The traditional partnership model is widely used in professional services, including accounting firms, law firms, consulting firms and architecture practices. Partners are expected to run the business, contribute capital, serve clients leveraging their expertise and build client relationships. There’s debate around whether this traditional partnership model is still fit for purpose: the business environment has changed and new dynamics are at play. Some of the challenges the model faces are explored below.
An outdated and unsustainable model?
A core problem with the partnership model is its focus on income distribution over capital appreciation. This is a framework that is materially challenged in an environment where agility, innovation and long-term planning are essential.
To compete, and win, in today’s ultra-competitive business environment, firms must invest in all aspects of their business. This includes developing a talent proposition that promotes learning, development and career progression (critical in people centric businesses), raising brand visibility and driving growth through strategic marketing initiatives. Unsurprisingly, investment in technology is also essential for driving automation and efficiencies, again particularly important in people businesses that rely heavily on expertise and time.
Unfortunately, the traditional partnership model often fails to facilitate the above due to a lack of alignment. A successful model should allow capital to be allocated as needed to move forward strategic objectives. This requires alignment across the partnership on capital allocation; something that is rarely achieved in practice. Different generations of partners are often motivated by competing interests. Younger partners may want liquidity for life milestones like buying a home or putting children through school. Meanwhile, older partners may be less inclined to invest in long-term initiatives they won’t be around to see pay off. This lack of consensus makes it difficult to pursue forward-looking investments in the long-term interests of the business.
Succession is another critical challenge. It plays a vital role in the life cycle of a business, but it is especially important in organisations that operate with the traditional partnership model, where human capital is the core of the offering. Despite its importance, many organisations struggle to retain and develop new talent, as transferring equity in a partnership is becoming increasingly cost-prohibitive. The capital that’s needed to buy into a partnership can be challenging, particularly for younger prospective partners who are already carrying large student debts and who have other priorities in life such as housing and children’s education. Bank appetite to lend to prospective equity partners has also diminished since the global financial crisis.
There’s also reduced appetite for taking on the responsibility of running a business, driven by the increased burden, complexity and stress of doing so in a world where greater importance is placed on work-life balance.
What are the alternatives?
These trends are a catalyst for change and evolution, in the process creating investment opportunities, either through disruption or consolidation. Two of Phoenix’s current investments are benefitting directly from the challenges associated with the traditional partnership model.
Setfords is a legal services platform that is disrupting the legal sector with its platform law model; its tech-enabled platform delivers all the back office services consultant lawyers need to practice, enabling them to focus on just practicing law and delivering a great service, without distraction or having to invest capital. At the same time, the revenue share model provides strong alignment. This is a competitive edge in a market predominantly made up of 1,000s of small, traditional partnerships.
Phoenix’s most recent investment, SMH Group, is a leading Yorkshire based accounting and advisory services firm. Given the recurring nature of their work, accounting partnerships are more susceptible to consolidation than disruption, a trend which SMH is benefitting from, having made 10 acquisitions over the last 8 years. As a result of its corporate structure and increased scale, SMH is able to invest in all aspects of its employee proposition. This includes recruitment to build out new service lines, lead generation through marketing initiatives and brand awareness, and investment in technology and automation to drive efficiencies.
Conclusion
The traditional partnership model is increasingly misaligned with the demands of today’s professional services landscape, which has moved on considerably. That’s not to say that a small group of aligned partners in a traditional partnership can’t deliver exceptional results and growth if they have a clear vision and are prepared to invest. There are also critical success factors that non-partnership models need to get right: most notably the retention and incentivisation of key staff, in particular future stars coming up through the business.
However, what’s clear is that change is afoot, and likely to accelerate in the coming years. This will alter the dynamics and prospects for mature industries that have historically operated with the partnership model.
