Key Partner Risk – the Elephant in the Room

By this time of year most law firms have will have prepared their strategic plan for 2014, which should flow from their existing 5- or 10-year overall strategic plan.

Most firms will have also done a risk scan of the environment to determine what factors can adversely impact their strategy and use that information to adjust their plans accordingly.

Most firms will identify compliance-type issues as risk factors.

Others will consider the economic environment and how that will impact revenue and use that to determine hiring practices.

The more thoughtful will analyze where their revenue comes from to determine if there is key client risk that should be addressed. Is the firm too heavily reliant upon 1 or 2 clients – and if so, then what is being done to reduce that reliance (read: risk)?

The most forward-thinking will drill down further and analyze where revenue comes from at the partner level, so as to determine the amount of key partner risk. Is the firm too heavily reliant upon a handful of partners whose departure could dramatically damage the firm? And if so, what’s being done to reduce that risk?

Ideally, from both the client and the lawyer perspective, firms should never have key partner risk. No one at the law firm should be indispensable, nor should anyone have the ability to cause economic damage to the firm. However, I see very little of this type of thinking.

Instead, law firms clamour after lateral partners with large books of business. But increasing the number of key partners does not lessen or diversity the firm’s risk – it increases it; there are two reasons for this.

First, when a key partner leaves, the other key partners will see an immediate reduction in revenue which will cause them to wonder why they should stay.

Second, the most important glue for a law firm – after large monetary returns – is the prestige of the firm (read: being partners with other key partners). Again, a reduction in key partners creates a reduction in prestige that causes a partner to consider her options.

Since the departure of one or more key partner impacts both monetary returns and firm prestige it’s not hard to see the potential domino effect.

But failure to address key partner risk is more than poor risk management.

It results in bad decision-making, since decisions are based not on what’s in the best long-term interests of the firm, but rather, on what will least disrupt or anger the key partners. Afterall, no managing partner wants to be the captain of the Titanic.

As a result, key partner risk remains the elephant in the room for most law firms – to their detriment, especially in the disruptive and changing legal marketplace we now inhabit.