Why Partnerships Don't WorkMany professional service firms operate under a partnership structure which is possibly the worst structure to use when running a business.Partnerships as a business entity have a long and varied history. They came about because they were easy to create. A partnership agreement can be written on a napkin and may say as little as "we will contribute capital in equal amounts, and share profits in equal amounts." They also allow for equal decision making as each partner, being an owner, has a say in how the business should be run. There are also legal reasons why many service firms operate as partnerships. Professional associations often deem it necessary so only their members can be owners. Unlimited liability of the partners also sought to bring some comfort to clients, because they knew the partners had to be responsible for the advice and couldn't hide behind the corporate veil. This became less important with the advent of limited liability partnerships, and the fact that most partners have very few assets in their own name as a means of protecting themselves against possible negligence claims. As a structure for a firm of up to seven partners operating from a single office, it still may be the ideal choice, however for larger firms it creates a number of problems. Decision making is too slowTraditionally, all partners think they are entitled to a say in how the firm should be managed. They own the business so why not? Well it can slow decision making to a crawl. Getting all partners to agree in a reasonable time frame can be next to impossible. Does a CEO of a public comany consult all stockholders before making a decision? No!Partners on pedistalsMany partners inflate their own egos. This can lead to intimidation of other employees who are then afraid to contibute ideas or appear to disagree with them. It can also mean partners believe they can "bend the rules." Imagine if all partners did this. The flow on effect on employees creates an even larger problem.Up or out mentalityThe promotion path is usually very clear cut. Start as a graduate and over a number of years move up the ladder to a partner. What's wrong with this? Not all people are ideal partners (in the ordinary context) and others don't aspire to be partners. They enjoy the technical work (being a minder) and don't want the other responsibilities that go with being a partner. This can mean the firm loses a good employee because it's up or out. Don't underestimate the status a partner has within the firm. Eventually the minder will grow tired of perhaps being the most profitable earner and not receiving the respect they deserve. Many surveys have concluded the respect within an organisation is one of the most important criteria for work satisfaction.Different work environments or marketsThere is an ingrained mentality that all partners should achieve the same level of fees and profitablility. This is next to impossible when there are different type of work and markets. Can a lawyer working with individuals achieve the same fees as one working with Top 500 companies? Unless they have a highly leveraged practice they can't. Animousity can grow if they are compensated evenly. Different work teams think they work better than others. Put them on different levels of the same building and it becomes worse. Put them in different cities and it becomes worse again. Put them in different countries and it becomes worse again. Get the picture? Multi-disciplinary practices will accentuate this problem further.This is the subject of another article by itself. Suffice to say that partners usually think they deserve more, and from a finite profit pool, this means it comes at the expense of others. Hardly good for partner relations. Profit sharing plans for employees are also more difficult to implement within a partnership. Corporate structures offer more scope for sharing profits and equity with employees. So how should all this be fixed. Not by simply incorporating and calling the partners directors. Sure this will address some of the liability issues, but not the management issues. The incorporation decision should be based on liability and tax issues. Appoint a board consisting of three partners. It's not a committee as they tend to discuss and advise. rather than act. The partnership agreement must state the authority of the board. Obviosuly there are some issues that must be subject to a vote by the partners. The primary business functions such as finance, human resources, marketing, technology and business services should be allocated to the board members. Appoint a practice leader to lead and manage the firm. They are the equivalent of the CEO (call the position that if you want) and they must report to the board, not the partners. They must be given bottom line responsibility and the authority to achieve it. Pay them what they deserve, which may by more than the partners. Give them a performance bonus or the potential to take equity. Partners must refrain from micro managing. This diminishes the practice leader's authority and contributes to the problem of the organisation losing focus. The practice leader and the board must provide the direction and focus to ensure that everyone is moving in the same direction. Another possibility is to get an external perspective. Don't assume the partners know everything about managing their business. Hire a consultant, or get an independent opinion if necessary. Have some-one review the business plan as familiarity often stifles creativity. Do what you clients do and get an expert opinion. The above methods won't solve all the problems, however, they are a step in the right direction. Leading a professional services firm has been likened to herding cattle. The partners want to go in all directions and often only think of themselves. The practice leader should herd the partners in, set the boundaries and then let them loose to achieve them. If you wish to reprint this article please Contact us. |
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