Live or let die: What law firms will look like in 20 years

I am old enough to remember when a well-known law firm granted only partners the privilege of using the grand staircase in the firm’s reception. The many other members of the firm who were not partners entered the building through a side door.

Most of us who are old enough to have been around in those days, including that firm, have changed. But we all still have to face up to a lot more change in the profession, including to the traditional partnership model. Is the LLP the best model and do we still need partners?

We lawyers are by nature conservative. Our legal training emphasises caution and aversion to risk. We have not had to face up to change because, until recently, lawyers have enjoyed a golden period. Those of us who qualified in the 70s and 80s were part of a generation that saw an enormous boom in legal services.

The number of solicitors increased dramatically and most firms grew. Significantly higher rewards were generated for many of us in the profession as a result of this demand for our services. Practitioners had to work harder and met more intellectual challenges in order to earn these rewards from their clients, but we did not face any pressure to change the way in which we delivered our services.

This encouraged in many the mindset that the services were being delivered by us in the best possible way and that no change was necessary. We have clung to the traditional partnership structure that is very hierarchical. In this structure, compensation has been based on the continual extraction of maximum income since, in the past, there has been very little opportunity for us to build capital value.

These factors have encouraged a suspicion of change and a reluctance ?to use modern management techniques ?or to rely upon managers who are not lawyers. This mindset can stifle enterprise in the profession. It can also stifle career development and succession planning. People are the lifeblood of a practice and a business cannot grow unless new faces are brought in and encouraged.

The career structure in the legal profession is very simple. The greasy pole is very short. As a lawyer, you train, you qualify, you work as an assistant. The big step in your career, if that is what you wish for, is to become a partner.

While not all partners are equal, most firms do not distinguish between classes of partners. It is very much a ‘them and us’ structure. There are the partners and then there are the rest.

The challenge is here

For many years, there has been talk about radical change in the legal profession. For UK firms, that change has finally arrived with the implementation of the Legal Services Act and the pressure on our businesses caused by the past four years of financial turmoil. But this is only the beginning. In 20 years, legal services will be delivered in ways that are unimaginable to many of today’s partners.

There are a number of drivers for change. There are too many lawyers. ?Many clients have realised this and are exploiting their position ruthlessly. Prices in many areas of the profession are being pushed down.

There are several new entrants to the market under alternative business structures. Several commercial organisations are also putting their toe into the market, including Eddie Stobart and British Telecom. Quality Solicitors has provided a high profile and sophisticated marketing service to many firms but, for some of these practices, this may not provide sufficient shelter from the ?coming storm.

Consolidation of the marketplace is finally taking place. This consolidation will inevitably put enormous pressure on smaller and medium-sized firms that try to compete with the consolidators.

Many firms will have found themselves squeezed between the international players and the commercial volume providers. This mid-market will have to do something special to survive those pressures.

Change or die

Our profession is generally conservative but is now facing a number of significant threats and challenges. For many members of the profession, their livelihoods are at risk. To survive, they must embrace significant change.

This is worrying, particularly for the ambitious young lawyers who are expected to await their turn for partnership. They have to hope that their partners have ?the will, the skill and the resolve to meet these challenges.

Worse still, some partners are simply hanging on for the last few years of their practicing life, avoiding change, while the younger members of the profession worry about how their firms can deliver successful careers over the next 20 years.

So what do we do? A key issue is that these pressures on the profession are game-changing and raise questions about whether the partnership model is appropriate for the future.

Is the traditional partnership or ?LLP the best structure to use? Can this hierarchical system of partners and others – them and us – cope with the perfect storm of recession and reform? Do we need partners?

These are questions that are not being discussed widely. The partnership structure needs to be examined in the context of career development and succession planning, bringing the ?next generations forward to reinvigorate the business.

There are many problems that the current model presents. While the high earners can enjoy advantageous tax arrangements in an LLP or limited partnership, the traditional nature of ?the structures can restrict change and hinder enterprise.

In some firms, the partners are circling the wagons and keeping the equity tight. Tough times mean that some partners are reluctant to pass work and clients down to junior colleagues. Since much of the financial reporting in law firms is based on billing, this can stifle the career progression of talented young lawyers.

In many firms, once a decision has been made to offer partnership, it is often difficult to go back on that decision if the appointment does not work out. Partnerships tend to operate on a collegiate basis. Unfortunately, in tougher times, which impose greater expectations on the leaders of a business – the partners – many decisions that were made in the good times do not look so clever now.

Weaker partners are being found out. But that does not mean that they are being asked to step down as partners. Many firms are reluctant to make those decisions, often because of a mixture of generosity, sentimentality and a lack of management will.

All that this does is create bed blockers. The failure to grapple with these problems discourages younger talented members of the team. The business then suffers in the short to mid term as weak partners fail, young talent leaves and growth is stifled.

Clearly these problems, and others, are not unique to the partnership model and similar issues can and do arise in limited companies. But different structures can produce different results.

There are many examples of large and successful practises in the law, accountancy and other professions that remain LLPs but have members’ deeds that include terms that mimic corporate structures. There are compelling reasons for all law firms to transfer their business to limited companies and, in 20 years, trading through a limited company will be the rule rather than the exception.

Presently, medium and small law firms are typically owned by a minority of the workforce. That minority will have invested in the business. Some, but not always all, will generate large quantities of fee income for the business.

The management of the business will normally be selected from within this group. The structure is very flat, with all partners having a voice in their affairs. There has been nothing wrong with this model. It has worked for generations.

But now that our legal monopoly has been stripped away, will this model be sufficiently flexible? For those medium and small-sized firms, the opposition are run on corporate lines. They are well funded, tightly managed organisations with strong brands. They range from volume providers such as Co-operative Legal Services to multinational top 20 firms.

Do enough partners across the ?country have the energy and skills to take on these corporate machines? This is particularly important for career development and succession planning – the future of law firms.

If partners have a strong vision for the future of their firms, they will need to ask themselves difficult questions. This requires the investment of time, money and the development of expertise when their primary role should be retaining old business and finding new business.

Will partners be prepared to offer reward schemes across the firm that motivate all staff by offering them a stake in the business? Will management be allowed to link reward to performance at all levels of the business, at the risk of diluting the profits of struggling partners?

Will partners allow professional mangers to introduce new ideas and disciplines to the business, even if these may inconvenience them? Will partners give up their badge of status?

Different models

These questions invite more debate, but in today’s environment, many ambitious young lawyers are asking themselves ?(or if they are not, then they should be asking themselves) whether they want to become partners.

Partnership has always been the badge of success. There is no doubt that clients are sold the idea that the partners are the leaders of the business who add extra value to the advice that they give.

Partners who receive a significant equity stake enjoy the privilege but also ?the responsibility of ownership. This is seen by some as a system that creates a cosy club atmosphere.

There are alternative ways of looking at the career structure and a number of businesses have adopted these ideas. Some firms have parked assistants or even ex-partners in roles such as of counsel, director or consultant. Some of these roles are for people going up, others are for people going down.

If there is no clear career structure, succession plan and reward system, then associates will see the writing on the wall. They will leave for a firm that seems to have a better career structure, go in house or simply abandon their ambitions.

The current rigid partnership structure can limit the opportunities for the talented and the ambitious. Some lawyers will look at the alternative of a corporate structure. In many cases, in-house lawyers enjoy a more flexible lifestyle and corporate benefits. Many of the risks of private practice do not affect them, but that does not mean that the rewards of profitable private practice are not available to them.

Preparing for the future

To be successful, small and mid-market firms will need to provide attractive career structures and compensation arrangements for all talented people. They will need to make significant investments in IT and business development. Many will have to merge and reshape themselves.

We need to think about whether the partnership model is suitable for the future of the profession. There needs to be a debate about whether more flexible structures should be introduced that will blur and even dissolve the line between them (the partners) and us (the rest).

The law firm of 2032 is going to be a limited liability company, or part of a group structure. The company model gives access to capital through public offerings. Investors understand the structure and are more comfortable with it. Shareholders should have greater access to a capital return on their shares and can be incentivised using option arrangements.

The company model encourages a business-led management structure run by a board made up of professionals. The structure blurs the line between partners and non-partners and between those who run the business and those who deliver ?the services.

These changes will not happen overnight. In fact, they will take many years. The older generation of partners will not accept radical change to the structures that they have grown up with. But there will be pressure from younger lawyers to look at these issues so that they have the opportunity, denied to most of my generation, of seeing a capital return on their skills and hard work.

Change needs to be led by the younger members of the profession, not just the junior partners, but also by those who aspire to be partners. They should see their future being delivered through: ?

• different ways of providing legal services;

• diversification of the business;

• greater investment;

• more structured careers;

• lower income but higher capital returns; and

• corporate management.

To achieve this radical change, forward-looking firms will start managing towards it now.

The end of partners

Can the concept of a partnership survive? Is it appropriate for the environment that we face? Is it flexible enough? Can it link reward to performance at all levels of the business? Can it make decisions in a fast-changing world? What rights and obligations does an equity investment automatically bring with it? The leaders of tomorrow need to be asking themselves these questions today.

The legal profession has to go through a lot more change. The firms that survive and succeed will be the ones that invite everybody to use the grand staircase.

Guy Vincent is a partner at UK law firm Bircham Dyson Bell ?(guyvincent@bdb-law.co.uk)