Follow up on why “Partnerships are not good for business”

My posting on the partnership structure being bad for business has attracted at least one reader’s comment. The constructive part of what I take away from those comments is that I must more fully flesh out my thoughts.

Why is the Partnership structure not good for the business of law?

After “sole proprietor”, which is the bedrock of our economic system, people advance their ventures in society with the augmentation of skills/assets that they don’t possess, but which their venture needs to progress. This is true for both profit and nonprofit ventures. We as humans don’t possess an infinite capacity to master or even expose ourselves to all the complexities of life and knowledge. Hence the need, as social creatures, to advance our personal goals by association with others who share our goals and support those goals with their differing skill sets. Simply put, two people, looking for more success have more needs and require more skill sets. The partnership structure can in theory encompass the most complex of organizational structures. The strength of the structure is founded in the “agreement” of, in the beginning, the simple two, but then the complex thousands.

Complexity comes in the form of the “partners” but also in the “partnership’s” interactions with other people, organizations and governments. Business, with the help of the legal community, developed other business structures to mitigate the complexities. Governments have embraced these structures as a matter of public policy because they in fact greatly enhance the quality of life and the pursuit of happiness of the population. Corporations in their many forms are not perfect and they can harbor injustice. But they do in fact provide a very powerful and time tested structure to advance the goals and desires of human ventures.

The legal community has adopted parts and pieces of the corporate structure and grafted it onto the partnership structure in the form of Limited Liability Partnerships and Professional Corporations. This is the point where I begin to question: why the graft and not the acceptance of the true corporate structure.

A partnership, as I have stated before, has the inherent quality of “ownership”. Whereas, a true corporate structure has the capacity for ownership but it is not part of the premise. This rooting in ownership is the motivation for the decision-making of legal partnerships. It is counter-productive because it assumes that those who have a “lawyers” skill set also possess a “business person” skill set. For those who do there is not an issue. But my experience has taught me they are not in the majority. That even the most successful legal partnerships are dependent on a core few in the partnership who posses both business and legal skill sets. Those partners who do not posses a business skill set are in fact at a loss to keep up. If they are fortunate to be associated with other partners who are loyal and responsible in their commitments to the “whole” partnership, then all will be smooth. If, however, there is a loyalty breakdown or competing interests and goals develop, then the emotional component and the fragility of a partnership is exposed.

The effect of a breakdown in the partnership, no matter how small, sends ripple effects out to the organization as a whole. Associate attorneys who are motivated by the eventual acceptance into the partnership will start to calculate the odds. They will size up the partners and attach themselves to the “alpha partner(s)” who are most likely going to overcome the disagreement within the partnership. Associates learn that there is a “political” component to their reaching the goal they were trained to fixate upon, ownership.

Personal politics, business skill sets, and the other complex “non-lawyer skills” that a person must navigate to succeed in the partnership structure are counter-productive to the practice of law and are counter-productive to the community they serve. The legal community knows this because they graft more and more checks and balances inherent in a true corporate structure into their partnership agreements. In my mind it’s similar to what China has done with their “communist system”. They watched the issues that the USSR could not overcome with their communist system and have grafted on Capitalistic attributes to form a “China Communism” which is neither pure Communism nor Capitalism. (A simplistic analogy. I hope the Political Science folks out there will cut me some slack.)

I encourage a hard look at what the down-stream effects are from the “ownership” fixation of the partnership system. Why can’t there be more “non-partner” tracks offered in law firms today? Why aren’t non partner tracks valued? Other professional services have made the transition from partnership to corporation with great success, Goldman-Sachs for example.