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April 22, 2008


Partners not Shareholders - Law Firms are Different

Margin not Profit
  • Unlike limited companies which aim to maximize total profits for their shareholders, almost all law firms operate as partnerships or LLPs.
  • With no shareholders to worry about, the profits are distributed across the partners. Therefore they are incentivised to maximize profits per equity partner (PEP).
  • This makes them potentially more concerned about maximizing profit margins (by keeping headcount down, for example) rather than increasing revenues by adding fee earning partners.
  • The same is not true about companies since the shareholders care only about margin in as much as it affects profit.
  • Most companies would happily exchange a small decrease in profit margin for an increase in profit. Quite the opposite can be true of partnership law firms.
Partners not Board Members
  • Law firms usually take decisions by reaching a consensus amongst the partners. If they don't, partners can defect to rival firms or set up their own, leaving the firm to disintegrate.
  • Therefore, legal practices tend to behave more cautiously than their clients.


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