The Indian Lockstep

There seems little doubt that the buzzword among the Indian law firms this year is “lockstep” with many of the larger players putting in place some form of lockstep or the other. While there is not much visibility on the actual mechanics of most of these locksteps, given that there is, at present, no obligation in India to disclose, whatever form it ultimately takes, a lockstep is welcome in the backdrop of years of closed, succession based partnerships that have characterised the Indian legal landscape..Among the numerous profit sharing methodologies available for partnerships to choose from, the lockstep certainly is not the runaway favourite. US law firms, with the possible exception of some New York law firms, look down on this model as something out of tune with the present. Yet most of the largest London law firms adopt this model with some considerable success. So what exactly is a lockstep and what does it take to manage a successful one?.In essence, a lockstep is a mechanism for determining the distribution of profits among dynamic partnerships that goes beyond the simple attribution of equity in terms of a static percentage of the profits. In a lockstep, every equity partner joins the partnership at the bottom of the ladder and then adds a certain number of units (or points or shares – the nomenclature differs from firm to firm) every year till he reaches the top of the lockstep where his points are frozen. This ensures that the older partners who are at the top of the lockstep constantly dilute their economic interest as newer partners catch up with them with gradually increasing shares. Since everyone is assured of an increase in equity each year (up to a clearly defined ceiling), there is an equal incentive for everyone to work towards the overall growth of the firm. On the flip side, since the system does not disproportionately reward extraordinary performance in a given year, there is no incentive to corner work at the expense of other partners – as is often the case in the more aggressive eat-what-you-kill models..In a truly dynamic lockstep partnership, there will always be a number of new partners joining the lock step at its lowest rung with older partners retiring at the top of the lockstep. Additionally, since the profitability of the firm should also (at least theoretically) be growing, this allows for more points creation from within the system..There is no better system than the lockstep to foster a sense of oneness in the firm. For organisations trying to deal with the turf wars that inevitably arise when younger, more ambitious partners are trying to climb the ranks in an eat-what-you-kill model of partnership, this system puts an end to the annual ritual of profit attribution among partners. In the lockstep, everyone works for the good of the overall partnership and there is no incentive in keeping work to yourself when there is someone else in the firm better qualified to do it. In fact, in most cases the opposite is true. In the Indian context, where law firms have traditionally closely guarded their equity, often handing it down from generation to generation, the lockstep, when well implemented, allows the firm to grow beyond the confines of its existing equity partners..However, the lockstep is not without its problems. Since the system inherently guarantees every equity partner the right to grow his equity year on year, there is nothing (other than a sense of fair play and a strict honour code) that keeps an equity partner who has got onto the lockstep, from slacking off and performing under par while still continuing to rise on the lockstep ladder. Given the certainty that the system offers, and almost guarantees, it is very important to ensure that the threshold decision of making a partner be very carefully thought through. Not only must the prospective partner be capable of contributing significantly in the year of his elevation, but he must demonstrate the ability to continue to do so over the course of his lockstep..It is because of these concerns that the pure form of the lockstep has been diluted in many law firms. Some firms now have gateways within the lockstep. This essentially forces partners on the lockstep to requalify at stipulated levels on the lockstep ladder. Those who do manage to requalify can move up the ladder, while others who fail must remain at that level of the lockstep. This in essence allows for the creation of several mini-locksteps that could be one way to address the problems of partners performing poorly on the lockstep..All the Indian law firms who have implemented locksteps are still only at the beginning of their development. It will be interesting to see how many can implement it efficiently in the face of pressures from both founding partners as well as new equity partners. One thing is certain, none of the Indian locksteps will be able to survive unchanged. In the next 5 – 10 years we will witness the evolution of a model best suited to Indian conditions. In the meanwhile, young partners who have been offered a spot on the lockstep would be well advised to consider carefully the terms of the lockstep and evaluate the certainty and fairness with which it is implemented..Rahul Matthan is a Partner at Trilegal, Bangalore