What is a Principal in a Law Firm?
An attorney who is a principal in a law firm is a lawyer who has been granted a certain level of responsibility within the organization. There are many levels of principal, but commonly they are defined as equity partners or senior managers and above, or some other term, such as stockholder, owner, or member.
There is no uniform legal definition of a principal, although many law and other professional firms, when forming a partnership, limited liability company, or other entity, will commonly define the term "principal" in their operating agreements and bylaws.
In large law firms, often the term "principal" or "equity partner" will apply only to shareholders or members (non-managing), and not to the senior non-equity partners, or senior and managing partners , who are commonly considered executives, but not principals in the firm.
Depending on the firm, principals may be more or less involved in management. However, in most firms, principals will make or participate in most, if not all, of the important decisions affecting the firm. A principal is not simply an employee. An equity principal owns an interest in the partnership or professional corporation. As such, principals owe a fiduciary obligation to act in the best interests of the firm and of the other principals. Principals are expected to protect the integrity of the firm, as well as vested interests of the other principals. Any principal who violates these obligations to the firm or other principals of the firm is exposing himself or herself to significant liability and a business divorce.
Experience and Qualifications Required
A principal in a law firm is an experienced lawyer and a leader within the firm. Most are experienced practitioners who have spent years building their legal skills and coalescing their knowledge into an area of specialization. Typically, principals in the average firm will have practiced for eight to ten years or more. They are usually very familiar with the specific industry sectors and environment in which they work and have a good understanding of their business client’s needs and interests.
While each firm alike is at liberty to set up its own rules and regulations, some firms do require their principals to be:
● Partners in the firm;
● Register as sole practitioners, meaning they have their own trust accounts and are responsible for their billing; and
● Legally allowed to practice law within the state in which they work.
The Principal Vs Partner: Key Differences
In traditional law firm structures, either the principal or the partner owns a significant equity share in the firm. Organic and changing ownership structures are being adopted by many law firms, but on the whole, firm founders often maintain the largest ownership share. In a founding firm scenario, it is typical that one or more firm owners take on principal roles until an elected group of existing principals elects partners. Sometimes, the founding principal chooses to automatically make all new hires partners after a designated period of time, though retaining a purchase option on their equity in the firm.
Although the specific role of a principal will vary depending on how a firm is structured, how equity is distributed, and how compensation is based, principals typically have more responsibility than a partner. A partner negotiates the terms of their work and is often given freedom to join firms or switch teams, though some compensation depends on whether the project is labored on by a partner versus an associate. On the other hand, a principal handles the expansive details that keep the firm functioning.
In firm structures where a principal and a partner are defined, the principal is the voting, profit and loss expressor at the firm. Principals have a role in approving new hires, budgets, and outlining the firm’s business development strategy. Still, however formal the role of principal, all lawyers must remember that their primary obligation as a lawyer always supersedes a firm’s strategy. A principal often provides an in-depth analysis of major business goals, client engagements, technological changes to be made and internal control policies.
Partners play a more action-driven role. More often than not, the partner is charged with bringing in business revenue, networking, and other tasks crucial to growing the business. The partner handles the day-to-day client interactions, project management, and legal writing.
The Importance of Leadership And Management
A firm’s leadership and management functions are generally the responsibility of principals. The decisions that principals make affect their firms at every level: its strategy, its position in the market, its profitability, its relationships with clients, its hiring and attrition, the training and development of its people, and so on.
No firm can be successful without a clear and purposeful strategy. Where does our firm want to go? What is our competitive edge and who is our target client? What niche do we want to fill and where will we be in five years?
Goals and strategies flow from a firm’s fundamental choices about how it will compete. The leadership and management responsibilities of principals include the choice of strategies, explains LegalBizDev managing principal Jim Calloway. "Senior lawyers need to be making the choice of strategy. You need strong partners who possess the very best of judgment if you are to thrive and prosper. The decisions you make are very important."
The importance of strategy is often overlooked because of the day-to-day din created by what Calloway calls "crisis management." But crises are more likely to occur when firms do not have a viable strategy than when they do. "Many times, when firms are reacting or responding to one crisis after another, that’s because they don’t have a strategy," says Calloway. "That’s because they’re not in control of their growth. When you’re doing all of that crisis management, you’re obviously not at the strategic level."
Strategic planning is a process that involves setting long-term and short-term goals and determining how to meet them. The planning process typically involves input from everyone in the firm, with responsibility for the final plan and presentation to the board of directors – and to other stakeholders – resting with the managing partner and the senior management team.
A firm’s talent development and management efforts are also the responsibility of principals. In addition to mentoring junior lawyers, principals should be working to ensure that their firm is developing the kind of lawyers it needs to thrive, as well as the next generation of leaders.
"There’s an old saying that you can’t drive as fast down the road of success if you don’t make the sharp turns along the way," says Calloway, "but there is a real danger down that ‘road of success’ that you will build the Ferrari of law firms and drive it like a Honda Plus 200,000 mile car. Firms need to be quite specific about their goals."
In addition to motivating and developing its people, Calloway emphasizes that a firm must also protect them by providing the information, resources and instruments they need to succeed. Many firms make significant investments in technology and training but fail to introduce those tools on a timely basis. "Fewer lawyers need to be running around trying to learn the technology when there are talented young people who could be tasked with that responsibility," advises Calloway. "Let’s take the cost of the Blackberry and give it to the 25-year-old who doesn’t need one. We need to be connecting with our lawyers on a more regular basis."
Business Development in a Principal’s Role
A principal’s business development activities may include attending events, sponsoring organizations, or serving on boards. Above all, that principal must be willing to meet with the firm’s clients and prospective clients. That same principal is responsible for making sure every senior associate is also bringing in clients, ten-year associates are managing relationships or sourcing referrals, and junior associates are identifying and participating in associations where they will rub elbows with potential clients. While it should go without saying that a principal is responsible for developing new clients for the firm, this includes more than being available to help less senior attorneys when they aren’t successful. To the extent the firm has an annual marketing plan, a principal should be the first to contribute to that plan, or to make suggestions as to how it can be improved . This requires participating in firm meetings, planning calls, or responding to communications setting deadlines for feedback. It also means realizing the firm has a budget, and being willing to be a team player in allocating marketing funds. Having occasional firm meetings over drinks at a member’s chic second home, or visiting a mentor’s summer "weekend" retreat, were fun, but these were not ways to budget marketing dollars. Going to other cities to watch a baseball game, while it was a great way for a principal to spend an evening, when in my history, raining out an afternoon game once saved a premium air fare for a meeting with my mentor, was not the best way to budget. In conclusion, understanding how business development, specifically for the principal, can benefit the firm will increase senior associates’ buy-in to business development for themselves.
Challenges for Principals
Common challenges faced by principals include managing client expectations while balancing administrative duties with the practice of law. Attracting and retaining top talent, and resolving issues to maintain prudent cash flow in one’s practice while paying others on a fixed basis are ongoing challenges. For example, while a below-market rate may be attractive for entry-level associates, this rate may result in high turnover as a firm’s entry-level associates move to other firms for a more competitive salary. When a key employee leaves, it often takes time for the replacement employee to train and become productive; which can interfere with accomplishing strategic goals. Competing on a national stage for new clients with the plethora of other firms with specialized practice groups and industry practices has become far more difficult. Management of a firm requires a significant time commitment, which can take away from time billed to clients. And with business development efforts being a firm-wide responsibility, compliance with the increased scrutiny of ethical rules for attorney advertising across jurisdictions has become far more complicated.
Forecast for the Principal
The future holds many challenges and opportunities for principals. On the one hand, the shift to more technology-based practices and the rise of alternative business models have created greater competition for client work and added pressure to law firm principals, many of whom have spent their lives in a system where a high billable expectation, a lack of connection to business economic realities and entrenched cultural paradigms were the norms. On the other hand, these same developments have created new space in which principals can operate in ways that actually support their autonomy.
In her book, Tomorrow’s Lawyers: An Introduction to Your Future, Richard Susskind postulates that "the battle to become a ‘partner’ will be more and more about who can deliver legal services in ways that are faster, better, cheaper and different from the past [and] all in the context of a drive towards legal process and legal knowledge automation." This is essentially what we are discussing here – establishing a client- and market-driven goal requiring an understanding of the market, its relationships and its needs and priorities, enabling a more value-based offering.
When law firms were businesses in the "lawyer-paid-to-hold-down-a-chair" model, it was reasonable (though not always logical) to focus on individual lawyers’ title. Elite or non-elite was more a function of brand prestige than anything else. However, the emergence of value-driven work means that now a majority of legal work is project-based. In order to make substantial revenue as a lawyer and stay a viable component of your firm’s business, you need to maintain a steady stream of work.
It is becoming increasingly clear that the so-called "Things," tend to care less about who’s in charge, but they still need you to get the job done. As the lines between "lawyer" and "non-lawyer" become increasingly blurred, it becomes less relevant who’s doing the labor. Not that you’ll stop being a lawyer, but simply that there are ways – like we already do in many ways – that you can make money and deliver value for your firm without necessarily being a high-billing lawyer. You’ll always be a lawyer, but the future may show that it is not the only – or even the most valuable – role you can play in a law firm. There are many alternatives that may fit you better than the principal model.
The reality is that either you embrace your option as a Principal/Partner, take the risk of change , and put in the motion the strategies that will keep you running during this time of transition, or you take your talents and experience elsewhere.
We have found that over the years, the majority of partners do not operate with any clear idea of what the principal model really means, and how they themselves have fit into the model. This is usually because the firm has structured its’ compensation system such that compensation is awarded based only on the amount of revenue a partner generates. When the transition begins to occur, the larger firms are more interested in acquiring partners in market segments they are missing or need to buy in to fill out lines of business in which they are weak. Many of the smaller firms, on the other hand, have embracing their Principal of "core", or "High Utilization", with little thought to succession and transition of professionals leading the firm. Much of the time, their entire infrastructures have been built in ways that were inefficient and highly dependent on high cost/high billing professionals, and placed little or no value on the business development or administrative contributions of non-rainmakers.
To the extent that high billing rates are the centerpiece of the firm, the value of the Principal becomes dependent on their ability to generate revenues to support their levels of compensation. This creates a cycle of risk that ultimately makes the Principal’s economic depend on "grim-over" economics that place them on the defensive whenever the market turns down. Ultimately, the Principal must either move up, or their value shrinks considerably. In the present economic reality, where growth and revenue generation is a function of market effectiveness, the Principal is a more valuable asset to the Firm, and, as the firm looks to seek growth through performance measures based on leveraging the capabilities of all of their professionals, they will find the Principal more valuable than ever before. For both, the real opportunity lies in re-imagining the model, changing the incentives, and managing the risk to the firm and the Principal to both enable effective succession and transition, create a more resilient Firm, and provide the Principal more power for their practice.
So there are two ways forward for Principals as far as we can see. Ensure the evolution of the firm is consistent with what you want, and use the structures and processes that help you assess your worth to the firm. Or hope for the best, do nothing and let the future unfold, however it shall unfold.