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The three hats of an equity partner

The three hats of an equity partner

Ever wondered why law firms seem slower to react to macro issues and change than corporates? Margaret Fitzsimons did, and she found that many traditional professional services organisations are…

Ever wondered why law firms seem slower to react to macro issues and change than corporates? Margaret Fitzsimons did, and she found that many traditional professional services organisations are complicated by their ownership structure and complex mix of personalities.

In the corporate environment, management, the board and the shareholders are normally mutually exclusive. In the traditional professional services partnership structure, management, the board and the shareholders are all one and the same.

Of course, there are many different structures in today's professional environment which range from the traditional model through to the corporate model - some firms have employed specialist management teams, some have external directors, some have external shareholders. Nearly all, however, have some owners which work in the business in senior positions or are on the board. This makes instigating and driving business decisions difficult, due to conflicts in the roles of owner, director and manager i.e. the Three Hats.

Which practices succeed?

I would hypothesise to you that the practices who are most successful, who place themselves on the edge and go in new directions, who are nimble and quick to react, who can easily implement and adapt to change, are those practices who have a group of excellent business people who manage the business, who are 'allowed' to manage and who are accompanied by an excellent board. These practices can dream big because they are 'empowered'. Everyone in the practice is travelling on the same bus and driving in the same direction.

Those practices who don't have the right people will choose a 'business as usual' direction, they will plod along in the same way, year after year, because everything is too hard and no one is willing to stand up and make the necessary changes. There may be some strong personalities on the board who have few business skills and who seem to sabotage new ideas and new directions. There may be one or two partners who like to play it their own way, in an operational sense, and will happily bend the rules, causing problems for the practice's management. There may be a grandstanding partner that may threaten to take his/her practice to a competitor if 'this or that' is implemented and so the implementation never happens. These practices will find it extremely hard to move forward due to conflicts in the three hats.

Managing different personality types

Over the years, I have seen some very interesting personalities in partnerships. In the firms that I have worked with I have sometimes likened the more colourful personalities to the animal kingdom. Some of my favourite 'animal types' have been:

The hare. The hare wants to win the race and will start the race without thinking about the best way to win it. The hare is not into planning. People who are like the hare like to do everything by themselves. These people are normally those with entrepreneurial flair and they generally leave a path of destruction that someone else needs to clean up. They are the people that say that they can't possibly follow a policy because it would be 'detrimental' to their individual practice. They will usually think of themselves first when a decision is being made rather than the best interests of the overall practice. These people may be the high flyers of the practice, they make lots of money but don't do much for the culture of a practice where leaders need to set an example. They make it hard to implement new policies because they always want to be the exception. They claim people don't understand them and threaten to leave if they are not accommodated.

The snake. The snake appears from nowhere and can suddenly give a lethal bite. The snake is Machiavellian, people who are extremely political and may be characterised by those who are in and out of other's offices with doors closed, having 'chats'. They may be the ones organising coffees in small groups and entertaining partners separately at home or organising social outings. The snake appears to be best buddies with everyone, but will often bring out a knife behind a back. The snake wins by planting small seeds over a long period of time. They will give favours to be repaid at a later time. Snakes are the dangerous people of a practice, intelligent people who may lay dormant and seem harmless for some time before showing the potency of their sting.

The hyena. Hyenas aren't the most savvy of animals, they rely on the power of the pack. They will circle victims together and then go in for the kill. This is the group of people who will end up making the political assassinations in a practice on behalf of the snake.

The bird. These people take flight when things gets too tough and they are reluctant to stand up and be counted. They hate conflicts and are happy for others to take the starring roles. They will silently disagree with decisions and exonerate themselves when the decision was wrong because they stayed silent.

The lion. The king of the jungle can bare its teeth when needed but keeps the circle of life going. Lions are smart and straight shooters. The lions of a practice are normally the older, wiser, senior partners who have business skills and have 'been there' and 'done that' before.

The galah. The galah is a grandstander who likes the sound of his/her own voice but has very limited business prowess. This person may be responsible for decisions taking longer than necessary or not made at all.

The sheep. Sheep are calm, nice people who are happy to roll on without upsetting anyone else and will just go with the flow. They are the people who will swing their vote depending on where they think the power base is in the practice.

The (sacred) cow. This is the partner who should have been moved out of the partnership a long time ago but no one is willing to have a courageous conversation.

The donkey. Donkeys are stubborn and are very good at being passive aggressive. These are normally the people who agree with what is being decided at the board and then they will go back to the operations of the business and refuse to follow a policy or not make an effort to implement an initiative. These types of people create silos in practices.

The dog. Man's best friend. Reliable, easy to talk to, normally intelligent, the perfect companion. The dog can run a long race and still have energy, it will obey its master when a decision is made. These are partners who have business skills, great communication skills and people skills. They know which hat to put on and when. They act appropriately and follow the corporate governance rules of the practice. These people will actively join in boardroom discussions, will make their opinions known, will accept the overall decision of the board and will support the implementation of the decision whether they agree with it personally or not.

From a partnership and board perspective, the more dogs and lions you have the better. However, from a practical perspective, we all encounter different types of 'animals' during our careers. With so many different 'animals', then, how can a practice take itself to the edge and effectively move in a new direction. The answer lies in the implementation and training of the Three Hats Methodology.

So what are the "Three Hats"?

Equity partners wear their manager's hat when they work in the practice on a daily basis - supervising staff, obtaining new clients, working with clients, interfacing with other managers. There is a salary component of equity partners' profit distribution which relates to their day-to-day work as a partner. Appropriate equity partner remuneration systems should be designed to reward both financial and non-financial contributions of each equity partner as a manager. This will incentify partners to implement the strategy of the business and to be a good corporate citizen.

In their role as manager, partners should be treated like any other manager in the practice. They should have a specific position description and pre-determined decision making boundaries. In this role, they are responsible for net profit generation and require mid level management skills. Using the manager's hat, an equity partner has an operational focus only and has no power to change or not follow policies except though the CEO, to whom they report.

With their hat on as an owner, an equity partner is looking purely for a financial return from his/her investment in the overall business. Equity partners make an investment in the business by providing capital or shouldering risks. An owner has no power except to influence the election of the board members or to vote at owner's meetings. As an owner, equity partners should receive a profit distribution which is substantially over and above what could be achieved for their work as a 'manager' in the general market place. If this is not happening then the Board should be considering major changes to the practice's management.

In their role wearing the director's hat, partners should be responsible for ensuring that the entire group of owners receive fair and maximised returns on investment (even when this may impact on them personally). In this role partners need business skills, people skills and management skills. They need to be able to implement and follow good corporate governance. Directors will be responsible for approving policies, practice strategy and budgets. This hat is perhaps the hardest of all and many partners will struggle to gain the skill set necessary to effectively wear the hat.

How do you implement the Three Hats Methodology?

If your partners are having difficulty wearing the right hat at the right time, then try some intensive training on the Three Hats Methodology, perhaps at your annual retreat. Have someone work with your partners during board meetings and introduce some 'rules' about the use of the hats. Build a culture that eats, breathes and lives the hats. That way, over time, your partners will naturally use the right one. It may be awkward at first, but eventually it will become part of your practice. Make sure you accompany the Three Hats Methodology with effective corporate governance, a strong chairman and excellent management and then watch out as your practice becomes a lithe super charged business.

Margaret Fitzsimons is a director of Trans4mation Pty Ltd, a management consultancy specialising in business transformation for professional services.

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