The Traditional Equity Model is Fundamentally Inequitable
Law firm remuneration needs to be radically overhauled
The traditional pay structure for rewarding non-equity partners in law firms is fundamentally unfair, out-dated and does not reflect the radical cost savings that can be made through the current technological revolution, says John Hayes of Constantine Law. More worryingly, our clients are re-engineering how they are doing things but we are not, at least not in the way that we engage with and pay our people. This is creating a huge employment relations issue.
Traditional Overheads Can’t be Justified
Traditional pay structures confer remuneration on a third-third-third basis: you earn a third of what you bill, one third is overhead and one third is profit to the partnership, but is this right? In our first year of trading, Constantine Law’s overheads were less than 10% of its turnover. Why? We work to a lean business model that has three features: (a) we have negligible non-productive overhead (no bloated support departments and no non-income generating partners); (b) we don’t carry fixed office costs (we take professional office space as and when we need it in London’s smartest new business club); (c) all our key support functions (IT, PA/Admin, Marketing) are outsourced to specialists whose job it is to provide a premium, cost-focussed service.
Our result? The one third spending on overhead can no longer be justified. It reflects an outdated labour intensive way of doing things where most of the core support functions of a firm were internalised. I think that this is madness; these costs should be eliminated so that more pay is returned to the people generating most of the fees for the firm: the non-equity partner fee earners.
Thus, any assistant solicitor reading this article can reflect on the fact that when they record their 10th hour this week, that is their salary paid for (at best). The next 10 hours’ recorded time is for the bloated support departments; Thursday and Friday are spent almost exclusively for the benefit of the equity partners. It’s a sobering thought (perhaps not for them).
Are Big Law Firms More “Agile”?
Many law firms are experimenting with agile working models. I know of a large national law firm that has recently ‘imposed’ an agile working model, whereby assistants are to work from home one day per week. Wow(!) In contrast, our team works remotely all of the time, apart from when they are meeting with clients or prospects. Other firms are moving to 100% hot-desking and still more are experimenting with other flexible working models. Big law firms are falling over themselves to use IT more productively, so as to free up office space and allow their fee earners more “flexibility”. This all sounds terribly progressive, but is it?
But For Whose Benefit?
In his excellent book, the Jelly Effect (by Andy Bounds) he rightly focusses on the difference between Features and Benefits. A “feature” is agile working: it describes the way we do things; a “benefit” is something good that happens to other people as a result of our actions. Thus, I was recently told by a peer, with wide-eyed enthusiasm, that they had left “big law” to join a truly agile law firm. No politics, working remotely, eat 70% of what you kill. Wonderful, double your money and everyone’s a winner. “Great!” I said, “presumably you have now reduced your rates by 30% so as to pass on the cost saving to the client?”.
“No, why should I do that? I still charge the same as I did at my previous firm.”, he smiled and walked off.
And this is the point, at Constantine Law we have reduced our rates by between 30-40%. I used to charge out to my corporate clients at £475 + VAT and I now charge out at £325 +VAT. Our associate solicitor used to charge out at £325 + VAT and she now charges out at £225 + VAT. I am charging my main client less than I was 10 years’ ago. How many lawyers can say that? There is only a point in re-engineering our processes if the client benefits. Everything, every action we take, has to be customer-focussed. However, big law does not get this. Big law sees “agile” as a means of driving up their profit per partner. Long term, our clients won’t stand for it.