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When the economy is weak, companies go through rounds of layoffs or firings. Law firms are no different, except for that de-equitization concept. As the dot-com boom fizzled and the aftereffects of 9/11 turned the economy sluggish, law firms began to de-equitize more than in the past. But now that the economy has improved and law firms are in growth mode, some in the industry say de-equitizations are just as prevalent. “When there’s plenty of work around, they’ll tend to make people partners more easily,” Ward Bower of legal-consulting firm Altman Weil says of law firm management. When work is scarce, some partners may drop a tier, he says, adding that firms only have to go through that process once to understand how difficult it is. So why, during “good times,” are firms showing decreases in the number of equity partners? One common theory espoused by some in the legal industry is that de-equitization is a tool firms use to manipulate profits per equity partner, especially for the AmLaw 200. However, a number of law firm leaders have a different take. Andrew Kassner, managing partner of Drinker Biddle & Reath, says that for the past five to eight years, firms have been de-equitizing partners in order to compete financially and increase profits per partner. He says that although his firm hasn’t had any increase in the shuffling of partners, he has heard of some firms de-equitizing groups of older partners. He says, however, that there aren’t any “mass programs” of de-equitization that occur on a regular basis. As the legal field becomes more specialized, Kassner says, firms diversify and individual partners do not, creating the need for de-equitizations. Client consolidation also leads to the same situation, he says. Buchanan Ingersoll & Rooney Chief Executive Officer Thomas VanKirk says it is clear that de-equitizations are happening more frequently, but they are not intended to raise a firm’s PPP. VanKirk says firms are de-equitizing to create a stronger firm for the benefit of everyone who works there. “You don’t create a static group of equity partners and just keep it there forever,” he says.In order to stay competitive, firms have to have their best and most productive lawyers as owners of the business, he says. As standards to make equity partnership increase, how fair would it be, asks VanKirk, to allow an equity partner to remain in the position if he doesn’t meet the standards while keeping a potentially more qualified candidate out of the equity tier. Thorp Reed & Armstrong managing partner Douglas Gilbert says economic times have little to do with when someone is made equity partner or dropped out of the tier. “It’s either time or it isn’t,” he says. TIERING UP Mark Alderman, chairman of Wolf, Block, Schorr & Solis-Cohen, says firms are increasingly using the process. “All roads lead to leverage,” Alderman says. “If [the] standard is profits per equity partner, then you have to leverage your business to maximize the profits at the top.” He says de-equitizations are happening at his firm more than before�because they never happened before. He says his firm has had between five and 10 de-equitizations in the past year or two. Between 2004 and 2005 the firm saw approximately a 17 percent decrease, from 100 to 83 equity partners. The firm’s nonequity group grew by almost 68 percent, from 43 in 2004 to 72 in 2005. According to Alderman, the cause for the 17 percent decrease in equity partners was a combination of the de-equitizations and attorneys retiring or leaving the firm. Frank D’Amore of Attorney Career Catalysts says the tiered structure actually results in fewer de-equitizations because lawyers aren’t making equity partner as quickly. He says a lawyer’s productivity and how it fits into the firm’s standards are taken care of on the way up through the addition of tiers rather than on the way down through de-equitizations. The numbers provide some proof of this theory. Much like Wolf Block, Drinker Biddle has had more lawyers become nonequity partners than lawyers bumped from the ranks of equity partner. For 2005, the firm saw a 6.2 percent decrease in equity partners from 148 in 2004 to 139 in 2005. The firm, in keeping consistent with its plan, saw a less than 60 percent increase in nonequity partners, from 21 in 2004 to 33 in 2005. Blank Rome had a 2.2 percent decrease in equity partners in 2005, from 176 in 2004 to 172 in 2005. In the same period, the firm had a 24.5 percent increase in nonequity partners, from 61 to 76. There also are firms that have increased the number of lawyers in both tiers. Fox Rothschild increased its equity tier by 6 percent, from 87 in 2004 to 92 in 2005, and increased its nonequity tier by about 5 percent, from 43 in 2004 to 45 in 2005. Cozen O’Connor went from 125 equity partners in 2004 to 127 in 2005 and went from 87 nonequity partners in 2004 to 95 nonequity partners in 2005. When asked how long firms could continue to increase the nonequity partner tier by double-digit percentages, D’Amore said, “For quite some time”�as long as the nonequity group has enough work to keep busy. D’Amore says the trend is moving toward a smaller group of equity partners in the future. OUT THE DOOR If de-equitization is a fact of large law firm life in the current market, how are firms handling the process? Most of the managing partners interviewed say attorneys rarely just walk in one day to learn that they have been de-equitized. “You really need to have a fair and honest discussion,” Gilbert says, adding that it is important to get the goals of both the partner and the firm out on the table. D’Amore says that in a well-managed firm, a partner usually will have about two years to try to turn things around. However, in firms with little camaraderie, a partner may be de-equitized with a day’s notice. Bower says that whether a partner will stay at the firm after being de-equitized depends on the age and professional goals of that partner. Some may retire, he says, and others may stick around and work without having to worry about putting in capital contributions or finding business. VanKirk says that individual partners might make the choice to move to a nonequity status. “It should be a happy situation because the compensation should match with what the partner wants to do,” Gilbert says. In extreme cases, Kassner says, firms ask a partner to leave. Leaving the law firm, by choice or by request, can offer new opportunities, but often at lower pay. D’Amore says that in-house positions are an option, but they are very hard to come by and often pay much less than a firm would. The same, he says, goes for government positions. The move from equity to nonequity can come with a significant change in pay as well. Bower says that equity partners generally make at least twice as much as nonequity partners. Gina Passarella is a reporter with The Legal Intelligencer, an ALM publication based in Philadelphia.

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