Saturday, June 20, 2009

How about the small-law firm model?

In reponse to my previous blog post Robert said...

'I've always wondered if the classic small-law firm model would work with IT shops. You know - newcomers start as "associates" and get paid a salary (possibly with bonuses), but the ultimate goal is to get recognised as a partner, in which case you shift to profit sharing.

The associate-level allows the firm to recruit new talent at a fixed risk; the partner-level allows for the co-operative mode. As long as the ratio of partner-associate is good (the case in small law firms, not large) the competition between associates isn't likely to be unhealthy - particular if the promotion to partner is merit based rather than "we've got 1 slot open this year".'

It turns out that we have some of these elements at Cogent, but we didn't have that model in mind when we created them.

We do have two groups for allocating profit share. One is like "partners" - it's myself, Marty and Simon. 50% of the profit pool goes to the partners and the remaining 50% is split evenly over all the employees. We needed that arrangement to make it sensible for the partners to stop doing personal consulting and switch to a salary-plus-profit-share arrangement, and even then we're only just now at the point where the partners would nominally break even. It's also rather abstract because as long as we're pushing consulting profits into product development there aren't any cash profits to share anyway!

So far this is very similar to the small-law firm model. The difference comes when we consider what will happen over time. It seems to me that the small-law firm model is predicated on growth, or at least turn-over - on the expectation that when you get promoted to partner there will be a supply of associates to generate profits. I'm biased against models that encourage growth (though our existing model has that bias at the moment). Over time at Cogent I'm actually expecting to reduce the partners' percentage of the profit share pool - keeping it enough to keep them interested in staying at Cogent, but gradually making more and more of the profits available to the general employees.

There are flaws in both approaches, so it will be interesting to see how the profit share approach evolves at Cogent over time.

1 comment:

  1. The best part of the law firm model is the serf culture engendered by the expendable associates, and never telling the associates they'll never make partner. That plus the six or so years before the associates get clued in that they've been used.

    How many software firms really last five years?