorted sense of reality, or what passes for reality, in how they should do business, how they should structure the business and what clients actually want – because they have created that reality themselves.

Long term success and viability of law firms can only come when all the members of the firm act in the best interests of the firm, whatever the short-term personal costs. And in order to do that, truly forward-thinking firms must, as Stephen Mayson says, shift away from concepts of ownership and rights, and toward custodianship, stewardship, responsibility, and accountability. The partnership model has no room for any element of custodianship, teamwork or collaboration.

Finally, the partnership model has no mechanism for outside investment that will fund innovations to ensure the long-term viability of the firm. All innovation must be funded from within the partnership which creates large short-terms costs for the existing partners that may never be recoverable – which means that it is unlikely that such innovations will ever be implemented. Few partners will fund innovations that will benefit others in the future.

“End of days” for the partnership model of law firms?

The model already has a built-in self-destruct button.

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Comments

  1. Bryce A. Schmidt

    While I understand the logic behind this article, nothing explained here will guarantee the demise of the partnership model. The forces at play discussed above have always been present. Despite those forces, the partnership business model of law firms has been around for hundreds of years. An abstract approach to this, while an interesting thought exercise, does very little to explain partnership behavior. The assumption that individuals will always act in their own best interest in the short term is a fallacy. People frequently behave in ways that are adverse to their own short term interests for long term gain. It should also be pointed out that the same collective action dilemma could be applied to corporations, but it certainly has not resulted in the eradication of the corporate business model.

  2. I largely agree with Mitch. Very few Partnership Firms have been able to succeed and scale-up (to the extent that they should have) inspite of them having being around for decades. Many Partnerships are getting dissolved and many more are getting fragmented and split. The mushrooming of Partnership Firms may have given rise to the belief that it is the best model of functioning. However, we have reached at a stage where Law is not just a profession, but a business which is professionally run. And every Law Firm, in order to survive and scale-up, needs to evolve and build self-sustaining systems which ensure that Law Firms are not tied to any particular Partner. Creating an atmosphere and systems of custodianship, empowerment, knowledge sharing, etc. can go a long way in mitigating the risks of running a Partnership.