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De-equitization. It seems a harmless enough word. But for managing partners, it’s seemingly even less popular than the ultimate conversation kryptonite: layoff. That doesn’t change the fact that more and more law firms are coping with the economic doldrums of the past two years by essentially demoting equity partners to non-equity status. This allows firms to stabilize or improve their financial numbers — especially the profits-per-partner figures that appear in the annual Am Law 200 in The American Lawyer magazine. Major Hagen & Africa legal recruiter Frank D’Amore said he has seen an upswing in de-equitizations over the past year or two as the economy has dropped off. He said such partners often find their compensation severely decreased with few job opportunities on the horizon because there is not much call for service partners — usually sophisticated client managers who don’t generate significant business — during a recession. Altman Weil law firm consultant Tom Clay said there are two reasons for the rise in de-equitization: the economic downturn and the fact that many firms promoted people to partnership status that have no business being partners. Firms were able to carry more non-business-generating partners during the boom time of the late 1990s. But with the economy hurting, firms are struggling to find ways to keep their profitability numbers at a stable level. Clay, though, said firms would not have to de-equitize partners if they had not promoted associates to the position who did not deserve such status in the first place. “Firms just didn’t have the will or discipline not to [promote undeserving lawyers to partner],” Clay said. “They may be good lawyers, but they’re not adding anything to the partnership. If all they’re doing is taking work from other partners, then they’re not doing anything for the firm. If they left the firm, it would just be another ho-hum situation.” Clay said managing partners never tell the media the truth about the extent of de-equitization because they are embarrassed — especially if it involves someone they’ve been practicing with for a long time. Though most lawyers are de-equitized involuntarily, others accept the demotion willingly, Clay said. Some are glad to be rid of equity partner obligations such as having to invest their capital into the firm. But Clay said some instances of de-equitization have resulted in lawsuits, mainly revolving around management being accused of changing the rules of the partnership agreement without fully informing partners. Clay said they are either partners who never achieved an acceptable level of productivity or those who once were rainmakers for the firm but have fallen on hard times. “Most of the people being de-equitized are people who should be let go, but most firms are not that heartless,” Clay said. “They just reduce their compensation. But they need to make a decision about whether this is someone they want to keep. You can still handle it the right way. Work with the person to transition them out.” Clay said firms should not use de-equitization to send a message to attorneys to straighten up. Nor should firm managers expect de-equitized partners to magically turn their performance level around to the point where they will eventually be promoted back to equity status. “You can’t go down and come back; you go down and out,” Clay said. According to Clay, there are five types of partners: Entrepreneurial leader: Consistently keeps multiple partners, associates and paralegals busy, often in many practice areas. His or her presence drives the firm brand, transitioning relationships to others and creating deeper, broader relations with clients. These partners are very rare. Business-generating partner: Capable of staying busy and keeping one to three others busy on a consistent basis with their own business and growing existing client relationships cultivated by others. Self-sufficient partner: Someone who keeps busy but usually gets a portion of work from others and manages to export a portion of work from others. He or she leverages equally the firm’s brand and his or her personal market presence for marketing. Service partner: Usually a sophisticated lawyer and client manager who can manage a service delivery team but does not generate a significant volume of work on his or her own. This type of partner would not meet the test for self-sufficiency. Technical specialist partner: A sophisticated problem-solver who is often uncomfortable with the social aspects of client interaction. This person will generally not lead a legal team but may lead a project team on a specific legal issue. Clay said law firm management often promotes lawyers to non-equity partner because it is afraid of making a difficult personnel decision with someone who has yet to demonstrate that he or she has the potential to reach equity status. He said the result is that firms do not have enough business generators and have too many partners that fit into the category of self-sufficient, service or technical specialist partners. “I’ve seen too many instances where firms haven’t made hard decisions about someone who shouldn’t be there,” Clay said. “I’m working with a 300-attorney firm right now and all of their problems are in the non-equity partner area. Too many [non-equity partners] are not productive.” Wolf, Block, Schorr and Solis-Cohen chairman Mark Alderman said the economic pressures of the past two years have clearly put pressure on firm managers to tighten their belts. But he said the reluctance firm managers have in making tough decisions during good economic times tells only half the story. “I don’t think the larger problem is that too many partners are promoted from the associate ranks,” Alderman said. “The greater problem is people who have been partners with the firm for a while and had a substantial amount of business but whose contributions have declined. That’s the hardest part and that’s what I hear more about around town.” Stacked up against its fellow Philadelphia firms, Wolf Block has a relatively low percentage (25 percent) of partners who hold non-equity status. Alderman said most of Wolf Block’s non-equity partners are lateral additions rather than de-equitized partners or promoted associates. Alderman’s story is quite popular among his peers. Not one firm manager interviewed for this article said that his firm’s non-equity partner numbers are significantly based on de-equitization. Instead they claim that numbers have increased in recent years mainly because of an influx in lateral additions or internal promotions from the associate ranks. At Buchanan Ingersoll, 47 percent of partners hold non-equity status — the highest percentage of any firm with a significant Philadelphia office, according to statistics provided by The National Law Journal‘s NLJ 250. Firm chairman William Newlin said Buchanan Ingersoll has long recognized that attorneys have different career goals and that non-equity partnership is the best solution for many who do not want the obligations and rigors of equity partnership. Newlin said the firm has had a modest number of de-equitizations, but it does not constitute a significant number of its non-equity partners. Though it has a two-tier partnership, Morgan Lewis & Bockius does not disclose how many partners hold each title. Philadelphia managing partner Howard Meyers said that de-equitization is “a completely appropriate management tool” but that poor or sagging performance is only one reason firms execute such actions. Meyers said sometimes when a partner is approaching retirement, he or she might want to cut back on commitments and have assurances of being paid at a specific compensation rate. Duane Morris chairman Sheldon Bonovitz said de-equitization is a combination of cosmetics and substance. The cosmetics surround The American Lawyer magazine’s AmLaw 200, which calculates which firms have the highest profits per equity partner. Firms want the good public relations that go along with high PPP. It helps with recruiting both lateral partners and upper-echelon, entry-level talent as well as retaining key personnel. The substance, Bonovitz said, is the trend toward two-tier partnership. With the cost of associate compensation and the high rate of associate attrition, Bonovitz said, it’s important for firms to retain talented associates who have not yet shown that they are ready to become equity partners. “This year we are promoting 10 associates [to non-equity partner] who have demonstrated the ability to handle cases on their own but not generate new business. I just think a lot of them haven’t had the opportunity to generate their own clients because they are working for other partners. But I think non-equity partners fill a very important role at a firm. You need business generators, but you also need people to do the work.” Reed Smith management was open about its decision to only bring in 55 of 85 partners from Oakland, Calif.’s Crosby Heafey Roach & May as equity partners when the two firms officially merge in January. About 15 of the 30 other partners will join Reed Smith as non-equity partners, while the rest will pursue opportunities elsewhere. In addition, the firm has de-equitized a number of partners in recent years. In the past three years, the percentage of Reed Smith partners that hold non-equity status has risen from 29 percent in 2000 to 32 percent in 2001 to 43 percent in 2002. During that same time span, the firm’s profits per partner have risen from $350,000 in 2000 to $400,000 in 2001 to a projected figure of $450,000 in 2002. Reed Smith chairman Gregory Jordan said there is not much of a correlation between the rising number of non-equity partners and the rising partner profit numbers. “[De-equitization] had no impact on our numbers last year and only a small impact on this year’s numbers,” Jordan said. “The biggest reason for the improvement was our improved performance.” Jordan said that de-equitization has come with the realization that as firms grow, they must be run like businesses rather than a pure extension of the profession. “There shouldn’t be any negative connotation in aligning people with their level of contribution to the firm,” Jordan said. “From our standpoint, this is not a function of the economy or not being able to carry someone at equity status. It has more to do with the fact that any big business asks its highest owners to contribute more to the firm. These are often tough decisions, but most personnel decisions are tough. How much someone gets paid. Bonuses. Promotions.” Legal consultant Joel Rose, though, said that while managing partners might put a positive spin on de-equitization, it almost always creates a cancerous situation at a firm. De-equitization is almost always the final straw in the event that a firm is not satisfied with a partner’s performance. “It’s almost like getting fired,” Rose said. “You’re not able to participate in votes. You don’t have a share [in profits]. You basically become a pariah. By the time someone gets de-equitized, they’ve been given warnings that their work is not up to par. So it’s one of the most severe penalties a firm can dish out. The only thing that is worse is expulsion.” The question now is whether firms will reduce the number of associates promoted to either non-equity or equity partner. Most of the aforementioned managing partners will argue that service partners play a key role in a firm’s success and that it is also unfair to gauge the business-generating capabilities of an associate in their seventh or eighth year. “We feel that’s too early to judge,” Jordan said. “[By promoting them to non-equity status], we give them the tools of partnership to grow their practice. There are other things aside from business-getting that are considered [when Reed Smith promotes someone to non-equity partner]. You look at the quality of their work, their work ethic, their recruiting abilities, their corporate citizenship. We don’t have an up or out approach with non-equity partners, so it’s not necessary that they be business-getters at that stage.” Even with Jordan and others talking about the benefits of non-equity partnership, most managing partners and law firm consultants believe firms will be more conservative with their promotion decisions this year. “I talk to senior associates who don’t even have a business plan,” D’Amore said. “They always tell me that they are too busy billing hours. But especially with the economy the way it is, it’s important to carve out some time for that. If you want to make partner, and eventually equity partner, that’s what’s necessary to get it done.”

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