Management summary Kirkland & Ellis, the largest law firm in the world, has put $500 million into a system built with Palantir. It will be reported as an AI story. It is really a data story. The clever part is not a better chatbot. It is turning decades of messy fund paperwork into clean, structured data the firm can rely on without rechecking. Tools like Harvey and Legora, for all their strengths, cannot do this dependably, because they work by prediction and will sometimes get it wrong. The software behind this will eventually be available to buy. The clean data will not. That is the real barrier, and most firms cannot keep even a simple client database in order. So the firms that pull ahead will not be the ones with the deepest pockets. They will be the ones whose data is in order, and on that score almost everyone is starting behind. Preparing means two things: take data seriously enough to hire a senior person to own it, and accept that the firm will change shape, with data and AI specialists working beside lawyers in client-facing teams, some at partner level and paid accordingly. I will admit something. Until a few weeks ago, whenever I heard the name Palantir, a particular picture formed: government contracts, intelligence agencies, surveillance programmes, software for tracking enemies abroad and, now and then, citizens at home. I never examined the impression. If I am honest, I never really looked into the company at all. Palantir simply sat, in my mind, somewhere on the Dark Side. It turns out I was wrong. What changed my mind was a deal. This month Kirkland & Ellis, the largest law firm in the world by revenue, announced a multiyear partnership with Palantir, backed by a $500 million commitment to its own AI. Most of the profession read the headline, filed it under “another big firm does AI,” and moved on. That filing is the mistake. The genius of what Kirkland has done has almost nothing to do with drafting and almost everything to do with data. Once I understood why, I stopped thinking about the Dark Side and started thinking about how badly the rest of the profession has misread what this signals. Why the Kirkland and Palantir deal is really about data. The hard part of private equity fund formation was never writing the documents. It was keeping track of what they promise. A single fund carries hundreds of side letters, each granting one investor something specific: a fee discount, an excuse right, a transfer restriction, a most-favoured-nation clause that silently entitles them to any better terms a later investor receives. Across a dozen funds and several hundred investors, those promises form a web of live obligations that interact with one another, with every new fund term, and with every transaction the manager wants to make, for years. Checking a continuation vehicle against that web is not a reading task. It is a tracking task at a scale no human team can hold in its head. It pays to be precise about what tools like Harvey and Legora actually do, because they do it well. Both are built on large language models. Ask Harvey whether a side letter’s MFN clause matches the template, and it will tell you. Feed Legora a thousand contracts and it will pull the key terms into a grid, with citations back to the source. For drafting, summarising and review, these are a genuine advance, and any firm not using something like them is already behind. But they share three limits, and none is a bug the next release will fix. First, they guess. A language model predicts probable text; it estimates rather than knows. On Harvey’s own benchmark, its best model still invents roughly one claim in 500, and independent testing of legal research tools has found higher rates. The emerging consensus is that hallucination is inherent to these models, not a defect to be engineered away. One error in 500 is excellent for a drafting assistant. For a covenant check across a $50 billion raise, where a single missed clause is a multimillion-dollar breach, almost always right is the wrong standard. Second, they work one question at a time, against the documents. Nothing durable sits underneath. Ask again next month, after three new side letters land, and the tool rereads the pile from scratch. There is no single source of truth holding, at all times, the current state of every obligation. Third, they struggle with identity at scale. “Texas Teachers,” “TRS” and “Teacher Retirement System of Texas” are one investor; a model that infers this across decades of inconsistent drafting accumulates quiet errors. What Palantir adds is the thing the announcements bury under the word “ontology,” and it is simpler than it sounds. Palantir does not point a model at the documents and ask it to be careful. It uses the model once, as a labourer, to lift each obligation out of the prose and turn it into a structured fact: an MFN clause, owned by this investor, in this fund, triggered by these conditions, expiring on this date. That fact then lives inside a governed model of the whole business, where every fund, investor, clause and transaction is an object linked to every other. And here is what matters. Once the obligation is structured data, the compliance check no longer runs on the language model at all. It runs on fixed logic, hard rules applied to hard data. The probabilistic engine reads. The deterministic engine judges. That division of labour is the whole game. So the genius is not that Kirkland bought cleverer AI. It is that Kirkland refused to let the answer to “does this breach a covenant” come from a model’s best guess, and built the layer where it does not have to. Harvey and Legora answer questions about documents. Kirkland is building a system that answers questions from a model of its business. One is a brilliant reader. The other is a system of record that uses AI to fill and query itself. The advantage is real, and it is worth being exact about its source. It is not the software, which others will eventually license. It is three things a rival cannot simply buy: the capital; the proprietary corpus, the nearly $500 billion of fundraising Kirkland touched in a single year, which is the reference data the system learns from; and ownership of the application layer, where the firm’s own judgement is encoded. This is a moat, not a monopoly. Every fund still has investors who need their own counsel, and there will always be a firm across the table. But that firm is now doing a fundamentally different job from one still billing hours to reread the side letters. The gap that is actually opening Almost no firm outside the largest American practices will ever have either ingredient. They will not write a nine-figure cheque, and they do not sit on a proprietary record of half a trillion dollars in annual deal flow. Realistically, every firm outside the US is a national champion: large at home, small against Kirkland. The temptation is to call this someone else’s problem and wait. That is the wrong call, because the capability will arrive off the shelf. Every serious enterprise software vendor now sells a version of the same idea, and legal-specific versions will follow. Within a few years a national champion will license an obligation-tracking engine without rebuilding Palantir from nothing. The platform commoditises. Which sounds like good news, until you remember the platform was never the hard part. The data is. An engine like this is only as good as what you feed it, and what you feed it is your own data, cleaned, reconciled and trustworthy. This is exactly where firms are weakest. The honest test is simple: most firms cannot keep a CRM clean. They cannot say with confidence who knows whom, which partner owns which relationship, or what the firm has done for a client over ten years, because that information is scattered across inboxes, spreadsheets, document systems and partners’ memories, and no one owns it. A firm that cannot maintain a contact database has no hope of maintaining a live model of every obligation across every fund. Feed a clean engine dirty data and it will industrialise the mess. So the real divide is not between firms that can afford the software and firms that cannot. It is between firms whose data is in order and firms whose data is chaos. Almost everyone starts behind, which is the one genuinely good piece of news for the smaller firm: data discipline is not bought with scale. A determined firm that gets serious now can close the gap faster than its size would suggest. This is also where the argument about outside capital stops being a matter of principle. Building real data capability costs money a partnership funds from its own distributions, which means partners feel it in their own pay this year for a benefit that lands three years out. Partnerships are structurally poor at exactly that kind of investment. Private equity money buys the runway to get the data house in order before the capability becomes the price of entry rather than an edge. The firms that took the investment will turn out to be the ones that could afford to act in time. What a sane firm does now Two things follow, one obvious and one structural. The obvious move is to treat data as a strategic asset rather than an IT cost. In practice that means giving data an owner with real standing: not a junior analyst parked in operations, but a senior data specialist with the authority to fix the plumbing and to change how lawyers record what they do, reporting high enough that partners have to listen. Most firms do not have this person. They have a help desk. The structural move is the one that will be resisted, because it changes the shape of the firm. As AI absorbs the production work that fills the base of the pyramid, the base narrows. Fewer juniors are needed, and those who remain must be more capable from their first day, working on judgement and client contact rather than document volume. The pyramid becomes a diamond, and the swollen middle of that diamond has to become a destination in its own right, not a waiting room on the way to an equity most will never reach. The diamond is not only a story about lawyers, and this is the part the profession is least ready for. It brings into the firm a class of senior professionals who are not lawyers at all: data scientists, legal engineers, pricing specialists, AI leads. In the old firm they sat in the back office and were paid as such. In the firm that is coming, they sit on the client-facing team. A data scientist who builds the model that shows a client which of its obligations are exposed, and presents it in the room, is not support staff. The work is economically indistinguishable from a partner’s. Which forces the awkward question I devote a chapter to in my latest book, Law Firm Partner Compensation: how do you pay such a person? In most jurisdictions a non-lawyer cannot hold equity, so formal partnership is closed to them. Pay them like a senior associate, though, and you will not keep them, because the pool of people who can do this work is small and the competition fierce. The honest answer is to build a structure that behaves like partnership even where the title is forbidden: shadow equity that tracks the firm’s performance and falls when profits fall, bonuses tied to outcomes you can actually measure, and a real voice on the matters they own. Recruit people for partner-level work and pay them like assistants, and they walk. That is not a moral observation. It is arithmetic. I began by confessing that I had filed Palantir under the Dark Side and left it there, unexamined. The irony is not lost on me that the company I associated with watching people from the shadows is the one that has shown my own profession something clarifying about its future. The light it casts is not flattering. It falls on an industry that has spent two years arguing about chatbots while the real contest moved to the data underneath, where almost no one was looking and almost no one is ready. Kirkland’s half a billion is the part no one else can copy. Taking data seriously, and letting non-lawyers into the room where the value is made, costs almost nothing. Which is why so few will do it. There is, it turns out, light from the Dark Side. The only question is who is willing to look at what it shows. This article is part of a weekly series drawing on the themes of Law Firm Partner Compensation by Jaap Bosman and Jaime Fernández Madero. If you would like to know more about this topic, read the book. Our book Law Firm Partner Compensation is available worldwide on Amazon, national online book sellers, and can be ordered at your favorite at your favorite bookstore

The playbook that supported the legal industry is crumbling! There is a version of this story that ends well. The legal profession has navigated disruption before, reinvented itself in fits and starts, and emerged each time with its fundamentals intact. Revenue kept climbing. Profits per equity partner reached levels that would have seemed fictional twenty years ago. The model worked exceptionally well. The model has been exceptionally robust. Few industries run the same playbook for five decades without fundamental revision, yet the legal profession has done exactly that. The partners running firms today have never practised under any other system, which is precisely the danger: a model that has always worked is almost impossible to recognise as a model on borrowed time. On the surface everything still looks healthy. Revenue is up. Profit per equity partner is up. The goose is still laying golden eggs. What the numbers do not reveal is that the playbook has quietly expired, and that the two structural advantages it rests on, the billable hour and the leverage pyramid, are both now in AI's path. How the model worked The billable hour became the dominant model from the 1950s onward. Before that, lawyers charged by the matter: a judgement call about the value of the work and what the client could absorb. The shift to hourly billing transferred the risk of inefficiency from the firm to the client. The longer a task took, the more the firm earned. In a growing market where clients kept accepting rate increases, no one looked too hard at the mathematics. Leverage did the rest. At its most fundamental, leverage is the ratio of associates to equity partners. A firm extracts the surplus between what associates cost and what they bill. The wider that spread, the higher the profit per equity partner. For as long as the legal market kept growing, the model was self-reinforcing. More clients, more associates, higher rates, more profit. Firms perfected the execution of this model over decades. The Am Law 100 generated $178.95 billion in revenue in 2025. A handful of firms now report profit per equity partner above ten million dollars. The model was not broken. It was exceptionally well-tuned, for the conditions it was designed for. The wall Those conditions are ending. The legal market has been largely stagnant in real terms for several years. Revenue growth has come almost entirely from rate increases, and that lever is not infinite. AI is now attacking the foundation of the pyramid directly. The base of the pyramid, document review, drafting, research, execution, is precisely the work that AI is compressing fastest. The time required for high-volume document review has already fallen by an order of magnitude on platforms in active use. First drafts, due diligence, regulatory research: all moving in the same direction. The arithmetic is uncomfortable. A firm that becomes more efficient while continuing to bill by the hour generates less revenue from the same volume of work. Costs rise by the cost of the technology. Profit falls. The efficiency the technology delivers flows directly to the client through the billing model, with no mechanism to capture it as margin. The firm that holds on to time-based billing as AI absorbs more of the work is turning its own technology investment into a liability. The business model that built the modern law firm is running straight into this wall. The new playbook What replaces it? Three things, in order of importance. First, a precise understanding of value. The TGO Value Matrix© maps legal work on two axes: the return on investment the client realises from the advice, and the degree to which that advice is available from equivalent providers elsewhere in the market. Work that generates a high return and requires genuinely scarce expertise commands a premium that has nothing to do with hours billed. Work that is necessary but generates no particular return for the client, and can be done equally well by many lawyers, will be priced as a commodity. As AI levels execution quality across the market, the firms whose work sits in the high-return, scarce-expertise part of the matrix are positioned to defend a premium. Those building revenue through volume at the commodity end face a structural problem that no rate increase will solve. Second, the ability to monetise efficiency. The entire pricing infrastructure of the profession, billing systems, rate cards, client expectations, performance metrics for associates and partners, is built around time. Moving to value-based or fixed-fee arrangements requires data on past mandates, project management discipline, and a willingness to let the firm capture the benefit of being fast rather than being penalised for it. Most firms are years away from having the capabilities this requires. The partners who will lead this transition are not the ones who have spent their careers perfecting time management. They are the ones who understand what the work is actually worth. Third, and most important of all, people. Last week's article explored this in detail. AI is the great equaliser. Any firm can buy the same tools. What cannot be equalised is the quality of the people using them. The research behind the 7-Core Dimensions© showed that 83% of what clients praise in their best lawyers has nothing to do with legal knowledge. Business understanding. Creativity. Relationship depth. Judgement under pressure. These are precisely the qualities AI cannot replicate, and precisely those it will most powerfully amplify in those who have them. Why now The billable hour is profitable for the partners who have spent twenty years building practices on it. The incentive to be the firm that moves first is weaker than the incentive to let someone else go first and see what happens. The pyramid is embedded in how firms train and develop people. Changing it means redesigning the development path, the pricing model, and the compensation system simultaneously. None of it is a simple project. None of this means the change will not happen. It means the firms that choose to lead it rather than wait for the market to force it will have a head start that compounds. The old playbook ran for five decades. The new one is being written now, whether firms are writing it or not. The ones that understand they are on borrowed time are the ones already at the desk. This article is part of a weekly series drawing on the themes of Law Firm Partner Compensation by Jaap Bosman and Jaime Fernández Madero. If you would like to know more about this topic, read the book. Our book Law Firm Partner Compensation is available worldwide on Amazon, national online book sellers, and can be ordered at your favorite at your favorite bookstore

September 2023 it was announced that three Kirland & Ellis partners would move to Paul Weiss. According to people close to the matter, the trio would each receive $20 million in annual compensation at their new firm. This is quite exceptional as today at Am Law 25 firms, only a handful of partners have comp in excess of $20 million. The news will undoubtedly leave a number of partners elsewhere in town feeling all at once very unhappy and under-rewarded. Modified lockstep For compensating its partners, most firms today have a system that includes elements of merit based compensation as well as seniority based. Some well-known firms with pure lockstep have introduced merit based differentiators in order to retain and attract star partners. What the modified lockstep looks like varies wildly. Most firms have adopted a set of – sometimes very detailed and complicated – rules for calculating each partner’s profit share. Others involve a compensation committee or have the managing partner decide. Compensation for yardstick Why is partner compensation such a hot topic in many law firms? Partners in business law firms invariably earn more than 99% of the population, so why not just be happy with it and focus on clients and family? One reason is that partner compensation is used as a yardstick for the success of the firm. Partners always compare PEP with other firms, seeing a close competitor have higher comp will trigger a heated debate on the firm’s strategy and sometimes results in star partners leaving. Also the opposite is true: a highly competitive partner compensation is a prerequisite for lateral hiring of rainmakers, which in turn could help the firm become even more successful. This is what’s happening at Paul Weiss. Which compensation model is best? Ideally in a firm, all partners are equally successful in the market and are happy to cooperate with each other. If the bandwidth between partners is narrow, there will be no need for merit based differentiation and lockstep will help avoid partners starting to compete with each other. Each partner will always act with the interest of the firm in mind. Unfortunately there is no ideal world in which each partner is equally successful and also partners are inclined to prioritize self-interest before firm-interest. This will even happen in lockstep firms as each partner is under pressure to meet his/her target. Partners start monopolizing client relationships and are trying to get files in which also other partners are active, to be administered under their name. Now the solidarity which underpins the lockstep is compromised, cracks will start to appear. Collaboration will suffer and star partners will demand action against slackers. One could also start from the other end assuming that self-interest is the norm and make the compensation fully merit based. This could even go as far as partners charging internally for helping out in another partner’s file. Such ‘eat what you kill’ compensation systems will allow for a very large bandwidth in partner performance, but provide no incentive for collaboration. Fully merit based systems also give young new partners a difficult start as in order to make an income they will have little alternative than working in other partners files at a reduced rate and without quickly growing a client base of their own. Since both lockstep and ‘eat what you kill’ have their problems, it comes as no surprise the hybrid modified lockstep has become the most popular. In reality the modified lockstep suffers from the same issues: collaboration remains an issue and the weak partners irritate the star partners. “There is no evidence to support that compensation impacts partner performance” Carrot and stick As stated, in our practice we have seen a great many different partner compensation models. Most of them have a few things in common: they favor a small group of partners and they aim to influence partner behavior. Let’s examen both in more detail. Mostly compensations systems favor the more senior partners with an established practice. One argument could be the firm must prevent such rainmakers to leave. While there certainly is some truth in that, it also creates problems, notably when it comes to succession. Also this group is typically also involved in the leadership of the firm whether it be formal or informal. Granting themselves the largest cut can in a way be self-serving. And I have not even mentioned ‘origination credits’, which also disproportionately favors this group. Over there years we have done multiple in depth analysis and never have we found any evidence that individual partner performance and behavior can be significantly influenced by compensation. Never have we seen a weak partner show better performance after his/her compensation was cut. Receiving less money will not transform a weak partner into a strong partner. This is similar for other aspects that are part of a partner compensation formula: rewarding collaboration hardly increases real world collaboration. Partners that feel comfortable collaborating will collaborate regardless and those that prefer to work on their own will continue to do so even it this means they will miss out on a small percentage of their compensation. As a rule of thumb: partner compensation is not the right tool to change the status quo. Only culture can do that. The bigger picture Partner compensation is one of those topics that we come across a lot when working with our clients. Many law firms spend disproportionate amounts of time discussing how to divide the profit among the partners. The problem I see is that having lengthy conversations on how to distribute profit does not make the firm as such more profitable. These discussions are just inward looking and a time and emotions consuming energy drain. We have found there are typically two triggers for discussing partner comp. The first is heavy lifters complaining about partners that seem to enjoy a free ride and don’t put in the effort. The other trigger is the wish to change partner behavior, typically this means stimulating collaboration. As mentioned before, there is no evidence that partner compensation changes partner performance. Taking away money from a weak partner will just legitimize their weakness. Giving more money to a top performer will only keep him/her happy for so long. We have looked in depth at lateral movements of partners across a number of markets. In some markets lateral movements are common in other markets they remain rare and are frowned upon. One thing partners that move firm have in common: the primary motif for moving is rarely money. Typically, they have lost confidence in their firm’s strategy or have developed cultural or interpersonal issues. A partner that likes the firm culture, gets along with other partners and feels supported, is unlikely to leave for more money. Using PEP as a yardstick for performance also has its flaws. Generally we at TGO Consulting prefer to look at profit margin, revenue per lawyer and a number of other indicators more relevant to a firm’s performance. Bottomline Law firms are well advised to have a permanent focus on performance and profitability on a firm level and not so much on an individual partner level. Partners should spend less time discussing internal matters and more time identifying and sharing business opportunities. Firms should invest in creating or maintain a result driven, inclusive, collaborative culture. Partner compensation should not disproportionally favor a small group and should be supportive for young partners who are still developing their practice. Any system that meets these criteria will do. Writing this article I noticed there is so much to cover when it comes to partner compensation, that it is impossible to squeeze it all in 1000 words. Potentially this is a good topic for my next book, what do you think? Want to read more? Continue on book website👇

While the legal industry fixates on AI, the more important question is going unanswered... There is a moment in the adoption of any transformative technology where fascination takes over from judgement. The automobile had it. Aviation had it. The internet had it. The legal profession is having it right now with AI, and it is entirely understandable. Partners who still remember the Blackberry as a revolutionary device are watching AI draft complex legal memoranda in seconds, summarise thousand-page disclosure bundles before lunch, and surface precedents that would have taken a team of associates three days to find. The pace of development is extraordinary. New capabilities arrive weekly. The FOMO is real, historically high, and for once entirely justified: this technology will reshape the profession in ways that are not yet fully visible. No reasonable person would argue that law firms should ignore it. They should not. The technology deserves all the attention it is getting and more. The issue is what is not getting attention while the whole industry stares at the screen. The framing problem Walk into any legal industry conference this year and the programme will be structured around the same questions. Which AI tools are leading the market. How firms are managing adoption. Whether the billable hour survives. What the pyramid looks like when AI absorbs the base. These are real questions. The business model that the legal industry has run on for decades, built on time-based billing and the leverage of a large associate population, will need to change. AI compresses the hours that used to generate revenue. Holding on to time-based billing while AI takes over more of the work turns the technology from an asset into a liability. The profession knows this, at some level, and the conversation about alternative fee structures and value-based pricing is slowly gathering pace. That conversation needs to happen, and happen faster. But there is a more important conversation that is barely happening at all. The equaliser AI is a great equaliser. Any firm, anywhere, can subscribe to the same platforms, access the same tools, and run the same models on their documents. The technology that accelerates due diligence at a Magic Circle firm is available, in one form or another, to a regional firm in Warsaw or a boutique in Melbourne. Within a very short time, the quality of AI-assisted execution will be roughly equivalent across the market. Platform access will become an entry ticket. It is not a competitive advantage. What cannot be equalised is the quality of the people using the tools. Our research back in 2020, which became the foundation of the 7-Core Dimensions©, showed that 83% of what clients praise in their best lawyers has nothing to do with legal knowledge or technical expertise. It is everything else. Understanding of the client's business. Creativity in finding solutions. The quality of the relationship. Judgement under pressure. The seven qualities that separate tier-one lawyers from the rest of the field are not technical. They are deeply, stubbornly human. In a market where AI levels the execution playing field, those human qualities become the only remaining differentiator. Not which firm has the better document review platform. Not whose AI summarises faster. The differentiator is the person in the room, and whether that person brings something that no machine can replicate. The amplification gap The relationship between AI and human quality is not neutral. It is asymmetric in a very specific direction. A partner whose primary value is execution quality, thorough, reliable, technically sound, will find that AI makes them faster. A partner who brings genuine insight, creative instinct, and an unusual ability to read what a client actually needs, as distinct from what they have asked for, will find that AI makes them formidable. The strategic judgement that was previously constrained by hours in the day and associates to manage can now be extended, cleanly and consistently, across an entire matter. AI does not dilute exceptional judgement the way a large associate team sometimes did. It amplifies it. The gap between exceptional and adequate, which the old model kept within a manageable range, is about to widen considerably. The firms that understand this now will build their talent strategy around it. Those that are still focused exclusively on the technology question will find, a few years from now, that their competitors have quietly built a different kind of advantage. The question firms are not asking The strategic question that the AI conversation is crowding out is this: do we have the right people? Not the right number of people. Not the right billing rates or utilisation ratios. The right people. Partners who genuinely understand their clients' businesses. Who bring creative thinking to complex problems rather than retrieving precedent. Who build relationships that clients return to because of trust, not habit. Who have the presence and confidence to hold a position under pressure. Who maintain their integrity when commercial temptation points the other way. These are not qualities that arrive automatically with a law degree or a partnership track. They are developed, with intention, over a career. And they require firms to think seriously about how they identify talent, how they develop it, and how their compensation structures either reward it or quietly ignore it in favour of metrics that are easier to count. Most firms are not thinking about this seriously enough. The AI conversation fills the room and the budget cycle, and the talent question gets at best deferred to next year's partner retreat. Meanwhile the technology is democratising execution quality for everyone, and the only thing left to compete on is the one thing the industry is underinvesting in. What this means in practice The firms that will look back on this period as a turning point are those that used the AI transition to ask a harder question about their people. Which partners bring something genuinely irreplaceable to a client relationship? Which young lawyers show the instincts, the curiosity, the emotional intelligence, that will matter more as technical work becomes automated? Where is the firm investing in developing those qualities, and where is it simply hoping they will emerge on their own? AI will keep improving. The tools available in two years will make today's look modest. The firms that treat the technology as the whole story will keep running to catch up with each new release. The firms that treat it as infrastructure, necessary but not sufficient, and focus their strategic energy on the human qualities that AI cannot replicate, will find that the race looks rather different from the front. People will be the great differentiator. That is not a soft observation. It is the structural consequence of AI becoming the great equaliser. The industry will get there eventually. The question is how long it takes to look up from the screen. This article is part of a weekly series drawing on the themes of Law Firm Partner Compensation by Jaap Bosman and Jaime Fernández Madero. If you would like to know more about this topic, read the book. Our book Law Firm Partner Compensation is available worldwide on Amazon, national online book sellers, and can be ordered at your favorite at your favorite bookstore

book Law Firm Partner Compensation by Jaap Bosman, co-authored by Jaime Fernàndez Madero Two years. One book. The most complete guide to law firm partner compensation ever written. It started with an article. September 2023. I wrote a newsletter on partner compensation that ended with a suggestion: this topic deserves a fuller treatment. The response was immediate. Enough encouragement arrived to make writing the book feel necessary rather than merely possible. Two years later, the book exists. It took longer than I anticipated. Considerably longer. The scope kept expanding because the subject kept demanding it. What it is This is the most complete guide on the topic that exists. It covers all the major systems: lockstep, eat-what-you-kill, and the full range of hybrids. It covers the psychology of compensation, the cultural dimensions, the strategic implications. It addresses origination credits, partner evaluation, the size of the equity partnership, succession, and the pressures that AI and private equity are now bringing to bear. It is written for managing partners, compensation committee members, and anyone who wants to understand what partner compensation actually is, how it works, and what it can and cannot be asked to do. More than 300 pages, fifteen chapters. A global scope: North America, Europe, Latin America, Asia. A foreword by Jaime Carey, Senior Partner of Carey and the 2025 President of the International Bar Association. My co-author I co-wrote this book with Jaime Fernández Madero, a friend and fellow consultant with deep experience across Latin America and a long track record of advising on compensation committees. A third contributor, Michael He - a good friend from China -, wrote a dedicated chapter on partner compensation in China. Between the three of us, the book covers partner compensation across the full range of markets in which elite legal practice operates today. The central argument No compensation formula can convert a weak partner into a strong one. What a well-designed system can do is create the conditions under which talented people choose to collaborate rather than compete, to build the institution rather than extract from it, and to stay rather than leave. Shared ambition is a more reliable predictor of a firm’s success than its compensation formula. These are not comfortable conclusions. They are, however, the ones the evidence points to. What will be next In the weeks ahead, 'Your Friday Insight' will go deep into a number of topics the book covers. These are live questions, playing out right now in managing partner offices and compensation committee meetings across every market. We will look at why partner compensation conversations never resolve. Not because partners are irrational or greedy, but because the compensation system is trying to do something it structurally cannot do: substitute for a shared culture. When culture is weak, the formula bears weight it was never designed to carry. We will look at AI. Not the breathless version, not the dismissive version. The specific question: if AI absorbs the Production end of legal work, what happens to the earnings model that has funded partner compensation for three decades? The pyramid does not just change shape. The economics of the whole structure shift. Who earns what, and on what basis, will need a different answer. We will look at private equity. Not whether it is coming — it is already here — but what PE actually sees when it looks at a law firm. Hint: it is not impressed by the profitability. It sees a business run by talented people who have never had to compete properly, and it sees the distance between what that business earns today and what it could earn with professional management. That gap is the opportunity. For some firms it is a lifeline. For others, a warning. We will look at salary partners. The layer that most compensation discussions quietly skip over, even though it is where the talent pipeline either holds or breaks. We will look at lateral hires: what they actually cost once you run the full calculation, what they signal about a firm's culture, and why so many of them disappoint. And we will look at culture directly, the word every firm uses and almost none define. What it is, how compensation either honours it or quietly destroys it, and why the firms that get this right tend to be the ones that do not talk about it very much. There are many more topics derived from the book. Not as a summary of its content, but the book used as the basis for discussing the topic. Get the book and share it on LinkedIn Available now on Amazon. If you prefer your local online bookstore, it should be there, alternatively your favorite shop around the corner, should be able to order a copy. (availability may differ across countries and continents) One request: once you have the book please post a photo of the book on LinkedIn, this will help me tremendously to spread the news! Your help is valuable and will be highly appreciated🙂 Also a - favorable - review on Amazon will be most helpful to help promote the book! Visit the book dedicated website: www.lawfirmpartnercompensation.com

I live in the Netherlands. My firm has its Amsterdam office in a neighborhood that sits, like most of this city, on a foundation of wooden poles driven into the clay centuries ago. For generations those poles held firm, preserved by the high groundwater that kept them permanently submerged and starved of oxygen. It was an elegant solution to an improbable engineering problem. Now the water table is dropping. Longer, drier summers are exposing poles that have not seen air in three hundred years. The wood rots. Houses crack and tilt. The homeowner facing this problem has two options. The first is to call a specialist contractor, accept the disruption and the cost, and fix the foundation properly. The second is to fill the cracks, repaint the walls, and tell yourself it will probably stabilise on its own. It is remarkable how many people choose the filler. I thought of those homeowners last week, when two governments revealed their positions on outside investment in the legal profession within days of each other. The Netherlands published a report commissioned by the Ministry of Justice, prepared by Erasmus University Rotterdam and research institute Pro Facto. Its conclusion was careful but clear: current restrictions on business structures for lawyers contribute to market failure, and third-party capital investment in law firms should not be prohibited. It should be regulated carefully, with a prior recognition framework imposing governance standards on any entity operating under the new rules. The timeline is cautious, a final decision is not required until 2030, but the direction is stated plainly. The Netherlands is getting ready to call the contractor. An English summary of the full report is available here Germany moved the other way. The Bundestag finance committee prepared legislation to tighten the existing ban on financial investors in professional services firms, closing a workaround that private equity had been using through foreign holding structures. The independence of the profession must be protected. Germany reached for the filler. Same week. Two governments. The same divided instinct that has run through this debate wherever it has surfaced. The access-to-justice argument is real and the Dutch report makes it well. But it is not the only argument, and for the firms at the top of the market it is not the most pressing one. The more urgent case for regulatory liberalisation sits elsewhere, and it follows directly from what AI is doing to the economics of legal practice. The traditional pyramid model, a broad base of junior associates executing work under the direction of a small number of partners, has been the engine of law firm profitability for half a century. It works because the volume of Production work, the research, the drafting, the execution, generates revenue that subsidises the brief, high-value moments of Creation where a senior partner’s judgement makes the decisive difference. AI attacks the base of that pyramid directly. When the cost of Production approaches zero, the subsidy disappears. What remains commercially defensible is Creation alone, and Creation cannot be leveraged the way Production could. The firms that understand this are already calculating what the transition costs. New AI platforms at enterprise scale require serious capital investment. The associate model needs to be redesigned from the ground up: fewer people, higher quality from day one, development paths that no longer rely on the accumulation of volume work to build judgement. Pricing models built around the billable hour need to be replaced before clients do it for them. The talent required to lead this transformation, the lawyers with the human qualities that AI cannot replicate and will most powerfully extend, commands a premium that the lateral market is already pricing in. This is an expensive set of problems to solve simultaneously. Banks will lend against stable cash flows, but a firm in genuine structural transition does not present the same risk profile as one running the existing model efficiently. The capital requirements of the AI transition are not the same as the capital requirements of growth. They are the capital requirements of reinvention, and reinvention is a different proposition entirely. For some firms, having the possibility to consider outside investment will not be a theoretical regulatory question. It will be the difference between managing this transition on their own terms and not managing it at all. Private equity brings more than capital. It brings the discipline of structured transformation, the intolerance of deferred decisions, and the insistence on building something that can survive beyond the tenure of its current partners. Firms that have operated for decades as comfortable federations of individual practitioners are not naturally equipped for what the next ten years will require of them. An outside investor, properly structured and properly governed, can supply not just the money but the institutional will to act. In my new book Law Firm Partner Compensation, co-authored with my good friend Jaime Fernández Madero and due to be published shortly, we address this directly. The compensation architecture of a firm in transition is fundamentally different from the one built for stable growth. When AI compresses the Production base, when the attribution of value becomes clearer and the amplification gap between exceptional and average partners widens sharply, the assumptions embedded in most current compensation systems stop holding. The firms that redesign those systems with clear eyes will be better placed to attract the talent they need. The ones that patch the existing model will find the patches failing faster than expected. Germany’s response, to legislate away the option before the conversation has properly started, is not a defense of professional independence. It is a refusal to inspect the foundation. Winston Churchill observed that you can take change by the hand, or it will grab you by the throat. The Netherlands is extending a hand, cautiously, with a great deal of consultation still ahead. Germany has both hands in its pockets. And somewhere in Amsterdam, a homeowner is looking at a fresh crack in the kitchen wall, reaching for the filler, and telling themselves that houses have stood here for three hundred years and this one will be fine. The poles, meanwhile, are continuing to dry out. Want to read more? Order my new book today

The Managed Service Organization is the key to PE investment in Law Firms The business case for PE participation in law firms is just so strong that current regulatory hurdles will not prevent this from happening. It seems unlikely that PE will want to be actively involved in the day to day legal operational aspects of a law firm, this will like today be left to the lawyers. Regarding legal work and client contact nothing will change, lawyers remain autonomously in control. Private Equity will likely focus on operations and expansion. Their interest is to grow the value. This as such is aligned with the interests of the partners. With today’s regulatory hurdles still in place in most jurisdictions, the structure of the Managed Service Organization (MSO) is what is making most sense. The MSO separates all non-legal elements from the legal. One should think of all back-office, the office space, the brand, the capital requirements. The legal services arm and the MSO cooperate under a service level agreement, whereby the legal arm receives services in exchange for a fee. Partners and potentially other lawyers and non-lawyers working with the firm will have a stake in the MSO of which the PE is the largest shareholder, but probably not the majority shareholder. One could easily think of other ownership structures for PE depending on creativity and regulatory requirements, but the core elements will remain that PE will not want to interfere with the legal aspects and that partners will have a share in whatever entity that will be created. Building a case for Private Equity (PE) participation and Management Service Organization (MSO) models in European law firms requires navigating a legal landscape that was significantly reinforced by a major European Court of Justice (ECJ) ruling in late 2024. While the court recently upheld strict bans, the argument for proportionality and necessity remains the primary pathway for future reform, especially when framed through the lens of market evolution and the "inconsistency" of current member state regulations. In December 2024, the ECJ delivered a landmark judgment in Halmer v. Rechtsanwaltskammer München (Case C-295/23). The court ruled that German laws prohibiting purely financial investors from holding shares in law firms are compatible with EU law, specifically Article 49 TFEU (Freedom of Establishment) and Article 63 TFEU (Free Movement of Capital). The court reasoned that a member state can legitimately assume that a lawyer’s independence and compliance with ethical obligations (like avoiding conflicts of interest) could be compromised if they are beholden to financial investors focused on profit maximization. This ruling currently serves as the "shield" for bar associations across the EU. To challenge this status quo, the focus must shift to the "suitability" and "necessity" prongs of the proportionality test. One could argue that while protecting independence is a legitimate aim, an absolute ban is no longer the "least restrictive means" available in a modern economy. • The Inconsistency Argument: Under EU law, a measure is only "suitable" if it pursues its objective in a consistent and systematic manner. One could point to the fact that many EU countries allow ‘non-professional’ ownership in other sensitive, public-interest professions like pharmacy (e.g., Commission v Italy, C-531/06) or medicine. If the "public interest" and "professional independence" in these sectors can be protected through regulatory oversight and structural safeguards rather than total bans, the legal profession's absolute prohibition appears discriminatory and inconsistent. • The MSO Model: One could defend the MSO model by emphasizing the separation of clinical (legal) decision-making from administrative and financial management. By drafting "ethical firewalls" where the PE investor manages the business side (HR, IT, marketing) while lawyers retain 100% control over case strategy and client advice, this provides a less restrictive alternative to an outright ban. • Technological Necessity: One could argue that the "necessity" of outside capital has changed. The legal industry now requires massive investment in AI and legal tech to remain competitive and provide "Access to Justice." If law firms cannot access equity markets, they are forced into debt-heavy models that may actually create more financial pressure on lawyer independence than stable equity partners would. The fact that nearly 12% of law firms in England and Wales operate under Alternative Business Structures (ABS) provides a real-world "control group" for such argument. There has been no documented systemic collapse of legal ethics or independence in those jurisdictions. This empirical data suggests that the "risks" cited by the ECJ in Halmer are speculative rather than inevitable, making a total ban "manifestly inappropriate" in a modern Internal Market. Article 15 of the Services Directive (2006/123/EC) requires member states to review requirements that limit shareholding in professional companies. While the ECJ in Halmer gave states a wide "margin of appreciation" here, one could argue that as the market for legal services becomes increasingly digital and cross-border, the restrictive German or French models create a "chokepoint" that hinders the development of a unified European legal market, thus violating the spirit of the Directive. In the MSO model, the law firm remains 100% owned by qualified lawyers, satisfying the "professional control" requirement, while the MSO owns the firm’s non-legal assets, such as real estate, IT infrastructure, and the employment contracts of non-legal staff. The "Ethical Firewall" is established by ensuring that the MSO has no access to the firm’s "privileged" data or client files. Utilizing a "cost-plus" or fixed-fee compensation structure for the MSO removes the direct link between a specific legal outcome and the investor’s return, thereby neutralizing the "profit-at-all-costs" risk that the ECJ cited as a justification for the ban. This structure mirrors the "Double-Veto" system used in other highly regulated sectors. In this setup, the MSO manages the "business of law" while the lawyers retain a "professional veto" over any business decision that touches upon ethical duties. By codifying this in the firm’s articles of association and making it subject to audit by the national Bar, the MSO model meets the proportionality test: it achieves the goal of capital infusion (modernization) without sacrificing the "public interest" goal of lawyer independence. The absolute ban is an "over-inclusive" measure that ignores these sophisticated governance tools already proven effective in the medical and accounting sectors. To navigate the requirements that forbid profit-sharing with non-lawyers while satisfying tax authorities, the MSO must transition from a "revenue-sharing" mindset to a "service-delivery" mindset. In the eyes of European Bar associations, any fee that fluctuates purely based on the law firm's profit or gross legal fees is a "red flag" for illegal fee-splitting. Therefore, the case must build a "defensible fee architecture" that relies on objective market metrics rather than the firm’s financial success. The legal argument for the MSO's fee structure rests on the "Services for Value" principle. One must argue that the law firm is not sharing profits, but rather paying a "commercially reasonable" price for essential infrastructure. To do this, the Management Services Agreement (MSA) should avoid a flat percentage of legal fees. Instead, the fee should be composed of discrete charges for specific services—such as a fixed monthly fee for IT systems, a per-head fee for HR management, and a market-rate lease for office space. Unbundling the fee demonstrates that the MSO is earning a return on its invested capital and operational effort, not on the lawyer’s professional advice. From a tax perspective, particularly in high-scrutiny jurisdictions like Germany (under the Außensteuergesetz) or France, the MSO and the law firm are "related parties." This triggers the Arm's-Length Principle, requiring that the transfer price for management services mirrors what an independent third-party provider would charge. One should use the Cost Plus Method (CPM) or the Transactional Net Margin Method (TNMM) to build the case. Under the CPM, the MSO identifies its total costs (salaries of non-legal staff, software licenses, etc.) and applies a documented "markup" (typically 5% to 15%, depending on the risk and value added). This markup is legally defensible as a legitimate business profit for the MSO, distinct from the "legal profits" of the law firm. A significant risk in the MSO structure is the "Constructive Dividend" (Verdeckte Gewinnausschüttung in Germany). If the tax authorities determine that the MSO is overcharging the law firm to siphon off profits into a lower-taxed entity or to benefit PE investors, they may recharacterize those payments as non-deductible profit distributions. This would result in a double-taxation penalty. To mitigate this, the case must include a "Benchmarking Study" that compares the MSO's fees to third-party providers like ADP (for HR) or commercial real estate firms. Want to read more? Order my new book today

Private Equity investment is rapidly emerging as a transformative force in the legal sector, offering law firms access to capital, operational expertise, and new growth opportunities. While regulatory barriers remain in most jurisdictions, innovative structures such as Managed Service Organizations are enabling firms to engage with outside investors without compromising legal independence. The evolving landscape — marked by increased partner mobility, generational shifts, and the rise of artificial intelligence — demands that law firm partners proactively assess the strategic implications of PE investment. Firms that embrace these changes may gain significant competitive advantages, but careful consideration of opportunities and risks remain essential to ensure long-term success. The past months, not a week went by without at least 2 or 3 articles on Private Equity investments in law firms. The biggest news arguably was about McDermoth considering a PE funded MSO structure. Where previous Alternative Business Structures (ABS) were limited to smaller law firms in jurisdictions that allow, outside ownership, McDermoth is a 1800 lawyer, 20+ offices giant, with about 2.2 billion in revenue, operating in jurisdictions where ownership is strictly limited to registered lawyers only. After the pandemic the legal sector has seen some unprecedented changes. The rapid emergence of Artificial Intelligence is one of them, but also the executive orders against some law firms by the Trump administration. The disruption of international trade and the global economic order are causing firms to reassess their international presence, causing expansion and reduction into and from certain jurisdictions. Today it is still hard to predict the impact of AI on the legal industry. It seems unlikely that the traditional pyramid structure will survive, which will have direct implications for leverage and pricing. It is not unlikely that AI will fundamentally disrupt the delivery model of legal services. A small number of firms such as A&O-Shearman (Belfast) and Clifford Chance (Newcastle) seem well positioned with their advanced AI integration and low-cost legal support centers. Most firms, except for perhaps the absolute elite, will need to reinvent their business- and service delivery model. Talent has become increasingly central to certain segments of the market. In New York today, profit shares of 25-30 million are no exceptions among the top-firms. Partner mobility has increased in the most legal markets, and has become a key element in growth in revenue and profitability. The ability to hire and retain talent is now central to a firm’s success. In the next five years or so the industry will see a great number of today’s rainmakers retire, putting a lot of emphasis on structured succession planning. At the other end, the Gen-Z young talent has a slightly different perspective on career and success in life. The above are just a selection of challenges facing law firms today. It would be easy to dedicate a whole article on this topic, but this in this article I want to focus on the opportunities and risks of Private Equity investment in law firms. Law firms offer an attractive investment potential to Private Equity because of the traditionally high client retention and the predictable cash flows. There is still a lot of market fragmentation, allowing for a buy-and-build approach. Law firms generally have a solid reputation and a great growth track-record: ever since the 1950ties profits have consistently gone up, not even Goldman Sachs can say that. From the law firm’s perspective, engaging with outside investment would offer access to capital for expansion, talent, technology or acquisitions. Private Equity also adds operational expertise, bringing professionalized management and performance monitoring. It will help with succession planning, addressing partner retirements and ownership transitions. Private Equity will also create economies of scale, consolidation, talent retention, brand visibility and access to the investor’s ecosystem. This sounds like a win-win situation, right? Reality is that outside ownership in law firm is currently prohibited everywhere except for a handful of areas, most notably England and Wales where Alternative Business Structures have been allowed since 2007 (Legal Services Act). Further, Arizona, Utah and Washington DC, spring to mind, as does Australia. The results so far have been lackluster: most investment has been in low profile smaller firms that did not grow to great fruition. Because of this ban on non-lawyer (co)ownership, Private Equity and interested law firms are now looking at the Managed Service Organization (MSO), whereby all non-legal functions and activities get separated from the lawyer work. This would include all staff services, office lease and also the brand. There will be a Service Level Agreement (SLA) and partners will also get a stake in the MSO. This structure allows for the legal arm to remain fully independent and in compliance with the current bar regulations, although some would argue that even this would not be allowed. The discussion on the regulatory topic revolves very much around independence. The ideal theoretical lawyer is totally free from any commercial considerations and only acts in the best interest of the client. In my experience today indeed lawyers act in the interest of the client, but that does not mean that they are free from commercial considerations. In effect big-law already has been a business for many years. Law firms have a strong focus on profitability and partners are subject to predefined performance criteria. Partners that trail behind are kindly requested to leave the firm. Partners are mostly no longer partners in the true sense of the word, they are shareholders instead. Structures are optimized for tax purposes and limiting professional liability. Also in the day-to-day operation of the firm, much is left to management and not to the partner meeting. It has been reported that both for the merger between A&O and Sherman & Sterling and recently Ashurst and Perkins Coie, the partners were not consulted prior to the merger being announced. The theoretical ideal has long been overtaken by the reality of law firms operating very much like any other business. So the question is if PE ownership really represents a fundamental threat. I am not convinced that will be the case. From the point of perverse incentives, Litigation Funding seems more risky to me and this has by now been widely accepted. “You can take change by the hand, or it will grab you by the throat” (Churchill) Today there seems to be a lot of momentum to make PE investment in law firms happen. On 28 November we organized a seminar on the topic which drew great attendance, I doubt if this would have been the same half a year ago. In August 2025, six business law firms in Sweden left the Swedish Bar Association to become AGRD Partners, a new legal service group backed by Danish PE firm Axcel. It is most likely that this is only the start and over time more law firms probably from other jurisdictions will join AGRD partners. Today that would mean leaving their National Bar Association. Leaving the Bar for most lawyers will be a price too high to pay. Membership provides a quality guarantee, legal privilege and the right to litigate in court. But once you peel away the emotions and look clinically at the facts, most work lawyers do, certainly in an advisory practice, could be done without membership. Bar Associations will need to navigate carefully, but proactively and with speed to avoid structurally losing members in the near future. Once a number of law firms will adopt PE investment, this will disrupt the level playing field. Such firms will have a significant competitive advantage over their peers, leaving those peers trailing behind. Private Equity will certainly not be the best way forward for every law firm. As the legal sector stands on the brink of significant transformation, now is the time for law firm partners to proactively evaluate the strategic opportunities and risks of Private Equity investment. By being proactive your firm can position itself to capitalize on new growth avenues, maintain competitive advantage, and navigate the evolving landscape with confidence. We will be most happy to facilitate this process. Want to read more? Order my new book today!

Above image generated by using Dall-E artificial intelligence Although vast amounts of students graduate each year from law schools and universities, the talent pool for top law firms remains limited. Most graduates have no interest in working in Big Law, and of those who do, a number does not meet the quality criteria. As a rule of thumb less than 10% of all law graduates falls within the Big Law target group for recruitment. It seems that with Gen-Z this number is declining. This means that in most jurisdictions, there is more demand than there are talented graduates entering the market. Hence the ‘war for talent’. Law firms go through great lengths trying to identify top talent early on and spending substantial budgets (including offering salaries up to $190.000) luring them to their firm. Look at the ‘Careers’ sections of the websites and one could be inclined to believe that joining a top-law firm equals working in paradise. There is just so much emphasis on individual career paths, mentoring, diversity, personal development and super interesting work, that it is easy to forget that in reality it is just hard work, like it was pointed out in a presentation that transpired from Paul Hastings: It is hard work Although the prevailing sentiment after publication of this slide was outrage and denial, I don’t see much wrong with it. Anyone pursuing a career at the top end of the legal market can only succeed by putting in a lot of effort. If you cannot stand the heat, get out of the kitchen. Having said that, this does not mean unfair and unhealthy working conditions. In February 2021 trainees at Goldman Sachs humbly requested management to be allowed to work slightly less than the about 100 working hours a week against an average of 5 hours of sleep: Fortunately, working conditions in law firms are nowhere near those at Goldman Sachs. However increasingly young lawyers are quitting the industry because of Uncaring Leaders, Unsustainable Performance Expectations and Lack of Career Development (McKinsey: Great Attrition, Great Attraction survey 2021) Generation Z Young lawyers entering the legal profession today are mostly born after 1997, the year that marks the beginning of Generation-Z. The first started during the Pandemic when there was hardly anyone in the office and at the same time workload was very high. Law firms, like other industries, seem to be confused and spooked by this new generation which is believed to have different priorities-in-life and no ‘old-school work ethos’. While it remains questionable if this is a fair characterization, many law firms struggle with how to ‘manage’ these young professionals. It is hard to count the huge number of reports, articles, conferences and workshops that have been devoted to Gen Z in the legal industry alone. This can probably be traced back to the perceived gap in the mindset and values of the partners – Baby Boomers and Generation X – and those of the new recruits. The former claim they had to work hard for their achievements, the latter were allegedly born with a silver spoon in their mount. Although this characterization is largely a caricature, Gen Z is different in at least one crucial aspect: young people resent being ‘just a cog in the billing machine’. For them the purpose of life is not helping the partners make millions. They are in it for themselves, not for the partners. Law firms are increasingly aware of this, hence the wordings on the career sections of their websites: “we value you as a person”, “we will invest in your personal growth and development” Preferring Profit over People During the Pandemic, profits soared across the legal industry. Demand was plentiful and costs were low. For most law firms 2020 and 2021 have been the best years on record. Last year, 2022, could not have been more different. The world entered in a global economic crisis. Inflation became high and money tight. At the same time costs substantially increased. All this impacted partner profits and that is where problems arise. Unlike other entrepreneurs and businesses, partners in law firms have for decades only experienced a steady growth in profit. To the extent that even slowing growth would lead to ‘panic’. A decrease in profit, in the minds of many partners, would be totally unacceptable. Now this is the reality for the first time. Welcome to the world I’d say. For a growing number of law firms, the prospect of slightly lower partner profits, compared to the year before - but still above 2019 - became unbearable. To ‘rescue’ the profits, law firms have started to layoff junior associates. The trend is to quietly make cuts through the review process. This year’s "aggressive" performance reviews* are resulting in an increasingly blurry line between layoffs and review-time cuts. On social media associates are buzzing with chatter about layoffs and cuts at many firms. No need explaining that for Gen Z social media carries more weight than law firms’ website ‘career’ pages. The Profit is in the People I have said it before and I will say it again: for a law firm people are the most important asset. The business of law is people’s business before anything else. No law firm can gain an advantage over the competition based on legal knowledge. It is the non-legal skills and attributes that make the difference. The law firm that is the best in attracting, retaining and developing talent is the one that is going to win. The knee jerk reaction to cull talent to save the profit might turn out to be a costly mistake. These firms might save some pennies on the short term, but they will suffer reputational damage for the years to come. There is a ‘war for talent’ and Gen Z does not want to be just a cog in the partners’ money machine. There is no better way to highlight that is ultimately what they are as by firing them at the first signs of headwind. Layoffs are short sighted and selfish. The same thing happened after the 2008 Banking Crisis and it became something those firms bitterly regretted. When the economy picked-up they found themselves understaffed and unable to attract new talent in a buoyant market. The difference is that at that time it were the Millennials, who tend to be more forgiving than Generation Z… Invest in talent development For commercial companies it is normal that revenue and profitability show variations over the years. Even Goldman Sachs has good years and bad years. Law firms partners must understand and accept that the legal industry cannot remain an exception and that sometimes a decline in profit is just a consequence of the economic reality. Like other entrepreneurs and businesses, law firm partners are well advised to focus on cumulative profit over the years. In today’s economy it is probably smarter to invest in talent, even though it impacts this year’s profit. Those law firms that retain their talent and invest in developing legal and non-legal skills will be tomorrow’s winners. Taken over a number of years these firms will have a better average profitability. TGO Consulting has developed a methodology that helps law firms with setting up a sustainable talent development program for all lawyers, juniors and partners alike. *Note: Structural periodical performance reviews are essential and should be standard practice at any law firm. The purpose of such reviews is to provide the associates with open, honest and constructive feedback, aimed to learn and improve. Feedback should never come as a surprise or ‘out of the blue’. Associates should get sufficient time and coaching.

There is a new hype: ChatGPT version 3.5. First launched 30 November 2022 this publicly available natural language processing tool immediately caught the attention of the media and the public. It allows to have high quality human like conversations with a chatbot, which I must admit is pretty cool. Up till then, conversations with chatbots were invariably cumbersome, frustrating and stupid. Natural Language Processing consists of two main elements: the language + the content. ChatGPT is impressively good when it comes to the language. The algorithm has been trained to predict which words are most likely to be used and in what order. The language and grammar of the tool could indeed be mistaken for real. This as such is a major technological achievement. The second element is the content. This is where things get a bit obscure. Even though ChatGPT responds like a human, unlike a real person it does not have any knowledge or understanding. ChatGPT sources its information on the internet, and that spells trouble. ChatGPT runs a high likelihood of producing bullshit in a very convincing and coherent manner. ChatGPT will always sound plausible, but could be totally wrong. So, while the Natural Language Processing part is groundbreaking, the content part is far from perfect. Training AI is not straightforward Algorithms need to be trained with vast amounts of data. The quality of these datasets will have a huge impact on the end product. It is tempting to use the internet as a source, but that invariably is a bad idea. In December 2022 Melissa Heikkilä (she/her) published an article in MIT Technology Review. She tried viral AI avatar app Lensa to make an avatar of herself. For her male colleagues at MIT the app generated realistic and flattering avatars —think astronauts, warriors, and electronic music album covers. However for Melissa, being a woman, Lensa created tons of nudes. Out of 100 avatars she generated, 16 were topless, and another 14 had her in extremely skimpy clothes and overtly sexualized poses. Only after she told the algorithm she was a male, Lensa produced flattering avatars like it had done for her colleagues. This is a great example of how the data used to train the algorithms affect the results later on. Lensa relies on a free-to-use machine learning model called Stable Diffusion, which was trained on billions of image-and-text combinations scraped from the internet. One just need to look at Instagram to recognize that women often place ‘sexy’ images of themselves. The internet is not a good source to train AI on. This is as true for Lensa as it is for ChatGPT (or any other tool). ChatGPT in the legal industry Lawyers use and process language a lot. Perhaps with the exception of writers, journalists and academics, no profession has language at the core like the legal profession. With that in mind the question arises if ChatGPT will disrupt the legal industry? Personally I think it will not. Let me explain: 1. Where will the content come from? Obviously lawyers at a law firm will not use Google as a source, so in order to use ChatGTP or a derivative, law firms need to feed it with their own datasets. These datasets need to be clean, meaning that every bit of data needs to be vetted before. Data must also be updated on a permanent basis. For many law firms this will be a hurdle they cannot take. 2. Will there be a return on the investment? Purchasing the AI tool and preparing the dataset will require a substantial investment. Further licensing fees and maintenance will add to the cost. Such an investment will only make sense if it will help the law firm to make more money. The question is will it? In this context I would like to point you towards an analysis by Lexoo which was recently shared by its CEO Daniel van Binsbergen. Lexoo analyzed how AI and Machine Learning could speed up contact review. It started with the assumption that such tools could save 50% of a lawyer’s time. It turned out to be 5% in reality! So AI/Machine learning would have very little real-world impact. Side note: this is why inhouse teams that have adopted machine learning have not magically freed up 50% of their time… Even in the unlikely event that the employment of ChatGPT would lead to substantial time savings for lawyers, this still wouldn’t mean there is a business model. If lawyers spend less billable time, this needs to be compensated for by higher rates or more work volume, otherwise it will be a lossmaking operation. The third option would be to employ fewer lawyers, but that would assume the ‘idle time’ could be pinpointed to one or more individuals, which will not be the case. 3. The Technology Paradox Once technology is introduced to simplify our lives, we humans get less experience. Today we have to drive our own cars. In the future there might be fully autonomous cars that do the driving for us. This will make us less experienced as drivers, so when something goes wrong, it will go dramatically wrong because the human lacks the experience to intervene. The legal profession runs the same risk. The present generation of lawyers already has the experience and will probably save little or no time using a ChatGPT based tool. The future generation of lawyers using such a tool will have less experience and will likely struggle to assess the results and identify issues, omissions or mistakes produced by the tool. Parting Shot While lawyers and the legal industry are well advised to remain open to change and new (technological) developments – maybe even more so than today – technology by itself is highly unlikely to fundamentally disrupt the legal industry. Its impact will always be marginal. The legal profession is first and foremost a human profession. Law firms are well advised to prioritize training and development opportunities for lawyers and partners over investment in technology. We do not need faster lawyers, we need ‘better humans’.

Recently I had the privilege of participating in an event that gathered over a hundred law firm leaders from Europe and beyond. Over speakers dinner, the night before, and the event itself I caught up with many old friends and made a number of great new acquaintances. It is a stark reminder of the importance and value of meeting in person! For the closing keynote, the organizers had managed to engage a well known and highly regarded corporate leadership expert, who had just served a term leading an esteemed global executive search partnership. One will be hard pressed to find more knowledge and experience as it comes to what it takes to be a successful corporate leader in 2023 and beyond. As you know back in 2020, based on research and experience, TGO Consulting defined 7 Core Competences© needed to excel at the top of the legal market. These seven dimensions are: 1. Understanding the Business Keeping up with economic news and business-related news on a daily basis. Showing an interest in and understanding of how companies make money. Having an understanding of how lawyers could help companies to be more profitable. 2. Creativity As a lawyer, being able to think out of the box. The ability to find multiple solutions for a problem. Regularly teaming up with others to get new insights. 3. Practice Development Ability to build a good reputation and develop a relevant business network. Being proactive in maintaining relationships with clients, potential clients and market influencers. Identifying opportunities in an early stage and acting upon that. 4. Practice Management Being able to manage multiple complex matters at the same time without chaos or stress. Being able to communicate timely, clearly and specifically when cooperating with others. Planning capability: being able to realistically estimate how long tasks will take and knowing inter-dependencies between certain tasks. 5. Emotional Intelligence Having a well-developed understanding of other peoples’ drivers, values and emotions. Effective communication of one’s emotions. The ability to build rapport with other people. 6. Integrity Recognizing the importance of permanently calibrating one’s own moral compass. Openly and pro-actively discussing moral dilemmas with others. Putting decency before profit or personal ‘temptations’. 7. Presence/Confidence Not being guided by the fear of failing or being made fun of. Easily mingling with new people in unfamiliar situations. Being self-assured and not immediately giving in when faced with opposition. The keynote speaker stressed the importance of 'listening' and in one-on-one discussions over dinner and during coffee breaks some argued that ‘the willingness and ability to listen’ perhaps should be added to the 7-Core Dimensions©. So, could ‘listening’ be the 8th dimension? It is complicated and all but straight forward, but on balance I do not think ‘listening’ should be considered one of the core dimensions. Please allow me to explain: Not Listening is Dangerous and Foolish I assume that all of you are familiar with the saying “the writing on the wall”. It’s origins trace back to the book of Daniel in the Christian bible. It depicts clear signs that something (bad) is about to happen. Yet in today’s world all too often corporate (and government) leaders are completely missing the writing on the wall. For leaders not listening can be dangerous and foolish. As a leader, do you know what the associates are thinking? What about staff, the partners, the clients? Being leaders and lawyers, all too often we assume we know. We prefer to talk about generation Z, rather than with generation Z. Listening requires an open mind, a general interest and a healthy dose of curiosity. Does the CEO of the airline listen to its passengers? Are they aware that first class passengers expect unlimited free fast internet for the duration of the flight? Is the CEO of the bank aware how frustrating it is for clients being forced to have conversations with a ‘dumb’ chatbot and not a real person? Last week I read an interview with the CEO of one of the large oil majors who could not understand why brilliant young talent no longer wanted to pursue a career in Big Oil... Leaders that do not listen, will miss the writing on the wall Too Much Listening is a Bad Thing Now that you know that the ability and willingness to listen is crucial for any leader, I must caution that too much listening will be harmful. Confused? Bear with me: Quite often what you hear is ‘bullshit’ (excusez le mot). It was Henry Ford who said “If I had asked people what they wanted, they would have said faster horses.” There is no doubt in my mind that he was right. I have been involved in close to a hundred client surveys and client panels over the years, and consistently part of what was said was useless. In general it is wise to be extremely cautious and not take everything you hear too literally. Leaders must not only have the ability to listen, but also apply a healthy dose of common sense when doing so. You will be surprised how often so called experts have it wrong. When IBM unveiled the first computers, experts said that we would probably only ever need a handful of such machines in the world. When Steve Job introduced the iPhone, Microsoft CEO Steve Balmer was convinced that only very few consumers would want to use such a device. When a friend on mine, who owns a hugely profitable global business asked the banks to help finance the development of a new type of machinery, all banks refused as they did not see a future for such (massive) machine. My friend ended up financing out of his own pockets and now has an immensely profitable worldwide monopoly, being the only company with such a machine. Leaders must know when NOT to listen and swim against the current. Listening creates expectations. If you ask for input and opinions, people will expect that their views are taken into account when it comes to taking a decision. If it then turns out the decision is not in line with their opinion or advise, they will be disappointed and potentially angry. This happens when the government decides to build a nuclear reactor next to where you live. It also happens if you ask your lawyers about work from home while not having a fixed desk at the office in order to manage office space more efficiently and cost effectively. Without effort I could go on producing more arguments limiting the usefulness of listening. Having said that, remember that at the same time I fully and wholeheartedly subscribe to the importance of listening: you most certainly do not want to miss the writing on the wall! In the end, more important than listening itself, leaders must have the ability to act in the interest of the firm. That is why listening is not one of the core dimensions, but still an effective leader can not do without. Ultimately leadership is stewardship. Leaders have an unwritten obligation to leave the firm (or company) better than they found it. On this and other leadership topics, TGO Consulting offers bespoke workshops at our Off-Site Retreat in Sweden. If you are interested in growing as a leader, please inquire for available dates.

This decade has been bumpy from the onset. First covid, then skyrocketing inflation upsetting the global economy. Not to mention the effects of extreme weather around the globe. It doesn’t look like things will change for the better anytime soon, unfortunately. While these events have induced a lot of misery for many, the legal industry has remained largely unaffected. Both 2020 and 2021 have been the best years on record. Lawyers that feared the sky would fall down when covid struck, could not have been more wrong. I, myself, was not on the side of doom back in 2020. On the contrary, I was convinced the legal industry could weather the storm and the economy would be buoyant once the covid wave was over. I still believe that would have happened if not for the Russian invasion in Ukraine that sent energy prices soaring and disrupted supply chains. Invariably when we move from one year to the next there is a tsunami of articles by reputable and non-reputable authors analyzing and predicting the future. I have read the analyses from the Economist, Bloomberg, the Financial Times and many others with great interest, but I don’t think reality will unfold as predicted. Who could ever have foreseen that China would abandon their extremely strict zero-covid policy from one day to the other? Legal Industry getting nervous Law firms are looking back at 2020 and 2021 as the best years in their existence. At least from a financial perspective. Profits grew double digits as there was high demand and costs were down. Extremely high workload, causing stress and anxiety, were notable side effects. When demand cooled down a bit in Q2 of 2022, initially this was widely welcomed. Providing a bit of relief and time to breathe. When interest rates rapidly started to rise and it became clear the economy would enter into a recession, relief turned into panic. Once again law firms fear the sky will fall down on them and I see firms that translate their nervousness into cost cutting and lay-offs. We all know that if one firm starts with lay-offs, others will follow. In that aspect law firms are like lemmings. There is this sense that the other firm will somehow be smarter and your firm should follow in order not to fall behind. I beg to differ. Looking at real world data, how bad is it? Lets have a closer look at what is the actual situation for the legal industry. Expenses are up. Direct expenses (salaries) are up 15,4% over the past 12 months (industry average for larger law firms), while indirect expenses have grown by 3,8% over the same period. The growth in direct expenses is mainly the result of aggressive hiring and rising salaries and bonuses. We can expect indirect expenses to grow faster in 2023 as housing costs will be further adjusted. Looking at the demand side the picture is not quite as dramatic. The most prominent characteristic of law firm financial performance in 2022 was the substantial slowing in demand growth that firms experienced throughout the year. On a year-to-date (YTD) basis through November 2022, overall demand contracted by 0.1%. Over that same period law firms increased their rates by an average of 4.8%. Which means there still has been growth in revenue. Looking at clients’ expectations regarding their legal spend over the coming year, almost half of companies expect to increase legal spending as opposed to only 19% expecting a decrease. Analyzing these real world data, it seems highly unlikely that the legal industry will be facing serious headwinds anytime soon. Sure, extreme growth has come to an end, but we all knew that wouldn’t last anyway. For 2023 I personally do not foresee serious demand issues for the market as a whole. (How the M&A market will develop is harder to predict, but I would expect a rebound towards Q3/Q4) Should law firms shed staff? For the legal industry, like many other industries, the pandemic fundamentally changed the employment dynamics. Faced with ‘insane’ workloads and working from home, more talent than ever took the decision to leave their firm. At the same time law firms increased recruitment to compensate for the leavers and to help meet demand. On balance this resulted in about 4% growth in lawyers (FTE). Now faced with more lawyers, growing expenses and normalizing demand, what would be the smartest thing to do? Many law firms have learned the hard way during the 2008/2009 financial crisis, that it is a lot easier to fire lawyers than hiring them back once the market rebounds. Lack of well trained experienced lawyers will result in high cost of lost opportunity. In other words: the short term cost savings do not outweigh the lost revenue in the longer term. Having said that, this is the time to more critically evaluate the quality and potential of your associates (and partners). Invariably there are hiring mistakes or lawyers that have not developed as expected. While law firms should always be critically assessing the quality and potential of each lawyer, this is the time to upgrade the average. While structurally and objectively going thorough that process, please do not forget to offer development opportunities to all lawyers, associates and partners alike. The law firm that becomes the best talent development machine will be the one that will come out on top. In the end being a top-law firm is about human talent more than about revenue. Growing talent is growing reputation and profitability. It is the best investment you can ever make.

The meteorological summer of 2022 has come to an end. I hope all of you have had the opportunity to unwind and have returned to your offices invigorated and full of energy. Over the past 6 months, the world in which we live has dramatically changed. Soaring energy prices, rampant inflation, an emerging food crisis. Behind all this is the war in Ukraine, rising geopolitical tensions, record heat and unprecedented drought. Who, like me, expected new roaring twenties after Covid, could not have been more wrong. This are once in a generation dystopian times and this will affect us all. Revenue drop After the legal industry has had two of their best years in history in a row, revenues around the world have now started to drop. There has been a sharp decline in M&A activities to the extent that even trainees and associates at the elite investment banks are starting to get worried about their jobs. Bars in the financial centers across the world are reporting an increase in visitors, a telltale that the corporate finance world is not swamped with work like it used to be a few months earlier. If it rains at the investment banks, it will drizzle at the law firms. Also in the legal industry, M&A activity is slow as are other practices that are closely tied to capital investments. Most other practices seem to be holding up fine for now. Rising costs In an industry that is tuned for eternal growth a revenue drop (not just a lower growth rate) is bound to create tensions and panic. Certainly since costs are rising at the same time. There is higher marketing and BD costs, higher salaries, higher recruitment, higher occupancy (energy), and so on. Many law firms have also made high numbers of new partners in the past two years. Less revenue, higher costs and more partners. This doesn’t sound good, does it? When Covid hit in March 2020, the legal industry braced for a hit. Many firms took strong measures to safeguard their liquidity. While this was a clear overreaction driven by fear, fueled by the unknown, it could well happen again. Partners as a group have their own distinct dynamics. Even if on an individual level the majority of partners does not feel alarmed, the group might panic. Once the herd moves there is little management can do than follow the direction of the herd. Avoid panic It is in times like this that law firm leaders need to act proactively and remain in full control. Do not hide, do not wait for one or more partners to take an initiative or ask questions. Law firm leaders should act first, decisive and firmly. Please allow me to give you some pointers: 1. Make sure you have adequate management information For any manager it is essential to have reliable real-time management information. This is especially true if business is at risk. Make sure you have weekly data on workload and utilization. Also closely monitor the influx of new matters. It goes without saying that all fee earners must keep up to date with entering billable time in the system. It wouldn’t hurt to remind them. 2. Do not start cutting costs Yes, costs have increased since 2020 and 2021. The costs of salaries have increased for most firms. Partly due to growing headcount and partly due to raising salaries and bonusses paid. Client events are back and so are conferences. This increases the marketing budget. We would not recommend that you start cutting cost in order to preserve the profit per partner. You will know by now that it is extremely hard to find and keep talent. Many law firms learned the hard way during the financial crisis in 2008. Once talent is gone it is gone and it will be near impossible to get them back once the economy bounces back. Also, you are well advised to keep investing in marketing and business development as this is especially important in times of slowing business. 3. Trust your partners. Invest in cooperation and a sense of stronger together If as a managing partner, you have the illusion that it is your task to manage the firm, I’m afraid you cannot be more wrong. Managing partners should provide guidance and a clear direction regarding the strategy and the priorities. For the execution they must rely on the partners. While this is true when there is a nice tailwind, it is even more important when there are strong headwinds like right now. Show your partners the direction to go, motivate and monitor, but don’t deprive them of their personal responsibility and autonomy. Put great emphasis on cooperation. The partnership is so much stronger as a close knitted team, than as a sum of individuals. 4. Communicate! In times of ‘trouble’, you don’t want your partners or anyone else in the firm guessing or speculating. When people start to speculate about the future, they are in this economic climate inclined to pivot towards the worst case scenarios. No need to say this is bad for morale and will lead to panic and calls for immediate action. Once this starts to happen, management will quickly lose control and become the playball of the sentiment. The only way to prevent things spiraling out of control is communication. Don’t leave people second guessing. Communicate frequently and openly. No hiding, no silence. This is also applicable vis a vis your clients: communicate more than you usually would. 5. Use the moment The legal industry has seen unparalleled workloads over the past two years. Leaving everyone exhausted. At times it seamed like there was only work and then more work. When the business cools down like it is to be expected, one should embrace the moment to recuperate and get better. Probably the best thing a law firm could do in the months to come is to invest in people development. This is exactly what we are already doing with some of our clients. We help them set up structural personal development programs for their partners (and associates). Such programs focus entirely on the 7 Core Dimension© that we have identified. Partners, without exception, highly appreciate, structural support in building a stronger practice. The future is uncertain and too volatile to reasonably predict. We have no choice than to act on incomplete information. Today not even the Central Banks can make accurate predictions for the next quarter, so why would law firms have a crystal ball? Amidst all this uncertainty, if you stick to the five pointers, you will likely emerge stronger once the skies starts to clear.

The relationship between a client and its lawyer has traditionally been a personal one. Even after lawyers had started to work together in law firms, there still is this very personal relationship between the lawyer and the client. I have written about this topic multiple times, raising the question whether a client is the client of one partner or a client of the firm. I have raised this fundamental question on many occasions with partner groups and almost invariably the individual partner wants to ‘own’ the relationship with their client. As it comes to ‘client relationships’, partners have kept behaving pretty much like sole practitioners. Arguably to a large extent also clients see the relationship with a lawyer as a very personal one. This is most prominently demonstrated if a partner decides to make a lateral move and switch firm. Data shows that under such instances over 50% of the clients decides to follow the partner to the other firm, even if this means an organizational nightmare. At the same time clients are complaining that law firm partners work in silos, don’t share information and are hesitant to invest in a relationship that they do not ‘own’. Those same clients are also increasingly expressing concerns that specialization in law firms has gone too far. Sure, clients like to consult every now and then with a partner who has an exceptional deep and detailed knowledge of a certain niche topic, but commonly clients would prefer their outside counsel to have a broader interest and knowledge. All sectors of the economy are facing tremendous challenges Law firm clients are real-life companies and organizations that must work very hard on a daily basis to remain relevant in their market. Almost every industry is facing new challenges these days. Industries face geopolitical issues, supply chain disruptions, rising costs and increasingly hesitant end-consumers. Investors, who have been seen record after record, are now facing a bear market. The energy sector is seeing a combination of challenges it has never seen before. The automotive sector is disrupted by electrification, and so has every other private or public sector comparable challenges of their own. All this calls for strategic ‘out-of-the-box’ thinking. Just applying experience from the past doesn’t cut it. Helping clients navigate the changes in the market and help lead the way to new market opportunities and new business models, requires skills and creativity that goes well beyond what any individual could achieve. General Counsel were first to recognize this need. On countless occasions GC’s have voiced their desire to get broader input from their outside counsel. This is not about handling individual mandates, but about exploring new ways forward, which is crucial for any company's future existence. Recently I had a conversation with the GC of one of the world’s leading new technology companies. This particular company is enlarging its product portfolio and its global footprint at a rapid pace. In doing so, the company faces a myriad of novel legal challenges that can make or break its very existence. A multi-talented lawyer remains a white raven This GC gave me two great examples of outstanding assistance from outside counsel. Example one was about a situation where the company was making a major investment abroad. As there were multiple countries that were very keen on attracting this investment, national and local governments were offering all kind of ‘sweeteners’ to make the decision fall their way. For this reason, the GC had engaged a tier-1 state-aid partner from a very reputable law firm. One might expect that a partner with such specific specialization would have a narrow and limited scope. Not this partner who was in his early forties. The GC told me this partner had such an exceptional understanding of the company’s business and strategic objectives that he had asked him to take the lead on all negotiations, way beyond just state-aid issues. Obviously, this partner would pull in other partners from his firm with other specialist knowledge, but it was him who was heading the negotiations and who had the lead. Unfortunately, this type of partner remains a white raven as this GC was not aware of any other partner at any of their panel firms across the world that would have this ability. This is a great example of a partner who, despite having a narrow specialization, has maintained a broader knowledge of the law, has a deep understanding of the client’s business and who knows to tap into other partners when needed. Involving third-parties in a workshop The other equally rare example this GC gave me was about a workshop organized by one of their panel firms. One of the elite law firms, has offered them to set up a one-day brainstorming workshop to discuss the strategic issues this company is facing, from many different angles. They did not only invite the legal team, but also members of the company's commercial, finance, production and engineering team. From law firm side also all kinds of experts were present. All of this was free of charge. The best thing however was that they also invited other third-party experts at the firm's expense. The GC told me that this workshop had been very professionally prepared and conducted. One day brainstorming and exchanging ideas from many different angles had provided several valuable new insights for his company. No need emphasizing that this became the start of a close relationship, that made the law firm a lot of money. We need swarm-intelligence to face strategic challenges This article is meant to argue and demonstrate that lawyers should stop working as individuals and in silos. The changes clients are facing in today’s market go well beyond what any individual could offer. Clients want their law firms to make full use of ‘swarm intelligence’. At TGO, we often call this the process of 'Melting the Brains'. Clients need access to all the knowledge, experience and creativity available within the firm. Clients also want to team up with lawyers and other experts at the same time to find new insights and solutions to the serious challenges they are facing. Working alone is sooo 2021, teamwork is the future. At TGO Consulting we have extensive real-world experience in helping elite law firms to truly collaborate, use and apply swarm intelligence at the benefit of their clients and their firm. We have a proven track record in helping to 'melt the brains'. Once the process of ‘melting the brains’ really takes off, this will be clearly reflected in the financial performance and the reputation of the firm. As such the program will easily pay for itself. Please contact us to find out how we could help your firm!

Remember the Airbus A380? It is the world’s largest passenger airplane. A humongous double-decker with a wingspan of 80 meters and a max take-off weight of 570.000 kg. The A380 has a maximum seat capacity of 853. The first plane was delivered in 2007, the last one in 2021. It certainly has not been the commercial success that everyone envisioned when setting off on its 30 billion Euro development. Obviously the aviation industry and the legal industry are not comparable in any way. What both have in common is the paradigm that bigger must surely be better. Perhaps even more than any other industry, law firms can become obsessed with the scale of numbers. For many law firms size equals success. The bigger the firm, the more successful it must be, right? Well, in reality probably not. Let’s analyze the merits of size and while we’re at it, dismantle some myths along the way. The metrics of size On a basic level the required size of a law firm will depend on whether it is a full service firm or a boutique, and on having a national or an international practice. Boutiques that strongly focus on one practice area or industry do not need to be sizable to serve their clients and be commercially successful. Around the world there are numerous examples of extremely profitable high-end boutiques that are less than 100 lawyers in total. High-end full service firms would by nature need to be bigger than the boutiques. For a full-service firm, the engine is typically the Corporate/M&A practice that will need to have a certain size in order to handle multiple complex transactions at the same time. M&A is considered the ‘engine’ since transactions typically generate a lot of spin-off for other practice areas such as Competition, Finance, Employment, and so on. In order to deliver the required level of service, each of these departments also has to meet certain minimum size requirements. If the firm is aiming at the top-bracket in their market, there are however not only minimum size requirements, but equally, maximum size-limits for each practice group. Allow me to illustrate this with the example of Employment as a practice group. Any full-service elite firm outside New York and London, would probably need about 2 employment partners with a team to service their transactional needs. As it is unlikely that the Employment practice will get 100% of their work through M&A, they will also have to find employment clients of their own. The problem is that in most markets there simply is not enough high-end employment matters around, so the Employment team will feel forced to accept mid-market work which does not fit the firm’s strategy and for which it will be extremely hard to charge the normal hourly-rates. Not to mention that on top of that conflicts with potential M&A clients will further limit their market. While there is, depending on the strategy and on the market, always a minimum size for a full-service elite law firm, there also pretty soon is a maximum size, after which the average quality of the practice will decline. Too many partners for the amount of strategic mandates, will inevitably increase the volume of less profitable plain vanilla work. When practice groups become too large they will feel forced to take on lower quality work to meet their targets. This will in the end increase the profitability gap between the leading successful practices and the rest. This will over time result in a ‘two-speed’ firm, where part of the partners is highly successful and the others are structurally trailing behind. No need highlighting that this on the long run will create tensions. Economies of scale The past two decades have been the heydays of law firm mergers. Merging was not just fashionable, it was generally considered the ‘silver bullet’. Many firms that had a weak performance merged with another firm that often also had a weak performance, resulting in one bigger firm that still had a weak performance. Merging rarely is the solution to a fundamental problem. Law firms also seek to merge for other reasons like entering into a new market. Take for example the UK magic circle firms looking for a foothold in the lucrative US market, or the mergers between UK and Australian firms hoping for a lucrative piece of the Chinese market. Both endeavors did not work out as planned. Undeniably also some of these mergers have been a great success. In 1999 Allen & Overy set up shop in the Netherlands by grabbing the 35 best partners of the renowned Dutch law firm Loeff Claeys Verbeke, which then ceased to exist. A&O almost instantly became a top-player in the Netherlands. It is not only hope and despair that drive law firm mergers. Increasing the power to invest in technology or marketing have also become motives. And there’s the FOMO category: fear of missing out. Others are merging, they must have a clever plan, so our firm should also merge because bigger is better. The downside of size When a law firm becomes too large for the market they are in, the average quality of the partners and the mandates will go down. The spread between partners and between practice groups will grow, and there will be a high risk of becoming a two-speed firm. Also with every expansion of the partner group, the firm will become harder to manage. Beyond a certain size, partners do not really know each other, which will hinder strategic collaboration, team spirit and firm culture. Above a certain size, partners will become more focused on their own interests and even less on the firm’s interests. Partners feeling the pressure to perform will increasingly feel frustrated by conflicts of interest that prevent them from taking certain clients. Last April, Dentons, a global giant with more than 10.000 lawyers, lost a $32 million malpractice law suit as the court rejected their claim that their Swiss Verein structure would allow them to serve conflicting interest as long as the clients were in different countries that were technically independent. The court did not buy that. The Big-4 Two weeks ago, at the end of May, it transpired that global accounting giant Ernst & Young is weighing a historic separation of EY’s audit and advisory businesses after years of criticism over perceived conflicts of interest between the two. Auditors are tasked with holding companies’ management to account and resisting pressure to sign off on numbers without proper evidence while their advisory colleagues prefer to keep clients sweet to generate fees in areas such as tax, deals and consulting. In conclusion The main message in this article is that law firms would be well advised to stop pursuing size for the sake of it. In the end profitability is more important than revenue, and strategic focus and a high-trust close-knit partnership have more value than having the highest number of partners. TGO Consulting would be happy to assist you in determining what would be the optimum size for your firm, your market and your ambitions. Why not schedule a meeting to explore?