Performance-based profit sharing versus lock step to equality: profit-sharing systems in Australian law firms. A study of comparative outcomes

"Large law firms have existed in Australia for a relatively short period of time, multijurisdictional or 'national firms' for an even shorter time. Prior to the mid-1970s, partnerships were limited to seven partners or fewer; prior to the early 1990s, Australian firms practised in only one state. In recent years, large law firms have been changing. They have evolved from traditional equity partners, sharing profits equally among partners, to managed businesses, many with both equity and non-equity partnerships. Many firms now share profits differentially, according to individual performance. The reasons for, and implications of, these changes are not fully understood. A review of the literature pertaining to both traditional law firm partnerships and contemporary partnerships, focussing on how and why firms share profits the way they do, identified gaps in the literature and practice of professional service firm management. This thesis attempts to deal with some of these gaps by increasing our understanding of the myriad consequences of chosen profit-sharing models on the internal dynamics of law firms and on the partner group in particular. The legal profession is thought to be influenced by institutional pressures. As a result, when changes occur in leading firms they are often embraced by followers. Indeed, there is also a tendency for smaller firms to mimic large firms in embracing change. This thesis examines why some large firms are changing their partnership structure and sharing methodology - and why some are not changing - with a view to better inform those that follow and who may be tempted to embrace similar changes. This study used phenomenological methodology to improve our understanding of a small subset of phenomena influenced by changes in the principles of the practices of profit sharing, specifically firm performance, partner performance, partner retention and gender equity. The purpose of the research is to improve our understanding of the profession's own perceptions of the transition under investigation. Data were gathered from a significant group from within the legal profession, through in-depth interviews with the Managing Partners of 19 large law firms who have been undergoing the transition. Thus recommendations can be made to other firms contemplating and managing similar changes. In order to triangulate the data, I analysed an existing dataset relating to firm performance, collected by me in the course of benchmarking the industry as part of a commercial venture involving FMRC. The FMRC data are considered as definitive comparative analysis information within the Australian profession. The findings of the study increase our understanding of management practice, particularly for firms contemplating changes to their sharing methodology and seeking to understand many of the implications of so doing. This thesis also raises several opportunities for additional research to enable us to understand the investigated phenomena more fully.