Professional firms experience a deterioration of their assets if they fail to open their ownership structure in time, as the “virtuous circle” that sustains this type of organization—professionals, owners, and clients—loses its balance.
Typically, law firms are founded in the same way: a talented lawyer, an expert in a specific field and recognized by society for that expertise—who also happens to have business acumen—decides to formalize the provision of legal services, often alone, and sometimes with a friend or relative with whom they share affinity. Over the years, the firm and its founders gain recognition in the market, which naturally attracts more clients and leads to more complex and profitable transactions. However, these also demand an immediate response capacity and the highest quality standards—something the founding partners alone can no longer achieve—forcing them to incorporate qualified professionals to sustain growth.
At that moment, the founders must ask themselves whether they wish to grow and institutionalize the firm—so that it outlives them—or whether they prefer to scale the business through a closed structure. Neither choice is inherently better; they are simply different, and the decision depends on the type of business the founders want to build and the vision they hold for its future.
It is more common for a firm whose expertise is based on specialized experience and knowledge (as in corporate, financial, or M&A practices) to require a larger number of senior professionals (associates and directors) than a firm whose expertise lies in a standardized service that does not demand the incorporation of highly qualified labor (for example, trademark registration or basic tax filing). In the first case, the firm’s assets are based on client relationships, and business generation deteriorates rapidly if the founders, nearing the end of their professional lives, fail to open ownership to the next generation. In the second case—standardized services—the partner is less decisive and acts more like a financial shareholder.
If the founders decide to pursue growth, institutionalization, and consequently the opening of the partnership, timing becomes critical. Before they realize it, the senior associates and directors they have brought into the firm—those who have lightened their workload, improved client service, and elevated performance—will be leading major transactions themselves, engaging with peers who now manage client companies, and becoming recognized in the market as “young experts” with substantially lower rates than their mentors. When this happens, senior associates and directors will demand greater economic compensation for their work and seek to participate in the economic success they helped create. They will also expect to be involved in strategic decisions, as those decisions will directly impact their future. If the firm fails to reward them adequately, competitors will have no hesitation in doing so.
As the high salaries and benefits of senior associates and directors begin to consume the firm’s profits and unsustainably compress margins, the natural decision for the founders will be to open ownership to new generations and advance further in institutionalization. At this point, the questions to be addressed in a new partnership agreement and compensation structure will be: How do I want the new partners and associates to behave? How do I encourage that behavior? To what extent should I share the benefits and risks of the firm’s activities when incorporating new partners? The challenge will be to transmit the firm’s culture and the founders’ vision to this new generation of partners.
It is also important to consider that, just like in other industries, clients of professional firms also renew over time. The firm must be capable of providing clients with peer-level counterparts—professionals with whom they can find not only professional synergies but also business development alignment. It should not be forgotten that ownership in a professional services firm should be distributed between those who maintain client relationships and those who have the ability to generate new business.
Founders must understand that this opening stage—where equilibrium among professionals, owners, and clients is achieved—will be accompanied by constant tension between individual and collective interests. They must be the first to promote a culture of solidarity while their influence gradually wanes and a new generation takes the reins of the institution.
To conclude the process, it will be necessary to find the ethos of the partnership: a shared culture and set of values among all partners, guiding decision-making amid the tension between individual and collective interests. If the founders succeed, they will have taken the first step toward creating an institution that transcends those who founded the firm with such effort.
Antonio Gómez Montoya – Socio de Black Swan Consultoría