What’s Next for De-equitization?

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Three years ago, at the height of the financial crisis, the phenomenon of de-equitization also was at its peak. The de-facto termination of older partners who may have had high billing rates but who brought in less business than their fellow partners was a purely financial strategy that had enormous human impact. Times of crisis led firms to take drastic action rather than hold on to partners who were once added for a reason.

We now appear to be past the peak of the de-equitization tsunami, but that doesn't mean the phase-out of older partners has gone away at larger firms.

One of the largest Wall Street law firms reportedly is offering its "older" partners a retirement package: payment for the next several years of 50 percent of the average annual draw for the last five years, plus medical and other benefits.

That's the same strategy automakers have used for years to reduce pension liabilities, and for the same reason: Pensions at some of the biggest firms are vastly underfunded, and firms need to reduce their future burden.

Beyond this, the simple fact is that the de-equitization is normal business activity. When an individual lawyer stops being as productive as he or she used to be — whether bringing in new clients as a rainmaker or billing enormous hours for existing clients — de-equitization is a legitimate option if done according to specific performance metrics. If done simply to get rid of older lawyers because they are old, the result is harmful. There have already been several Equal Employment Opportunity Commission discrimination actions and resulting settlements that have hit major firms.

De-equitization may continue, but in another form: technological unemployment. This is the first business cycle where technology has had such a dramatic impact on law firms. Previously, if recession meant reduced business, that business would recover as the economy did and firms could continue to grow both in size and in revenue per lawyer. Now, law firms are facing what other industries faced earlier: needing to reduce headcount while using technology for greater fee efficiency. If older lawyers have not maintained their technological proficiency, e-discovery software and knowledge management databases may take their place. The impact on small firms, which are under their own fee pressures, will be just as great.

There is a final aspect to the necessity of de-equitization — at some point, lawyers often feel entitled to get what they're getting; that by virtue of being in a larger firm, their compensation should continue regardless of the firm's fortunes. If those fortunes sag a bit, even if the lawyers are not as productive, they still want their compensation.

According to some accounts, that was precisely what happened at the now-bankrupt Dewey & LeBoeuf, a firm that hired many lawyers with very high compensation guaranteed for a number of years. When the fortunes of the firm sagged, the high-rollers bailed, the underperformers remained and the firm died. At least one former partner has sued the firm, calling its compensation structure nothing but a Ponzi scheme.

He may be right. But if the issue is firm survival, de-equitization of some partners is preferable to pretending that nothing is wrong ... until suddenly there is no more firm.

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