Another article from the pen of Jordan Furlong at Law 21
In this article he investigates the pros and cons of floating your firm and how organisations like Lyceum Capital a London-based buyout firm, is interested in investing in the legal industry, with a ?focus on new business delivery models, not traditional law firms?
Which begs the question – will standard practice law firms start to spin off new companies with partners as directors to investigate new ways of doing legal business and delivering legal services?
All we’d suggest is that people / firms start thinking about it quite quickly, because it looks to us, that the Indian LPO’s have already seen an opening in the market and we believe it won’t be long before they take their offshore services to London, New York, Frankfurt, Sydney etc and apply the lessons they’ve learnt in Bangalore and Pune to the world’s most profitable legal markets.
Here’s the article in full – if you want to access the links please go to this url
http://www.law21.ca/2009/08/27/the-real-impact-of-private-equity/
The real impact of private equity
Posted: 27 Aug 2009
It?s coming to the attention of many North American lawyers that our overseas colleagues are or soon will be selling equity interests in their law firms. Earlier this summer, American Lawyer profiled the progress of pioneering publicly traded law firm Slater & Gordon in Australia. More recently, Bloomberg News announced that at least three UK law firms are willing to accept private equity investment starting in 2011, when radical measures introduced by 2007?s Legal Services Act take effect. Neither of these developments will be news to regular readers here, but many other lawyers newly faced with these prospects are hitting the books to figure out how to respond.
Often, the first book they pull out is their code of professional conduct. Objections to outside investment in law firms tend to cluster around the twin assertions that shareholders would demand maximized return over professional and ethical considerations, and that outside investment would create too many opportunities for disqualifying conflicts of interest. On the second point, when you think about it, conflicts arising from external investors aren?t really qualitatively different from conflicts by current investors ? i.e., the other partners in the firm. And in any event, not every conflict of interest is a disqualifying conflict that undermines the lawyer-client relationship. More complicated to manage? Quite possibly. Irreconcilably difficult? I?m much less sure of that.
On the first point, it seems to me that we?re confusing two different types of obligations. There?s a difference between a binding ethical obligation owed to a client ? to do your best work to further the client?s interests, in complete confidence and loyalty ? and the general corporate obligation to return a profit to a shareholder. The first should and will trump the second, always. And really, when you get down to it, these obligations dovetail more than they conflict. A good lawyer who acts ethically in his clients? best interests is by definition maximizing the value of the firm and the return to the shareholder. It won?t serve an investor?s interests to encourage behaviour that would wreck the law firm?s reputation for trustworthiness and ethical conduct? ? it would be a surefire way to ruin the value of the investment.
Now, the ethical waters around non-lawyer equity interests in law firms do run deep, and I?m not the captain to ply them. At the moment, I?m more interested in the defensiveness that talk of outside investment generates in many lawyers. Although I accept that many lawyers? objections on ethical grounds are sincere, I suspect that many other lawyers object because of the threat non-lawyer influence presents to two foundational elements of lawyers? lives: change and control.
When you look closely at the discussions around non-lawyer investment in law firms, it becomes clear that such investors actually have very little interest in the work lawyers do for their clients ? they?re really not that into what we do. Their interests are entirely profit-based, and they view law firms through the single lens of revenue generation. From the Bloomberg article:
?Law firms are pretty attractive investments as they have stable cash flows, long track records of business operations and increasingly are much better run,? said John Llewellyn-Lloyd, executive director of Noble Group Ltd., a London-based investment bank. ?You would expect them, like any professional services business, to provide a pretty good return.? Alan Hodgart, a law firm consultant at H-4 Partners in London, said investors are expecting ?fairly high returns, in excess of 15 percent.?
So law firms are attractive because they?re a steady, reliable investment. Nothing new there ? partners have been comfortably aware of that happy fact for years now. But there?s more to it than that. Your average law firm isn?t just a reliable investment ? in many cases, it?s a vastly underperforming one. Investors look at the short-term, narrow-focus, seat-of-the-pants way most firms are operated, and they salivate at the thought of what even a basic injection of systemic discipline and workflow reform would do to already-fat profit margins. Again from Bloomberg:
Lyceum Capital, the London-based buyout firm, is interested in investing in the legal industry, with a ?focus on new business delivery models, not traditional law firms,? Hand said in an e-mail. ? Lyceum Capital wants to invest in ways to reduce legal costs and make some types of legal work cheaper and more efficient.
Further along these lines, consider what consultant Joel Henning predicts about the impact of outside investment on law firm management:
The result might be very different service delivery, billing and compensation systems, minimizing individual performance and maximizing team, practice and firm performance. Investors would bring to bear a more contemporary suite of tools and techniques for managing the delivery of legal services. They would be astounded by the enormous duplication of efforts at law firms.
If we allowed businesspeople to invest in and join the leadership of our law firms, I suspect that more and better smart systems and processes would be developed and refined on an accelerated basis, systems that would accomplish many legal tasks beyond drafting and researching, reaching even to some problem solving. If this were to happen, the billable hour and the lawyer compensation systems grounded upon it would largely become anachronisms. Savvy outside investors would find that too many smart lawyers and too few smart systems currently inhabit our law firms.
And here?s Altman Weil?s Tim Corcoran on what would happen in a law firm where business decisions aren?t left to lawyers alone:
Fundamentally altering the firm?s recruiting strategy?? Establishing true associate training and apprenticeship?? Re-designing compensation systems to drive collaborative behavior?? Which Biglaw partner wants to raise his hand and dive deeply into these issues?? ?
If a PE firm purchases a significant stake in a large law firm, rest assured that the investor representative they install on the management committee, whether this is a COO, CFO or some derivation, will be able to do the math justifying why process improvement will lead to substantially better returns ? for the investors, for the partners and, oh yes, for the clients.? This isn?t rocket science, and cost containment programs based on ROI, investments based on NPV and even formal business process improvement programs like Lean Six Sigma are really not much more than common sense ideas backed up by math and a governance structure which places the good of the firm above the desires of individuals.
Of course it will be hard.? But the PE investors who truly want to unlock the value embedded in Biglaw will understand the potential return on delving into the tough issues.
That, I think, is the key selling point for potential investors in modern law firms. They see the enormous value that?s hidden away under layers of wasteful processes, poor client communication, and amateurish management. They?d love to get their hands on and polish up these rough diamonds. Lawyers say they object on grounds of professionalism; I say there?s nothing unprofessional about running a business efficiently and effectively. In fact, experienced business management that does away with internal inefficiency will reduce costs, thereby making it possible to lower prices, which absolutely serves clients? interests. Outside equity investment as a tool to improve access to justice? I think it?s more than just arguable.
Lawyers could continue to object that equity investors wouldn?t pass these cost savings on to clients ? they?d simply pocket the difference as extra profit. I find that enormously funny, because how is that different from what many law firms already do now? If there?s any difference, it?s that outside investors ? motivated to take a longer-term view than partners, whose vision usually extends only as far as this year?s draw ? have an incentive to build the business for future success, which would encourage any measures that would make the business more appealing to clients and boost market share.
At the heart of it, I think this is what motivates a lot of opposition to outside equity investment in law firms ? the knowledge that the new people would do things a whole lot differently. They?d change the way lawyers do their work, which for many practitioners is the most sacred cow of all. Non-lawyer shareholders wouldn?t tolerate some of the stuff law firms get away with now, and the lawyers know it. So it?s about change, and it?s about loss of control ? two things lawyers really don?t like.
Equity investment in or outside ownership of law firms will be neither a panacea nor an unalloyed good ? mistakes will be made, lines will be crossed, abuses might well take place. No innovation arrives perfectly safe and sound. But what such investment does offer is something the legal services marketplace has needed for too long: law firm management singularly driven to improve efficiency, effectiveness, and above all, client satisfaction, because it makes business sense to do so.