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Complacent law firms get a helping Hand
Posted 9/06/2008 by John Malpas
‘Law firms to sell shares’. It is the kind of headline we are currently seeing a lot of as the ‘legal Big Bang’ gets ever closer.
In fact, it’s a headline I remember reading well over a decade go. What started out as the headline-grabbing blue-sky thinking of a government minister eventually became a serious report before finally finding its way onto the statute book.
One person who has been taking the reforms very seriously is Jeremy Hand, the managing partner of Lyceum Capital, which is actively targeting the legal sector for investment opportunities.
He had a star turn at the Legal Week Strategic Technology Forum, which took place last week in Portugal, when he discussed his plans for the legal sector with David Morley, Allen & Overy’s recently-installed senior partner, in a pre-recorded interview that will soon be appearing on legalweek.com.
Given that a major theme of the conference was the battle IT directors have trying to get partners to look beyond next year’s projected partnership drawings when signing off investments, Hand’s contention that private equity could help law firms take a longer-term view was lapped up by the delegates.
Of course, until very recently, law firm leaders were far too busy focusing on the immediate challenges of running their firms to worry about some bit of legislation that may, or may not, throw up new opportunities and threats. Just a couple of years ago, I would be met with a blank expression when conversation with a managing partner moved from utilisation rates to what were then known as the ‘Clementi reforms’.
But it seems we have reached a tipping point. The far-reaching provisions of the Legal Services Act are now only three years away from coming into force and have finally appeared on the radars of the average business law firm management team.
Having said that, I doubt there is more than a handful of senior business lawyers who have as good a handle on the reforms as Hand does. The word 'complacency' springs to mind…
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Comments
I have talked to a few firms about the impact of Clementi and "complacent" is the right word.
Many law firms start with an unnaturally insular view of reality, and respond "well why would we want to take our firm public?"
And the answer of course is if you are in a successful firm with a reasonably stable partnership, you wouldn''t.
So who will avail themselves of this new option? Three scenarios:
A. A very old firm with a good, but somewhat run-down name (call it “Smith & White”) will take an infusion of capital, link up an offshore back-end, hire at a premium price 2-3 high book-of-business but difficult personality lateral partners, and then systematically look for ways to up-end the model, reducing costs, measuring performance, guaranteeing satisfaction for clients. This newly empowered firm would not displace the Magic Circle, but they’ll go after the next tier and gain a lot of business, because they will have re-engineered their service delivery in a way that is meaningful to clients.
B. A good, solid mid-sized firm will ask themselves the simple question: “We now have 20 partners and fairly little capital. If we pay a partner $1MM/year, that same $1MM would allow us to cash-flow $10MM or more investment. What if we think about adding as our next partner not another lawyer, but what we could do with $10MM?” Then they would do some, but not all, of what Smith & White will do, and they’ll be able to work with many of the same suppliers as Smith & White, because Smith & White will have trained those suppliers.
C. A stable firm with a contentious partnership will find it has to buy out key partners, but it wants to keep the firm together. They will take a capital infusion to do so, and then look for ways to emulate Smith & White.
Whether any of these firms will ever truly “Go Public” I would question; but certainly they can access the capital markets in ways that create liquidity and competitive advantage. The point is (and some lawyers seem almost congenitally incapable of understanding this) that disruptive innovation never comes from the super-elite, and DOESN’T HAVE TO. The disruption will come from an outsider, but will quickly impact the elite – think Honda and General Motors over the last 40 years, think JetBlue and United Airlines.
If these scenarios sound fanciful, remember they are exactly was has happened in a dozen other industries that have been impacted by a combination of global competition and private equity.
So perhaps the nature of law is such that is immune to the competitive forces that have shaped every other industry, but anyone who bases their strategy on that assumption can hardly call themselves 'prudent.' When GE was first faced with the challenge of the Internet, CEO Jack Welch instructed him managers to study the strategies that outsiders would use to attack their businesses and adopt those strategies before their competitors did. The law firms that truly care about their institutions for the long run won't assume that nothing can change, they start to deploy Smith & White's playbook before it is necessary, so that they can lead the change.
Posted by Paul Lippe | 18/06/2008