It’s no secret that the legal industry is undergoing a momentous shift. From the exponential globalisation of the industry, to the arrival of NewLaw firms and service providers and the development of AI, the traditional career path for lawyers has taken new twists and turns.

Equity partnership was once the end goal for most lawyers – but a shift away from the lock-step model, the global consolidation of firms, and trends of de-equitisation to maintain profits are pushing that goal further out of reach.

At the same time, lawyers have more job options to choose from and are pushing the boundaries of work/life balance. So it’s valid to ask: as equity partnerships are getting further out of reach, do lawyers even care?

Going the distance

Under an equity partnership model, partners are compensated by a share in firm profits. In many firms, this is allocated on a pointsbased system.

“Equity partnerships have been around for forever,” says Lisa Gazis, the NSW managing director of Mahlab.

The road to equity partnership used to be simple. You would join a firm as a lawyer, work your way up over the coming years and eventually, equity partnership was yours. These days, that couldn’t be further from the truth.

“A big trend we’re seeing is that the path to equity partnership is becoming longer and less certain,” Dr George Beaton, director of Beaton Capital, says.

“There was a time when if you stuck around for five, six, seven years, and jumped through the hoops and you were judged by the others to be a ‘good guy’, you’d become an equity partner.”

However, Dr Beaton says that the path to equity partnership is now at least twice as long.

“People only get to partnership in their late 30s these days, not their late 20s, and the progression through the partnership is also getting longer and longer,” he says.

“This is turning a lot of people off. They’re saying this is just too long too hard, I’ll just set up on my own or I’ll join one of the boutiques, so we’re seeing this as an accelerating trend.”

Taylor Root partner Tim Fogarty agrees with Dr Beaton, pointing to the lengthening time to partnership as a disincentive.

“Historically there used to be a view that it might take 10 years,” Mr Fogarty says.

“But these days most people view it as far longer than that in most of the larger professional law firms, but it’s always down to performance.”

Ms Gazis believes equity is a relic of a different time, when firms had “fewer offices, partners never left and they retired out of partnership”.

“We’re seeing a bit of a movement away from the traditional equity concepts because equity was something that was very prevalent in an era where all the partners knew each other, often quite intimately,” she says.

“Now things are a bit different. Partners do leave before retirement, the firms have grown considerably, there are issues of non-performance and issues of having to de-equitise partners.”

On top of that, Ms Gazis believes we’re seeing fewer and fewer equity partnerships being offered.

“It’s in part because it’s getting harder to carve up the pie, and in part because a lot more lawyers are now considering non-equity partnerships and other alternatives.”

Meritocracy reigns

Another factor affecting equity partnerships is the shift away from a lockstep model to a more meritocratic system.

“The days of the lock-step partnership structure of doing your time and year after year rising up the equity ladder are over,” Mr Fogarty says.

“That’s a pretty archaic way for law firms to operate; it’s just not common any more.

“It’s far more common to have a more meritocratic environment so people don’t comfortably sit on 100 points without actually generating sufficient revenue to warrant that number of points to be held.”

Ms Gazis explains that the point system is a mechanism that allows firms to distribute profit in proportion to who brings in most of the revenue.

“Basically partners work on a point system and then depending on where they are within that system they would get a distribution of the profits.”

She adds that because lawyers are no longer sticking with one firm for life, firms are more reluctant to hand equity partnership positions out.

“Because we’re seeing partners leave and there’s been a lot more movement of partners, firms have had to address this when they bring on new equity partners,” she says.

“What they’re trying to do is change the system of equity and remuneration to be able to attract people, bring them across and reward them, and also develop an equity system of reward which will also enable them to retain their best fee earning partners.”

As a result of this, partnership tiers are changing, according to Ms Gazis.

“We now have non-equity partners, we have salaried partners, we’ve seen different types of profit sharing models also,” she says.

Safety not guaranteed

Even those who have already made it to the position of equity partner aren’t out of the woods. Firms are increasingly turning to de-equitising current equity partners in the face of cost demands and profit protection.

Dr Beaton says the big picture trend is that there is pressure everywhere.

“The large, the mid-sized and the small firms are all under pressure. This includes the big cities as well as the regional centres and the suburbs. Virtually across the board,” he says.

“That’s been intensifying for some time and in the endeavour to maintain the value of a point of equity, one of the obvious responses is to reduce the number of units. Essentially that’s what we mean by de-equitisation.”

Dr Beaton says firms can de-equitise partners by either reducing the number of points, and therefore profit, that they’re entitled to, or they can remove their equity entitlement all together.

“So de-equitisation is a way of really maintaining the size of the slices of the equity pie and this is one of the several responses to a shrinking profit pool.”

A report produced by Melbourne Law School and Thomson Reuters, Australia: State of the Legal Market 2015, found that firm profitability has largely been maintained through a combination of de-equitisation and reduction of equity partner headcount.

Australia’s eight biggest law firms – Allens, Ashurst, Clayton Utz, Corrs Chambers Westgarth, Herbert Smith Freehills, King & Wood Mallesons, MinterEllison and Norton Rose Fulbright – saw the number of equity partners reduced by 10 per cent between Q4 2012 and Q4 2015.

In the following 15 largest firms in the country, equity partner headcount dropped by just over 5 per cent.

Meanwhile, the Mahlab Report 2015 Private Practice found that the average equity partner salary at large firms in Australia has decreased.

“Whereas three years ago a full equity partner at such a firm could comfortably expect an income of $1.2 million and upwards, some firms have seen this dive to $750,000 to $800,000 with little prospect of reversion,” the report read.

Global perspective

The globalisation of the legal industry has contributed to both the increasing difficulty of making equity partner and the trend of de-equitisation, Mr Fogarty believes.

“It’s not necessarily a local topic any longer because you’ll have global boards – and decisions made in America or in the UK – who will have a say about who’s going to get promoted to equity partnership and who isn’t,” Mr Fogarty says.

At global firms, sometimes the value of a partner’s practice in Australia may not be as impressive when viewed from a UK or US perspective, he warns. In this regard, global strategies towards the number of equity partners in each region come into play.

Mr Fogarty says that this can make current equity partners nervous and make them look closely at their own future in that environment. Occasionally, this can lead to selfish practices in the way partners behave and relate to their co-partners.

“Hoarding of work is an example; not referring work that perhaps might be better off done by experts in other fields; people claiming revenue that perhaps might actually not legitimately be theirs to claim,” he offers as examples.

“It can create a pretty disruptive environment.”

Ms Gazis points out that there are other reasons for firms to de-equitise partners apart from simply to maintain profit.

“Sometimes it’s done because a partner might not be performing. They might have a pattern of non-performance consistently over a long period of time and so the firm would need to adjust their entitlement,” she says.

“Or it might be because the partner themselves has decided they want to de-equitise because they’re thinking about other things like retirement or family.”

Where the grass is greener

While the road to equity partnership is not as smooth and straightforward as it once was, some firms make it easier than others.

Broadly speaking, equity partnership is easier to achieve at boutique and national firms than it is at global firms because they don’t face the same global challenges.

Often boutiques are formed when three or four partners come together to create the firm and they split the profits equally among each other. Obviously, this is the easiest way for lawyers to achieve and maintain equity partnership without fear of being de-equitised.

Indeed, this makes for an attractive option for lawyers doubting whether they will ever reach equity partnership at their current firm, which leads to partners breaking away from big firms and setting up their own boutiques.

When it does come to global firms, not all of the global law firms are integrated financially, which can make equity partnership easier for Australian lawyers.

“Some global firms have a Swiss verein model, which keeps costs within a region or within a country as one profit pool,” Mr Fogarty says.

There are seven global firms that operate under the Swiss verein model as of 2014: Dentons, DLA Piper, Hogan Lovells, King & Wood Mallesons, Norton Rose Fulbright, Squire Patton Boggs and Baker & McKenzie.

Dr Beaton says most Swiss verein firms are formed when a firm expands globally by merging with other firms in different regions, but decides to keep separate partnerships.

“When these mergers take place very few of them are true balance sheet mergers. The firms don’t, some do but not all, merge their balance sheets,” Dr Beaton says.

“So they retain separate partnerships in each country and they are a network of firms. Each firm is self contained and behaves as a separate profit centre in its country or in its region under one banner.”

Indeed, six of the seven current Swiss verein global law firms are the result of mergers, with the only exception being Baker & McKenzie, which used to be a single partnership.

On the other hand, firms which do have a single global profit pool, such as Herbert Smith Freehills and Ashurst, believe the model promotes collaboration and reduces competitiveness.

“Having a single profit pool means that work that comes in [and] benefits everybody, regardless of who does it,” says Sue Gilchrist, Herbert Smith Freehills’ regional managing partner of Asia and Australia.

“So instead of competing with one another to bring in and do work, as is often the case under alternative firm structures, our partners are incentivised to work together, which ultimately leads to better client outcomes and better work and learning experiences for our people.”

Similarly, Ashurst vice-chairman Mary Padbury says: “Ashurst operates as a single profit pool across the globe, so partners collaborate across geographies to ensure work is undertaken by the lawyers best placed to assist a client in terms of expertise and availability, irrespective of location.”

The firm has a single global board elected by the entire partnership, a global management structure, and is run using a matrix structure.

Each practice division has a global head and each division is managed across all the regions in which Ashurst practices, Ms Padbury says.

Fading desire

While equity partnership is becoming harder to achieve and harder to hold, many lawyers are turning their backs on it altogether.

“Increasingly,” says Dr Beaton, “there are people who say, I don’t want the risks and responsibilities of being an equity partner. I want to practise, I want status in the market, and I want to be able to go home and tell my partner or spouse or children or parents that I’m a partner, but I don’t want the downsides.

“So there are people who elect to remain salaried partners even though they might have been invited to become an equity partner.”

Ms Gazis adds that while there is a definite prestige about being named equity partner, other things are more important to lawyers these days.

“Obviously if you’re an equity partner it does bring a certain cachet. But you also have liability issues that you contend with, whereas a salaried partner doesn’t necessarily have that, and that is quite attractive to some,” she says.

Equity is no longer the most important thing for lawyers, according to Ms Gazis. Instead, having sufficient money, good work, and a good environment is what is driving them.

“Lawyers are much more mobile than they have ever been and if they’re able to get the remuneration they want with a culture and environment in a business that they feel aligned to, it’s worth a lot more to them than the politics of a partnership,” she explains.

“Whilst equity can be a prestigious thing, that is becoming more and more watered down as a concept.”

Ms Gazis says the emergence of NewLaw firms is also providing alternate opportunities for senior lawyers.

“Australia now has NewLaw-type law firms, firms which are set up as corporate structures, and others where lawyers aren’t going in as partners any more. They’re going in as directors, and so saying, ‘I am a partner’ is perhaps not what it used to be because times have changed and things have moved on.”

Unattainable goals

When it comes to graduates and junior lawyers looking for work, Mr Fogarty says they’re no longer even thinking about partnership possibilities.

“Partnership is very much a distant light on the horizon for lots of junior lawyers. And I think many would be happy not to ever get there,” he says.

“It’s surprising the number of lawyers who speak to us about their careers and often partnership is not actually the end game for them, which is quite a change in the mindset of lawyers.”

Mr Fogarty says those of the younger generation are thinking more mid-term as opposed to long-term and are keeping their options open. They are considering in-house roles, government roles, going to the bar, working overseas, and NewLawtype structures.

Many are also turned off by the demands and lifestyle of pursuing partnership.

“Long-term private practice is a very demanding environment because clients expect certain levels of service and some people want to have families or have reduced hours,” Mr Fogarty says.

“Some people want to work parttime, people might have other interests but want to maintain an element of a professional legal career.”

Regardless of these changes, one reality is that lawyers are taking far more control of their careers and actively making decisions that best suit them as opposed to staying at one firm for life.

“Partners in law firms are far more minded to actively consider career opportunities these days, whereas before they were quite happy to stay put and just see how thing go,” Mr Fogarty says.

“Now they really want to take a bit more control about their own future and their own careers and examine whether or not the grass actually might be greener on the other side and do something about it.”

He adds: “They are no longer a partner for life at a firm. We do see partners moving far more regularly, so that is definitely a change in the legal landscape and the movability of partners and their practices just seems to be far more common than it used to be.”

Ms Gazis believes we will continue to see changes.

“This concept of non-equity is going to be something that we see more of, and we’re going to see different partnership structures; they’re not going to be the traditional partnerships. They’re not now the traditional partnerships because partners no longer just stay in one firm,” she says.

“Having a non-equity level allows firms to retain people that they would like to have as partners, who might not otherwise have had an opportunity to get to equity level for whatever reason.”

Dr Beaton adds he expects to continue to see consolidation and fragmentation of the market, which will widen the gap between boutiques and globals, and the lawyers who work for each.

“More firms are going to merge and most of those will adopt verein structures, but we’re also seeing a trend towards the setting up of boutiques,” he says.

“So we’re seeing consolidation, the bigger getting bigger and swallowing others, and then you’re getting fragmentation as people break away, very often the most talented and high-power rainmakers who think we don’t want to be part of this big thing, we’re going to set up our own.”

Because of this, says Dr Beaton, equity partners in global firms will increasingly become small fish in a big pond, while equity partners in boutique firms will remain big fish in a small pond.