Well… to be perfectly honest, if I knew the full answer to that now, I would probably be sitting in a lavishly appointed hotel (I would not waste money on my own lavish offices, of course) revealing my thoughts on the matter to eager and greedy lawyers for a ‘fee’ rather than sitting here on a Saturday afternoon, a glass of Rioja to my right, and nipping off every so often to do 100 press ups or 30 curls with weights while I smoke on my balcony.
The difficulty with the present model of partner owned law firm is that Professor Stephen Mayson has a point (infra). Neil Rose argues in The Law Society Gazette that ‘Law firm partners are paid too much and their business will struggle to attract external investment because they are not worth as much as partners believe. Stephen Mayson, director of The College of Law’s think tank says that partners have to re-think how much they pay themselves.
Cutting to the chase – in the partnership model the profit goes to the partners, so there isn’t anything left for external investors. To attract external investors there will have to be an attractive return on capital invested. This means that the model will have to change. Partners will have to convert drawings to a much smaller salary and share, as shareholders, along with external investors. Have they the appetite for this? Of course, it is quite possible for law firms to come up with wonderful fudges by packaging off parts of their ‘business’ to external investors… but that, I shall leave for another time…and, who knows, possibly for that meeting at a lavishly appointed hotel with greedy lawyers?
The law firms will also have to build up a real brand, recognised not only in this country but worldwide. Law firms are not very good at marketing themselves to the wider market, it would seem. Rachel Rothwell, writing in the The Law Society Gazette states that ‘More than 60 of the public cannot name a single law firm’.
While the top City firms are obviously well known to their specialist clientele – and they are not all interested in the wider market – this lack of brand recognition of law firm providers of legal services does not augur well for the future.
I would hazard a guess that most people would be able to name an Insurance company – Norwich Union, Churchill… come to mind immediately, for example. Most people would be able to name a leading supermarket…. of course… Tesco et al comes to mind. There are many other large corporations out there with well known and trusted brands who are quite capable of providing high quality legal services.
The question is – will they invest in law firms with their antiquated business model structures and complex and possibly inefficient management and delivery infra-structures, or will they start from scratch, paying good money to attract expertise? I suspect it may be the latter model – for in business, the brand and scaleability and liquidity of investment on a stock market is the real key.
When a solicitor or barrister, for that matter, decides to retire. That’s it. No further earnings or drawings and NO EQUITY… for there is nothing to sell.
I have a feeling if a law firm went into the Dragons in Dragon’s Den seeking investment… there would be five people saying “I’m OUT”.
It is wonderfully ironic that while law firms can’t build a brand within an investable model (yet)…. providers of legal education can and did. BPP Law School, as part of BPP Holdings PLC, was sold to the yanks for a very large sum of money…..
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PS – this may interest you – a tweet from a fellow tweeter…
filemot There is one #IPlaw firm already quoted on the London Stock Exchange http://www.murgitroyd.com/i…
In the current model it is the Banks that invest in most law firms by lending the Equity Partners the capital required. They make these loans at attractive commercial rates and often have other overdraft lending with the firms. Top law firms certainly used to be regarded by Banks as pretty safe investments. The Recession may have changed that but I bet it was the Banks pressure that made the big firms cut their fee earners so early and aggressively during this recession.
The question is would a law firm get a better offer from private equity than from a Bank. They might but they would have to have confidence in the management team. Are there really top class managers in our law firms? Managing people businesses especially when some of those people think they own the business is particularly difficult.
Lawyers training today should probably forget about aspiring to partnership and concentrate on their legal skills
Filemot…. Yes… you make the essential point and I have no doubt that most law firms are fairly safe bets for Bank lending – but investors with a slightly different and short term agenda? I’m not so sure.
VCs, typically, want in and out within 3-5. Equity partner loans, I understand, are rather longer.
I suspect that most lawyers are just not interested in the business of the law firm as such – so long as times are good. they are, primarily, lawyers who want to get on with their lawyering? You have been at the coal face in a large firm – is that your feeling, or are we off beam?
The partnership model for management is known to be ‘problematic’. My good friend, Nick Jarrett-Kerr, former managing partner at Bevan Ashford and now freelance can be very amusing on the herding cats issue.
Good post!
The brand point is interesting, most biglaw firms don’t consider the general public their market so its not surprising people don’t recognise them. The insurers you mention are consumer insurers, I wonder how many would have recognised AIG (before they sponsored Manchester United or went belly up in spectacular fashion last year!!)?
Given your points on pay, surely you’re spot on on the point “I suspect it may be the latter model [start from scratch, paying good money to attract expertise], I really can’t see a big law firm breaking their model enough to attract the investment, unless of course some magic circle firms who shall remain nameless continue down their current revenue slide and this becomes the only option open
Jason… Eversheds… DLA Piper are BIG… very big… and they are full service firms… I’m sure they are interested in the wider market… be surprised if they weren’t…and they both seem to be diversifying and growing ?
herding cats would be simple – the only thing to do at a partners conference is to arrange a decent piss up and manage the firm some place else.
S J Berwin used to be the only firm with a sensible partnership agreement (it didn’t exist).
Jason has a point that the big law firms do not really need that much investment. IT and fitting out new offices are the main hits but its nothing to what a real business needs. A patent attorney probably uses more working capital than corproate finance driven law firms so that maybe explains the Murgitroyds listing.
The last of the possibly related posts is depressingly on point
Charon,
I am not sure that I understand why a law firm might need external capital. Surely returns are so high and capital needs are so low that the business will always be self-financing.
It might be that the partnership model has to change, but giving up a share of the business to external investors does not seem to make much sense, when the business has no need for extra finance.
Times might be tough and salaries might have to come down, but I don’t see why law firms would need to turn to external investors.
James C – would agree that it is unlikely that a profitable firm has need for capital. What partners may have a need for is a liquidity of asset upon retirement. the partnership capital loan is returned, the bank paid off (if applicable) – but that is it… the end.
Would it be more interesting to have a corporate structure with shares liquid on the stock market so that on retirement those shares can be sold – equity. Would this generate a better model for long term investment by lawyers in their own life work?
That is the real issue, I would have thought? (Or one of them?)