I believe this is the most important story in the legal profession in your lifetime, even if you are a centenarian. It redefines the debate as to whether law is a profession or a business. According to today’s Financial Times UK edition,
“One in 10 of the 100 biggest law firms have indicated they could seek a stock market flotation in the wake of planned rules allowing outside investment in the legal sector.”
And of those who are not contemplating a flotation:
“one in five expected their firms to seek outside investment”
“Two-thirds of the managing partners, in effect the law firms’ chief executives, said their firms were likely to admit professional managers to the partnership.”
Food for thought – Good News and Bad News:
The Good News: The notion of allowing non-lawyer partners would permit key support professionals like Executive Directors, Financial Officers, Marketing Directors, Training Directors, IT Managers, Knowledge Managers etc etc to have a stake in the business. I am OK with that – especially if it reduces the “us vs. them” attitude that is so prevalent between lawyers and non-lawyers in many firms.
More Good News: Investing in the firms future by enabling it to improve value to clients through training and infrastructure is a great idea.
Final Good News (sort of): A few wealthy people will get much wealthier in the initial deal (it’s called cashing out). Maybe they promise to stay around for a while for cosmetics and even shake a few hands now and then, but let’s not be coy, the desire of power partners to get a whopping return is what will drive these deals. Some not-so-senior partners will get some good cash too. (Where were those lake cottages for sale again?)
The Bad News: Selling a stake in the firm, whether to the market or an investor, is suicidal. This investment comes with a built-in poison pill. Here is the progression:
Step One: Senior partners cash out. (Note, Step One of Bad News is borrowed from Good News… as Leonard Cohen sang, “we are locked into our suffering and our pleasures are the seal”.)
Step Two: Everyone feels very excited – they will now be a part of something big and supposedly wonderful and corporate – perhaps the firm will even be managed now. There will be champagne and hats and lots and lots of publicity. (Clients will yawn).
Step Three: Reality sets in… these investors want WHAT? … a return on their investment off the top? What are you talking about. Profits are for partners. Oh, and those things that we used to do because we thought it was fitting for members of the profession to “give back” are not going to get approved without a business case for how they generate new fee income? The grey area between business development and boondoggles will be grey no more. Fly economy, buster. We have standards of performance that are enforced and your friend in the corner office can no longer protect you (she already cashed out, remember?).
Step Four: “Hey, wait a minute”, say the young Turks, “why should we suffer in a firm where 20% of our profits, off the top no less, go to outside investors? Hmmmm, I could be generating the same income in a firm that does not have outside investors hmmm, let’s consider this for a nanosecond. [The next sound you hear is the whirring revolving doors as the up-and-comers leave for greener pastures.] (Greener pastures are defined as firms who were not daft enough to get on this bandwagon in a moment of mind numbness.)
Step Five: The remaining productive career-oriented partners say “this isn’t working” and the investors are saying the same. We are losing talent, morale has plummeted, no-one listens to the turn-around CEO you brought in from industry the future is far from bright if we stay on this path “better liquidate”.
Step Six: The remaining partners make an offer to buy the firm back from the investors for 10 cents on the dollar (or 10 P on the Pound Sterling) and the episode fades into oblivion.
For those who are thinking: “this story is about the UK – not our jurisdiction” I will simply remind you that the largest firm in the world is based therealong with a number of other global legal powerhouses.
I would like to extend my congratulations to the 9 out of 10 biggest firms who are not contemplating a flotation and the four out of five who are not interested in private capital either. You are the wise ones – you don’t need capital that way – you can generate your own. After all, you are in a people business – you do not compete with Intel. If you did, you might need a few billion for a plant in Asia. All you need is to keep your wits about you as a few of our colleagues proceed lemming-like into the sea I’ll see you at the Carlton Club and we can lament their tragedies over a cognac.