SPECIAL ADVISORY ARTICLES
Crazy Like A Fox
This co-authored article (with Ed Reeser) explores why the increase in nonequity partners (and decrease in associate ranks) makes business sense.
At first blush, it sounds crazy: firms shedding associates—long regarded as the sweet spot of law firm profitability—while expanding their ranks of better-paid nonequity partners. But even during the recession, that's what happened ["Holy Nonequity Partners," May 2010]. And the bankers have noticed. In an essay about third-quarter financial trends ["New Year, Old Worry," January], Citibank's Dan DiPietro and Gretta Rusanow noted "a discernable decline in the percentage of associates represented in the leverage composition and a significant growth in the income partner, counsel, and of counsel categories. The result is a much more expensive leverage model, which would be fine if these more expensive lawyers were as productive as equity partners and associates, but they are not. In looking at average annual lawyer productivity from 2001 to 2010, income partners and counsel worked about 150 hours less than equity partners and associates." In other words, relying on nonequity partners instead of associates makes for a dangerously expensive leverage model.
We disagree. We believe that the growth in nonequity partner ranks is a part of a fundamental shift in the leverage model — call it the New Leverage. Reduced reliance on associates is part of it; so is the deequitization trend of recent years — and it's an aspect of the latter element, not the former, that firms should be worrying about.
First, about those nonequity partners: If firms are crazy to increase their nonequity ranks like this, they're crazy like a fox. In the deleveraging process, nonequity partners are immensely more profitable than associates.