The traditional partnership model is going through a period of rapid change towards a more corporate style of management. You can look at almost any Professional Services firm and see where it falls on the journey between the two. In the legal market UK firms tend to be further towards the corporate end of the spectrum in comparison to US firms while the Big Four already act very much like corporate entities but without external shareholders. Hedley May is a leading executive search firm with a specialist focus on Governance, Regulatory and Control functions of major corporations. Its consultants discuss how Professional Services firms are shifting from Partnership business models to become more sustainable...
British Professional Services firms are the acceptable face of the City. They are incredibly successful as employers, thought leaders and influencers around the world. In contrast to the long-term decline of British banks, four or five of the world’s top ten law firms are British. They are genuine market leaders that compete globally with the top US firms in a way that is no longer the case in the banking world.
The Big Four are slightly different. While the scale of their US operations makes them the dominant influence on strategy, the UK tends to be next in line and our innovations often spread across Europe and the rest of the world.
However, large scale changes in their structure are in motion, greatly impacting on the way Professional Services firms will need to operate in the future.
A new partnership model
The traditional partnership culture promoted consistent, coherent, long-term strategies supported by the majority of partners and was designed to deliver the continuity and sustainability of the partnership across generations. This worked well for the relatively small, homogeneous and geographically-limited firms that dominated the market until 20 years ago.
However, as the complexity and scale of the modern law firm increased they have moved towards more executive corporate structures, stepping away from true partner control and vesting more and more power in their senior leadership team.
Crucially in the Financial Crisis the executive gained more authority to redeploy partners around the firm, reduce compensation and exit partners as or when necessary. These crisis powers were never rescinded which has meant the benefits of being a partner are now far less distinct from being an employee. All international law firms now have clearly mandated executive committees and powerful department heads. They are much closer to the matrixed management structure of the Big Four and, while they still have elected partnership boards, these are mostly guardians of governance as the real power is wielded by the executive.
Partners are increasingly now held to financial metrics and formally appraised on behaviours with these factors reflected in compensation and the number of firms maintaining a traditional tenure-based lockstep structure has dwindled to a handful. Three Magic Circle firms have voted to move further away from the lockstep in the last 18 months and the vast majority of the larger law firms (both UK & US), the Big Four and the scaled management consultancies vest power over compensation with their executive management teams. Partner compensation and progression are treated much in the same way that a bank might evaluate their cadre of MDs.
However, there are still some critical vestiges of partnership that differentiate firms from the financial institutions they often work so closely with. Professional services firms slightly resemble the British electoral system with partners voting in an executive team (usually “first past the post”) but only having to live with them for four or five years before they can make their views felt once more.
The challenge of globalisation
The ever increasing challenge of delivering services globally impacts law firms and the Big Four differently. The former are typically integrated international partnerships sharing profits, while the latter are global brands built up from a collection of national member firms with limited profit sharing.
For the larger UK law firms the challenge is how to reflect the international nature of their businesses (60% of Magic Circle partners are working outside the UK) in their executive teams and practice leadership. Allen & Overy has had a Belgian managing partner who joined by merger for a number of years, but this is the exception to the rule so far.
For the Big Four international issues often create tension between the executives of the separate national partnerships and the leadership of the international entities that protect the global brands and arbitrate disputes between member firms. This unconsolidated legal structure complicates how they can acquire and joint venture with genuinely international businesses (such as the major technology consultants and suppliers) and even the sharing of IP across their own platforms. For the first time since the demise of Andersen there are significantly divergent global strategies between the Big Four with Ernst & Young heading much faster towards international integration than the other three.
The other geographical factor driving change across professional services firms is a product of the rebalancing of global business itself. Historically, the US, UK and larger European markets were dominant because international investment was a response to the needs of multi-national clients headquartered in these jurisdictions. They expanded into emerging markets to service such clients but more recently these markets themselves have become the drivers of growth with many new corporates and financial institutions equalling and even surpassing their “old” world antecedents. These markets operate to different norms and rules and are often still evolving in their own way.
In contrast some of the biggest strategy consultancies have created virtual international management teams with no fixed headquarters and a much higher degree of international diversity within their management teams. Learning from this model and adapting the traditional partnership model could be crucial to delivering the level of innovation and change that these new and highly competitive markets require.
Changing roles and responsibilities
Although still falling short of the accountability expected in the corporate world, professional services firms have become more intelligent about appointing partners to senior management roles. Rather than just reward the most senior partners or provide a soft parking place for under-performing but worthy colleagues, there is a much harder focus on capabilities and responsibilities.
Firms have also become more robust ensuring fewer partners are in leadership positions and only the very most senior have management as their sole remit. Many in the next tiers down are expected to balance client and fee earning responsibilities with management duties.
As management teams professionalise there is a parallel shift in the importance of high quality support functions. Directors of Human resources, technology and business development are far more influential and often spend as much time with senior and managing partners as their own partner colleagues. These roles can now enjoy partner equivalent status and compensation levels that would have been unheard of even a decade ago. Given that very few of the senior executives or practice/sector leaders join from outside the partnership, this can also provide a source of competitor insight, new thinking and innovation.
Client expectations drives change
Globalisation of the largest firms will continue to be driven by the needs of the largest clients and there is no let-up in the demand for change. Large corporations and financial institutions want to re-configure how professional services are delivered with pricing and procurement pressures forcing firms to re-think commoditised services and the way they project manage workflows. New competition such as the growing number of alternative legal providers and boutique consultancies unencumbered by the partnership economic model will exploit any who fail to adapt to these pressures.
At the same time they still have to provide the highest quality professional advice but need to convince clients that they have the specific expertise required as talented generalists are no longer sufficient to justify premium pricing.
The leading British professional services firms are definitely on the right to track but there is still a way to go in a rapidly changing market. The process of professionalising professional services will continue but inevitably it will impinge on the cosy relationship partners historically enjoyed with the simpler partnerships of the past and there is a genuine risk of disengagement as individuals feel less appreciated. While for many professional services firms this is already accepted, for some law firms there is still a potentially painful process to go through.
Hedley May is an executive search firm with a specialist focus on Governance, Regulatory and Control functions of corporates and financial services organisations as well as Partner appointments into professional search organisations. Founded in September 2009, the firm has established itself as a market leader for their appointments across the Compliance, Risk, Internal Audit, Finance, Legal, Company Secretary and Executive Reward functions.