This is an important question, especially for small and midsize law firms that want to have a future.
Many smaller law firms are firms in name only. The partners share a common brand, office space, and expenses, but almost nothing else. My Walker Clark partner, Fernando Moreno, describes such a firm as a condominium.
the risks
Although a "law condominium" has some advantages, especially for retail law firms[1], we have observed some disturbing characteristics of this structure, which pose serious long-term risks for commercial law firms. These include, for example:
- The "eat what you kill" compensation systems that most law condominiums have focus entirely on individual performance and individual rewards, with no incentives for partners to develop business except for themselves. Referrals and cross-marketing are almost rare.
- The underlying corporate structure of the firm, if there is one at all, is usually under-capitalized or not capitalized at all, making it very difficult for the firm to invest in growth or infrastructure beyond what are ordinary operating expenses.
- Knowledge sharing and the profitable management of intellectual capital among partners usually is episodic or non-existent.
- Most partners are always at risk of leaving the firm.
- These firms usually are unable to invest in recruiting top-quality associates and have higher turnover rates of associates. Very few associates remain long enough to become partners.
- The law condominiums seldom survive longer than one generation.
- These firms almost never develop a recognized brand nor become an institution in the local business and professional communities.
- They are especially vulnerable to economic dislocations and also have difficulty responding to new opportunities when business gets better.
- Planning and strategic decision-making almost never take place; and administrative issues, such as whether to hire a receptionist, can produce a "civil war" among the partners.
Each of these factors influences the profitability of these firms, as well as the profitability of each partner's practice. The inherent irony is that although some partners believe that the condominium structure is the best way to protect their individual financial interests, it also can curtail their individual opportunities. Although all of these risks can be managed reasonably well for a while, even in the loosest arrangement, they are much more difficult to manage over the long term. It takes a special type of commitment among all of the partners to do it successfully.
at your next meeting or retreat
This can be a very productive topic for a partners meeting or weekend retreat. Ask yourselves: What are we really: a law firm or a condominium? If you aspire to be a law firm that is a sustainable business institution in your market, but in reality act like joint tenants in a condominium, your governance, compensation system, and partnership values probably require honest and in-depth reconsideration.
Norman Clark
[1] As we use the term, a "retail law firm" is one that focuses primarily on the delivery of legal services to individuals, in areas such as family law, personal injury, criminal law, and real estate conveyancing, and to small businesses in routine commercial transactions and disputes. By contrast, a "commercial law firm" is one that focuses primarily on midsize and large businesses, banking and financial institutions, and high net-worth individual clients. There seldom is a sharp line that distinguishes a retail law firm from a commercial law firm; but most law firms are oriented toward one category or the other.
