This extract taken from Ark Group’s Tackling Partner Underperformance 2nd Edition – Authored by Nick Jarrett-Kerr examines the background and trends, including how all firms have a performance curve resulting in the firm being segmented into high-performing A partners, B partners who form the engine room of the firm, and C partners who in relative terms perform less well than their peers. It establishes what motivates partners to perform and the importance of setting and communicating clear and measurable standards. It outlines a definition and the implications – financial and otherwise – of underperformance, and how firms can manage performance for success.
As primarily people businesses, law firms rely on the brain power, acumen and performance of their lawyers to gain results. Correspondingly, law firms and professional service firms place less importance on tangible assets such as plant, machinery and inventory. The maximization of a law firm’s productive capacity is therefore a key element in profitable and sustainable long-term performance.
It is also accepted that in any people business a version of the Pareto Principle – the 80/20 rule – also applies, with 10-20 percent of the firm’s people making by far the largest contribution to the firm’s success. Managers such as Jack Welch, the famous former leader of General Electric, have applied this principle in segmenting employees into three bands in terms of their performance – the top 20 percent, the middle 70 percent and the bottom 10 percent. The top 20 percent are the firm’s stars. The middle 70 percent are enormously valuable to any organization, providing the backbone of skills, energy and commitment without which the organization could not survive. In the case of some corporations such as Microsoft, and in the world in which Welch used to work, the bottom 10 percent have to go. As Welch says: “It’s awful to fire people – I even hate that word. But if you have a candid organization with clear performance expectations and a performance evaluation process – a big if, obviously, but that should be everyone’s goal – then people in the bottom 10 percent generally know who they are. When you tell them, they usually leave before you ask them to. No one wants to be in an organization where they aren’t wanted”.
Partners of law firms used to think that they formed the premier cadre in the firm’s hierarchy, automatically making up Jack Welch’s top 20 percent. It is now accepted that the 20-70-10 rule applies as much in the partnership layer as in the rest of the firm. This was reflected when, some 20 years ago, David Maister coined the expressions “dynamos”, “cruisers” and “losers” to describe the three categories of partner in professional service firms. The term “cruiser”, however, may be unnecessarily pejorative as it implies a group of partners who are working in comfort zones, when in reality they form the backbone of the firm. It may therefore be better to think of partners as A partners, B partners and C partners. In most firms, B partners form the heart and soul of the organization. As Delong, Gabarro and Lees point out: “The bulk of any firm’s talent is its B players – the 70 percent who are neither stars nor failures but consistently solid performers.
They are the firm, and the firm is only as good as they are”. Within any firm there is a normal curve of distribution or performance, as shown by Table 1. In most firms, it is rare to find more than 20 percent of the partners falling into the A or dynamo category, and it is also clear that in some firms at least 10 percent of partners are underperforming against the firm’s agreed standards. As Edwin Reeser points out in Chapter 5, “Most equity partners in law firms are hard workers. The fact that the underproductive partner discussion continues year after year, for several decades running, makes it clear that we are not tackling a problem based on vast numbers of shiftless, lazy people who somehow have made it to the ranks of equity partnership in law firms and cannot be gotten rid of”.
Table 1: partner performance distribution curve
One fundamental assumption which many law firms (rightly or wrongly) make is that it is important to have financial incentives in order to influence partner behaviors and thereby drive law firm performance. The philosophy of many law firms assumes first and foremost a belief that partners – particularly partners who are at the lower end of the performance table – can be motivated to work harder by being offered the chance of higher rewards or better compensation. Alternatively, it may be felt that it is possible to shake partners out of lethargy, laziness or comfort zones by the threat of being penalized through the compensation system. As can be imagined, there have been many studies on the topic, many of which have found that remuneration on the whole does not significantly motivate people; however, dissatisfaction about remuneration (or the perceived unfairness over the way in which remuneration is fixed) can often have a severe demotivating effect. If a partner, therefore, feels that other partners are consistently contributing less than them but are receiving greater rewards, in the long term the overperformer will vote with their feet. Equally, partners who feel that prima donna partners are pampered and spoilt creatures who are favored with excessive financial rewards may become disillusioned with the perception that their honest toil has been overlooked or undervalued.
The introduction of a performance-related compensation element in the system of partners” rewards is often brought about in circumstances of mixed or confused motives. Within even the same firm, I have found some partners who have felt that the bonus is primarily designed to reward exceptional performers, whilst other partners have felt that the main purpose is to persuade moderately performing partners to think hard about their overall contribution to the firm and to find ways of improving. This confusion therefore highlights the distinction which must be drawn between incentives and bonuses. Incentives are designed to fix a reward against a future target, whereas bonuses reward past outcomes. Firms who therefore hold strongly to this incentive assumption will often be attracted to performance-based rewards being allocated prospectively rather than retroactively, or to a formulaic element dependent on future performance.
Motivating partners to perform
The underlying assumption behind the Jack Welch style of forced ranking is that somehow a performance-related system with elements of forced ranking can operate to improve the star quality of the firm. The forced ranking approach to compensation requires firms to compare partner contributions and to place partners in order of performance. The belief is that a performance-related system will attract and reward winners and at the same time will repulse and penalize losers. The tendency, under the “pure” forced ranking systems, is for corporations to weed out and expel the bottom layer of their performers each year, thereby theoretically raising the performance and quality bar incrementally. The idea, furthermore, is that motivated lawyers who are driven to outdo their peers will choose firms where their superior performance will translate into extra financial rewards. Less able lawyers will at the same time seek out more comfortable firms where their lower level of performance will be tolerated. This thought process is part of a trend towards higher standards and greater rigor. We see firms trying valiantly to “raise the bar” on an ongoing basis, and to develop their people. There, is, however, a danger here. Recent research has shown that forced ranking approaches can result in lower productivity, scepticism, reduced collab-oration, damaged morale and mistrust in leadership.
This does not mean that an approach which contains elements of forced ranking is in any way invalid. Nor does it mean that all partners have to be equally treated. There should be status tiers in every firm where it is clear who deserves to be at the top and the bottom of the pecking order. However, in any approach where partners are comparatively graded, great care has to be taken to ensure that the perception does not grow in the firm that there are a very few stars at the top and everyone else is somehow inferior. Indeed, there is an implicit forced ranking that takes place in every firm as it develops. The disappearance of some underperforming partners automatically results in other partners falling into the bottom performance tier. As Ed Wesemann explains: “In part, this is because law firms are grading their partners on the curve. The act of removing significant numbers of “underproductive” partners from a law firm’s equity ranks has the effect of raising the average for the remaining partners. Lawyers who used to be viewed as solid service partners find themselves slipping toward being considered underproductive”. As a recent paper comments: “…. pressure, if maintained below a certain level, can lead to higher performance. However, with lay-offs, constant pressure demoralizes employees, leading to drop in performance. As the company shrinks, the rigid distribution of bell-curve forces managers to label a high performer as a mediocre. A high performer, unmotivated by such artificial demotion, behaves like a mediocre.
A golden rule of any partner performance management system is that it should not be just a tool for managing underperformance; equally, the partner remuneration and compensation system should not be used as a tool to punish underachievement. Equivalently, partners who are working hard and making real contributions to the development of the business find it difficult if the problems of consistent underperformance are not addressed. This issue has become harder for the older partner. In former times, partners would tend to ease off as they approach retirement, and, with the disappearance of goodwill, a gentle decline towards retirement whilst maintaining a full profit share was often felt to be a fair trade-off for years of hard work and loss of goodwill payments. With shrinking margins and increasing competition, however, most modern law firms realize that they simply cannot afford to carry any passengers, and the older partner finds themselves in the position of having to work harder in later years than in earlier times in order to justify their profit shares. Sadly, some find this difficult, not least because their client base tends to be made up of individuals and professionals of a similar age and can often shrink as their clients reach retirement age and no longer have a need for legal services.
Even if not underachieving, partners can be found in most law firms who are drifting along, just doing enough to escape scrutiny. Whilst this can be the case at every level, it can particularly be true of the more mature partner. Some senior partners retain huge amounts of energy, but some also may be in decline, with waning productivity and fading appetites for work. Some partners even appear happy to settle for a lower tier of compensation on the basis that lower tiers of compensation or profit share will correspond with a lower level of hard work and contribution and hence will put them under less pressure to perform. The problem can be exacerbated by the reward system if it fails to have mechanisms in place to achieve a fair but sensitive approach.
Setting standards and managing performance
Before deciding how to deal with underperforming or underproductive partners, it is important to be clear about what the firm expects of its partners and what roles and responsibilities it needs them to perform. Partners equally need to be clear how they are to discharge their various roles as owners, managers and producers. The current trend away from the more revenue-based and formulaic systems of partner compensation is no accident. Firms are increasingly responding to the growing realization that such revenue-driven systems reward only a very restrictive set of behaviors and at times actually serve to penalize longer term entrepreneurial activities. To recognize the wider contributions and expectations of partners, firms usually identify and define four, five or six specific areas in which they expect partners to perform well. These come with different names from firm to firm but generally cover areas such financial and business performance, people management and team development, business development and rainmaking, client relationship management, contributions to the firm as an institution, and self-development and professional expertise. There is, however, a number of steps needed to build the right model. Firstly, and most obviously, the firm needs to agree the performance areas which are important for them.
The trick here is not to have too many – four seems to be a minimum and more than six usually leads to duplication and unneeded complexity. Secondly, it is important for every partner to know how to succeed in the firm, and a useful start is to define the parameters for star partners on the highest possible tier or grade and for newly appointed equity partners just starting on their equity careers. The intervening levels can then be created so that partners are clear what they have to achieve to stay on their existing grade or level or to move up to the next level.
These critical areas of performance can then be built into the firm’s written system and processes for managing partner performance. The trend towards a written and explicit set of partner performance management guidelines is a relatively recent one, but firms have found that – whether they prefer to be lightly managed or are heavily centrally controlled – that some degree of oversight and performance management is useful and necessary. The framework for a successful performance management system should meet a number of objectives which go far wider than issues of underperformance or partner discipline. The main thrust of any performance management system should be to encourage and support behavior and performance which contributes towards the profitable development of the firm towards its strategic goals. In summary, the performance management system should:
Identify the areas where the firm must perform as a whole in order to achieve its strategic and economic objectives, which can then be drilled down into “critical areas of performance”;
Ensure that remuneration levels match contributions to strategic objectives of the firm as well as the maintenance of cultural values;
Recognize/reward long-term growth towards strategic objectives rather than just short-term results;
Encourage partners to support new ventures and develop new services in line with objectives;
Encourage, motivate, value and reward high achievers who are critical to the firm’s strategic success and who contribute to an exceptional level; and
Manage and develop performance in the broadest sense in all of the critical areas of performance.
This then leads to seven essential elements which are necessary for a successful partner performance management system. Firstly, it must identify the criteria – the critical areas of performance or “balanced scorecard” against which partners will be evaluated. Secondly, it must lay out in some detail the processes and systems for partner review and appraisals. It must thirdly clarify the evidence, metrics and data which the firm will employ to inform the firm’s evaluation procedures. It should fourthly contain the firm’s requirements for each partner to compile some form of personal business or contribution plan, containing goals and objectives which are directly related to the firm’s overall strategic objectives. As a fifth element, the expectations of partners and the firm’s leaders should be firmly set in identifying the methodology and frequency by and with which the partners and their teams will be actively managed on a day to day basis. Sixthly, it must set out the firm’s processes for dealing with underperformers. Finally, the performance management system should contain the firm’s methodology for partner promotion, progression and development.
Underperformance used to be thought of as synonymous with under-productiveness, but it is clear that any definition has to go much further than the adherence to billing and financial targets. As Vincent A.F. Sergi, Chairman Emeritus of US firm Katten Muchin Rosenman LLP, puts it: “In defining underperformance we have to think of it in terms of specific expectations for each partner. As the practice of law keeps changing and evolving, you cannot just have general standards that fit each and every partner. You have to look at it with real specificity and understand what role the partner in question is expected to play in order to help drive and grow the firm’s business. There are many different roles in a modern law firm”.
Underperformance can therefore be defined as the consistent failure of a partner to meet the firm’s reasonable expectations or standards for productivity, profitability, quality, technical proficiency, client service or interpersonal relationships. Underperformance includes poor managerial competence and behaviors (such as bullying, emotional abuse, discrimination and uncontrollable anger) which are inimical to the firm’s values and agreed cultural norms. Underperformance is also relative – it is interesting that, in all of the case studies which accompanied the first edition of this report, laziness was not an issue; the main problem was the failure of some partners to keep pace with their peers in terms of service standards or technical ability, or to adapt as quickly as others to the changing nature of the marketplace. In the 2011 Underperformance Survey, one respondent commented: “Partner performance criteria are dominated by client and financial issues but we strive to include “softer” issues such as behavior”.
The implications of performance issues within law firms
Table 2 shows the main features and consequence of underperformance within law firms both for the firm and for underperforming partners. The direct financial consequences are the easiest to measure and are on the increase. The Ark 2018 Underperformance Survey found that 96 percent of firms surveyed had noticed a measurable negative effect on profits per partner (up from 75 percent of firms surveyed in the 2011 Underperformance Survey). 70 percent of firms thought that profits had suffered between 5 percent and 10 percent in the last three years. If extrapolated throughout the leading firms in any jurisdiction, it would appear that many millions of dollars, pounds and euros are leaking from the profession as a result of the issue of underperforming partners.
However, the cost does not end with the bottom line effect of below average productivity. The costs involved in the management time of dealing with underperformers can, for example, be considerable both in terms of counselling, advising and rehabilitating underperformers and in hiring new staff to replace members of staff that have perhaps left because of the behavior of poor performing partners.
Table 2: features & consequences of underperformance
Clearly there are many financial indicators which can be measured in law firms. The problem is that, not unlike the assessment of the true cost of replacing a departing partner, some of the issues are hard to quantify. Whilst it is possible, for example, to measure the cost of clients lost due to negligent or inefficient work, it is less easy to measure the cost of lost opportunities, or the effect on staff morale of an underperforming partner who is continually allowed to get away with blue murder.
Equally, the presence of an underperforming partner may cause others to leave, or block promotion and recruitment opportunities. Here, a back-of-the-envelope calculation can be as useful as a long-winded attempt at empirical analysis. However, the true cost of underperformance of a single partner almost always can reach six figures and sometimes amount to several millions of dollars. We spoke to one firm where a partner had been identified as underperforming, but the cost of severance was considered too high. Two years later, the underperforming partner was still there and the cost had, if anything, increased, whilst at the same time the partner concerned had been paid a profit share far in excess of her contribution. Any definition of underperformance has also to include partners who are failing to meet standards of behavior within the firm. Disruptive and difficult partners can have a devastating effect on the firm. One analysis puts the hidden costs of dealing with “asshole” workers as high as $150,000 per year per person.
Robert Sutton explains: “I find these costs disturbing, as they reflect so much time wasted by talented people. The figure almost certainly underestimates full financial damage, as it omits physical and mental health effects on victims, time lost by and the emotional and physical toll on witnesses and bystanders, and the negative effects of the fear, loathing and dysfunctional competition (the asshole) provoked”. Even in firms where the cost of showing partners the door is high, the return on investment from grappling with both problems of underproductivity and poor partner behavior can be considerable.
As Table 2 shows, there are, however, other more intangible costs. It is clear that continuing issues of poor performance or below-standard productivity by one or more partners has a morale-sapping effect on the rest of the partnership group, particularly if it is felt that the situation is not being tackled in a timely fashion. Underperforming partners may be performing poorly because of periods of depression, whilst equally partners who are brutally aware that they are not meeting standards may become depressed and feel isolated. Underperformance can often be part of a vicious cycle of depression, isolation, bitterness and bad behavior. Additionally, instances of underperformance can also trigger – albeit accidentally and with the best of intentions – a dynamic in which partners “perceived to be mediocre or weak performers live down to the low expectations their managers have for them”.10 This dynamic has become known as the set-up-to-fail syndrome; “the process is self-fulfilling because the boss’s actions contribute to the very behavior that is expected from weak performers. It is self-reinforcing because the boss” low expectations, in being fulfilled by his subordinates, trigger more of the same behavior on his part, which in turn triggers more of the same behavior on the part of subordinates. And on and on, unintentionally, the relationship spirals downward”. As one respondent to the Ark 2018 Underperformance Survey put it, “partner underperformance is not only a financial drag and impediment, but it is bad for the morale of those working hard”.
Values and culture
Underperformance is not therefore just a question of poor productivity, nor is it necessarily only an issue of hard work versus laziness. Of equal importance are failures to meet standards relating to quality of lawyering, client service and office behavior. Most firms have a set of values and accepted norms of behaviors and conduct. Table 3 shows how the fine words of the firms in respect of their values are often not reflected in partner behaviors. If even a few partners are exhibiting the behaviors shown in the second column of Table 3, there will be a detrimental effect on the whole firm in at least three ways.
Firstly, if partners fail to maintain agreed values, or exhibit behaviors which run counter to the firm’s espoused culture, this can quickly undermine the firm’s internal ecology. Secondly, the existence of poor partner behavior can have a huge detrimental effect on staff and partner morale. Thirdly, what is also clear is that people in any organization will take their cues from what they see or feel is going on, more than what they hear. The fine rhetoric of the firm is often not matched by the actions of partners. The words (what is said) often do not fit the music (what is done), and the rhythm (the organizational pulse and atmosphere) can beat out of time as well. For those with management responsibilities, the problem can be acute. Whilst the firm’s statements, messages, speeches and slogans can all be carefully and strategically orchestrated, it is less easy to control what is done by the partners in practice – fitting the music to the words can be a huge task.
Table 3: where the words and music fail to match
Managing for success
How firms manage issues of underperformance also helps to define how well the firm is perceived to be run by its partners. One firm which participated in the 2011 Underperformance Survey thought, for example, that the issues have an impact on the credibility of the management team. It is certainly true that the high-performing partners at most firms can be very quick to criticize any softness or slowness on the part of the management team in tackling performance issues. Dealing with underproductive partners therefore often continues to find itself at the top of the to-do list for a lot of management committees.
It is also clear that these issues provide a constant management concern which does not look likely to disappear. 87 percent of the firms participating in Ark 2018 Underperformance Survey thought that they were likely to have to take further action in respect of partner underperformance in the next two years (a slight increase on the results of the 2011 Survey).
Whatever shift is made towards some element of partner performance management – including the management of underperformance – it is a huge challenge to figure out and then implement a fair and just system of assessing or judging partner performance, particularly in so-called “subjective” or “soft” areas of performance and behavior. It is clear that firms are trying to take particular care to clarify the evidence and data which is to be examined in any assessment. There are also a number of “best practice” principles at play. Firstly, the firm should be certain to connect the dots between the firm’s vision and strategy and the day-to-day expectations for partner performance.
There should, in other words, be a clear “line of sight” between baking and slicing, between a partner’s personal objectives and the overall objectives of the firm. Secondly, the decision-making process should be carefully decided, and the assessment process and forum for assessment and decision-making should all be accepted as fair and reasonable by all partners. Thirdly, the system must be able to retain sufficient flexibility so that decisions can take into account overall intangible contributions as well as market factors, and so as to ensure that high flyers are treated in such a manner as to minimize the risk of head-hunting and that low flyers are treated fairly.
This extract taken from Ark Group’s Tackling Partner Underperformance
2nd Edition – Authored by Nick Jarrett-Kerr, available now