Law Practice Management

Big Firms Hurt Profits With Non-Equity Partners, Consultant Finds

Big law firms with the most non-equity partners may be hurting their partner profits.

That conclusion seems counterintuitive, Legal Blog Watch points out. Many would assume that having fewer equity partners means higher profits per partner “because there are fewer partners taking a piece of the profit pie.”

But law firm consultant Bruce MacEwen is advising firms against creating non-equity partners because it hurts profits. His conclusion, posted on his blog Adam Smith Esq., is based on an analysis of the latest profit numbers from the top 100 firms released by the American Lawyer.

MacEwen found that the higher the proportion of non-equity partners, the lower the firm’s revenue per lawyer and profits per partner. For law firms with no non-equity partners, the average revenue per lawyer was $1,127,500. For firms with more non-equity than equity partners, average revenue per lawyer was only $724,500.

MacEwen suggests that profits may be harmed because de-equitized partners subtly change the firm dynamic. “Firms with a single-tier partnership attract the true Type A’s: Those of us who have never finished anywhere but at the top of a class and have no intention of starting to do otherwise,” he writes. “But the two-tier firms hold out a veiled alternative: If you keep your nose clean and work (reasonably but not insanely) hard, you might find yourself taking home (say) $400,000 per year, adjusted for inflation, for the duration. And you won’t have to kill yourself in either billable hours or business generation.”

MacEwen says the ranks of associates are shrinking, even though they cost the least and they bill the most hours. Non-equity partners are the most expensive form of leverage for firms, and they bill the least, he says.

MacEwen says there may be other praiseworthy reasons for introducing non-equity partners. A non-equity tier may allow firms to retain valuable practitioners and provide a place for lawyers who want to avoid ceaseless billing pressure. It may also be used as a temporary place for lawyers to learn rainmaking skills before they reach full equity partnership.

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