Time to Take Your Law Firm to Market?

(thanks to greentech media)

Is it worth floating a law firm on the stock market? Peel Hunt, a broking house, thinks it can work. In a briefing note, it lays out the attractions and possible drawbacks.

Some of the key points are a continuing need for legal services with a growing regulatory state--ie. more red tape, more need for lawyers and other professionals. Good steady income streams (if partners bill properly, I assume). One of the most important reason given is

Flotation simplifies many of the problems associated with partner transition – equity is transparently valued and incoming partners need not provide capital. This can ease the recruitment of young partners, who rarely have built up their own personal wealth to be able to afford to buy in from their own cash resources. Equally, rewards above normal remuneration and after loan interest and loan capital repayments are, in some cases, only achieved by partners in their late forties. The best young partners, particularly those with a marketing mindset, are likely to want a visible reward and, in particular, the possibility of capital reward in their thirties.

 On the downside is a crucial factor. I've written about managing cultural risk in firms and Peel Hunt identify "the risk of culture change" as a clear risk of flotation

The biggest risk, but the most difficult to analyse objectively, is the extent to which
a public flotation may cause partners to change their behaviour in a way that damages their “trusted advisor” status. The intrinsic pressure of meeting market expectations may change the behaviour of partner/directors. If this causes them to market more aggressively the firm’s specialist services then this may be positive. If however it leads to a more “churn and burn” mentality then, even though this may take years to feed through, this would severely undermine goodwill.

  This is one area where I would say the vast majority of professional service firms, frankly, don't have a clue. If they mess it up then this is where they will do it. Without cultural mediators they are lost. The example Peel Hunt cites is Slater & Gordon in Australia which seems to be a financial and cultural success.

Lawyers would do well to read pages 13 to 15 of the briefing which detail how salaries and dividends would need to be handled. Some middle-range partners might not be entirely pleased with what's on offer: the senior partners will be laughing, however.

The biggest question is how do you value a law firm? I'm not going into detail here but most lawyers will have to learn something called financial reality. It's rather different from Wonderland. (See page 18 for more.)

Using Allen & Overy as a case study, the value of the equity comes out "at £1.48bn, equal to £4.0m each per full equity partner...Those closest to retirement are the most likely immediate beneficiaries of a listing."

Standby for internecine warfare...?

PS. I should mention a fascinating post by Mark Brandon at Motive Legal on "Would you buy shares in a law firm?" which delves into some of the dangers of law firm flotations.

Time to Take Your Law Firm to Market?

Managing Cultural Risk in Professional Service Firms

"We'd like you to talk about culture," the caller said, "Over breakfast."

Why not? I thought. I've almost got to the stage where I'll talk about anything. A friend once cracked the lame joke that he'd set up a stall with me, the notice announcing The Prof Is In. Only I'd do it for free instead of charging 5 cents and in this case I was getting fed too.

The Managing Partners' Forum asked me to talk about managing cultural risk along with another social scientist from Holland, Candida Snow, a student of Geert Hofstede.

Two pieces of writing influenced my thinking for this presentation. One was Jordan Furlong's post Why do law firms exist? It helpfully goes back to first principles. The second was a paper External Agency Relationships and Agency Problems in Professional Service Firms: A Multilevel Study by Michael Lander, J. Van Oosterhout and Pursey P. M. A. R. Heugens, which examines in detail the effects of the deployment of soft versus hard controls in professional service firms. I should also mention Emmanuel Lazega's fascinating book The Collegial Phenomenon: The Social Mechanisms of Cooperation among Peers in a Corporate Law Partnership (OUP 2001).

Given that Candida and I had at best a vague brief, we wondered what we ought to say and how it would be received. We only had 15 minutes or so each. Our audience was a mix of lawyers, accountants, consultants among others. So we did what we would like and I think it went over well since the discussion ran ten minutes over time before the moderator called a halt.

I've made my presentation with fuller notes available for download.

And if you want to know how I imagined a professional services firm or law firm might look like, then it's like this

And here's what you have to do to manage one...

Managing Cultural Risk in Professional Service Firms