Large law firms and Ponzi Schemes

Large law firms and Ponzi Schemes

By Nick Jarrett-Kerr

The traditional large law firm model has often been likened by its detractors to a Ponzi Scheme – a giant pyramid structure in which those at the top of the pile benefit unfairly from the hard work of the junior lawyers who are building up from the bottom.

Ponzi Schemes of course are fraudulent, and whilst the description therefore unfairly applies to law firms, there are elements of truth in it. The polite and more correct description for the large law firm business model has included the word “leverage”. At the start of their careers, junior lawyers have traditionally worked their fingers to the bone in the hope that their efforts will be rewarded in future years and that one day they in turn will benefit from the endeavours of lawyers more junior than them.

This model relies on three essential features, all of which are under challenge now. The first is that the model can only work if law firms grow at a sufficient rate to allow career progression and for the leverage structure to be rebuilt under each promoted partner as he or she moves up the pyramid. Hence a firm with a leverage ratio of five lawyers for every partner essentially needs to continue to grow at the rate of five lawyers for every young lawyer that it adds to its partner complement. This means that a firm growing from ten partners (and 50 non-partner lawyers) to 20 partners will therefore need to become a 120 lawyer firm in order to preserve its leverage structure and, thereby, its profitability. This worked well until the early part of this century when we saw a huge growth in partner numbers, but this growth trend has now been rever

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About the author:

Nick Jarrett-Kerr LL.B is a member of Edge International, a leading global consultancy to law firms.  He is one of the leading UK and international advisers to professional service and law firms world-wide on issues of strategy and all important business issues facing firms today.  .

He is a regular writer and speaker on management and leadership topics.  Prior to becoming a consultant, Nick (who is a solicitor by training) was for eight years the Chief Executive Partner of UK Law Firm Bevan Ashfordduring a period of enormous growth starting in the depths of the 1989-1992 recession.

In the last few years, he has consulted to firms in more than twenty different countries on four different continents

Nick is the author of  two books – Law Firm Strategy – After the Legal Services Act( 2009; Law Society Publishing) and the recent best-selling Special Report Tackling Partner Underperformance in Law Firms (2011Ark Group).Nick has a regular monthly column in Managing Partner magazine, covering issues that are top of the mind for professional service firm leaders. Nick is alsoVisiting Professor at Nottingham Trent University where he leads the strategy modules for the Nottingham Law School MBA strategy modules. 

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