Q&A: John Nerurker: “We don’t want to create an environment where partners are competing against each other in an ‘eat what you kill’ environment”

[Australasian Law Management Journal,Finance & Accounting,General Management,Marketing & Business Development,Strategy & Leadership,Uncategorized] November 6, 2019

In the first installment of a two-part Q&A, Mills Oakley CEO John Nerurker explains how a distinctive, collaborative approach has underpinned his firm’s transformation into one of Australia’s largest law firms. He also explains why transparency and fairness are the rationale behind the firm’s mantra of ‘rewards follow performance.’

Mills Oakley has been in business for more than 150 years and still prides itself, first and foremost, on great client service. Even in an era of digital disruption, are those qualities the key to success?

The fundamentals of great client service have not changed. What has changed is the way that service is measured. Institutional clients, in particular, have increasingly sophisticated tools to measure the outcomes delivered by firms; there is greater oversight of every aspect of the relationship. Clients are able to easily identify the firms that are most responsive, most effective and deliver the best value for money. Being able to access this feedback is a boon for those firms that are serious about maintaining a high standard of client service.

You joined Mills Oakley in 2004 when it was a one-city firm. How has the firm evolved since then?

We have certainly come a long way. As you point out, we were a Melbourne-only firm back then and just a fraction of our current size. We had 16 partners when I joined and the average partner had a practice of around $750,000. Now, we have more than 100 partners and many of our partners control over $2 million in fees. So, we have transformed from a $12 million law firm into a $200 million firm today. What we are really proud of, though, is that we’ve achieved this without merging. I would also emphasise that, for Mills Oakley, it has never been about a ‘magic number’ in terms of revenue or partner numbers. Our growth aspirations have instead been defined by our strategic goal to offer the depth and breadth of service that our clients require on a national basis.

What kind of changes were needed to make that transformation?

It was immediately obvious that we needed to do things differently, starting with the way we managed rewards and remuneration. The first step was to devise a profit-sharing model that would incentivise the kind of behaviours that drive long-term success. These days, we hear a lot about the importance of rainmakers. Rainmakers are an important part of a business, but a lot of firms make the mistake of assuming that is all you need to succeed. Actually, you need much more than that. You also need other skills: technical excellence, excellence in service delivery, the ability to manage a team and so on. Most importantly, you need everyone to collaborate and you need a model that incentivises teamwork. That model needs to be equitable and it needs to be transparent, otherwise people won’t have confidence that they are being fairly recognised for their efforts.

What are your thoughts on the lockstep remuneration model?

We are unequivocally opposed to it. In fact, that is a key differentiator between ourselves and many competitors. Most traditional law firms operate on a lockstep structure that rewards tenure. They have less incentive to invest in their business because this can erode short-term profitability. They are reluctant to promote new talent or make investments for the longer term because this, in turn, can reduce short-term profit.

By contrast, Mills Oakley has no lockstep. We are here for the long term. Each and every one of our partners is genuinely motivated to leave the firm in a better place than when they joined.

We are passionate about leaving a legacy for the next generation: helping them advance their careers and supporting them with appropriate investment. We are particularly passionate about new technology and investing in start-ups which will help transform the legal sector in the future.

There must have been lots of internal debate before reaching agreement on a different model.

There were a lot of conversations! But, luckily, common sense prevailed and our model has been a key plank in our success because it has allowed us to attract the right calibre of partners. You can’t have a successful firm through a lockstep model that simply rewards incumbency, because this can only mean that the up-and-coming high performers earn less than they contribute. That model in my view is flawed from the outset because a firm’s success is closely linked to its ability to promote and reward rising stars.

Our model also suits older or long-serving partners who still have a lot to offer in terms of relationships, wisdom, commercial nous and mentoring. Unlike at certain other law firms where such partners might sit precariously at the top of the lockstep, at Mills Oakley these older partners absolutely do not have a target on their back! Within our model they can remain with the firm for as long as suits them, on their terms, while being fairly remunerated and valued for their contribution.

Can you explain in more detail this notion of rewarding performance and how your firm may differ from some others? How does the firm’s equity model work?

I would say we have two key points of differentiation. First, our model is a hybrid model which rewards both individual performance and team performance. We start with an expectation that partners will introduce a minimum amount of fees. This is important because clearly revenue is the lifeblood of any business. And, in our view, it is inherent that every partner in the firm should at least have some ability to attract new work and clients to the firm.

But equally, we don’t want to create an environment where partners are competing against each other in an ‘eat what you kill’ environment. That’s why remuneration is based on the firm’s overall performance and not individual performance. Every equity partner has an exposure to every practice area in the firm. This incentivises all partners to work collaboratively, share clients, IP and market intelligence and truly work as a single partnership.

The other point of differentiation is that our model is fluid: we recalibrate equity points annually, based on the previous year’s performance. This ensures that no partner ever draws more than their contribution and that our model is sustainable.

How else do you encourage collaboration?

We quarantine 10 per cent of our profits each year in a bonus pool, which is paid to those partners who have supported the ‘firm first’ mindset by collaborating with their colleagues and shared work and clients.

Our strong cross-referrers have benefitted handsomely from this profit pool – some have even doubled their original draw with bonus payments. There have also been several examples of partners with fewer equity points taking out a disproportionately large share of the bonus pool because they have successfully shared clients with their colleagues. The system really does reward the right behaviours in a completely transparent way.

And what about junior lawyers aspiring to join the partnership, or a partner seeking to be promoted to the equity ranks?

The best part of our model is its simplicity. If you are a great lawyer, a good cultural fit, and you’re able to sustainably introduce $800,000 in fees to the firm, you’ve reached the partner threshold. If you’re able to introduce $1.6 million, you’ve reached equity. It really is that straightforward. And, we apply exactly the same threshold to our internal candidates as we do for lateral hires.

In effect, it sounds as though this sense of certainty has been the key for employees seeking to progress within the firm.

Everyone wants certainty, but I meet so many partners and aspirant partners who say they’ve been let down by their previous firm. They were promised that if they achieved certain targets, they would be promoted. But when the time comes, guess what? The goalposts have moved; for example, if you’re in an international firm, head office may have changed the promotions threshold.

The truth is that almost all lawyers aspire to be partners and want a transparent process which allows them to control their destiny. No act breaks down the trust between a law firm and a lawyer faster than moving the goal posts. You just cannot do that. It’s a fundamental mistake which almost inevitably leads to talented people leaving the firm.

Have any aspects of the model failed?

We’ve had a couple of tweaks to the model over the journey, which you’d expect, but no wholesale changes. So we are pretty pleased that what we put together such a long time ago has now played a role in our evolution in the legal profession, helping us become an Australian Top 10 firm by size.

The second part of this Q&A will appear in the November MailChimp edition of the Australasian Law Management Journal and be posted on the Law Management Hub.