I have previously written that Australian and UK legal reforms allowing public ownership of law firms could mean big changes in law firms and legal technology. Lyceum Capital in the UK announced in March that it seeks investments in UK law firms. Today, I heard a fascinating interview of Lyceum’s managing partner. 

I am at the Strategic Technology Forum in Lisbon, hosted by Legal Week. One of the sessions today was an interview for this conference with Jeremy Hand, managing partner, Lyceum Capital by David Morley, worldwide senior partner, Allen & Overy, LLP. The interview was recorded in London recently, for this conference. The interview lasted 30 minutes and covered much ground. The dialog is paraphrased; a good faith effort to capture the high points.

[Update 12 June 2008: See Morley and BVCA head debate the future of law in LW video, LegalWeek article on this interview with link to the video.]

Q: What attracts you as an investor to the legal sector?
We are a UK investor and have chosen to invest in service providers. We look at markets with long term favorable drivers for growth and profits. In legal, we saw excellent profits and growth, more fragmentation than comparably sized markets, customers who are often intimidated by providers, and inefficient service providers. So there are big opportunities for both new and established entrants that are well capitalized. This is all driven by the Legal Services Act. Even though it only comes into full force in 2011, it creates opportunities today.

Q: From a lawyer’s perspective, why should they take it seriously. Why can’t they say, “it doesn’t affect me”
Being capitalized and well run is always helpful. Investment in IT, work flow, and high quality people is expensive. But partnerships are often reluctant to invest to position themselves for long term success. Financing working capital is a drain, especially for fast growing firms; keeping pace with financial needs can pinch partners. Plus, many partners are too concentrated in their ownership interest in their firms. Human greed is always a factor; some departing partners would like to capture some of the value they have created. You can also use new capital structure to attract and retain the right mix of talent. And finally, capital provides wherewithal to acquire other firms.

Q: Law firms have self-funded or used bank borrowing. Why do they need more capital now?
If owner-partners are the only funders, there is a natural tendency to act very conservatively because their assets are at risk. You can reduce this constraint and improve the financial structure with external investment. In many other professional service organizations, external capital has been effective in driving improvements and increasing value. It’s not just the money – it’s the outside expertise as well.

Q: What will investors seek? What do they get when an investment is made in a law firm?
Lyceum has experience across broad range of professional service firms and we know how to drive growth and profitability above the market average. We offer more flexibility in control and exit. On control, many law firms have a structure where the managing partner does not have much power relative to other service firms. Making quick, effective, and sometimes bold decisions is typically beyond most partnerships. It does not work in that structure. As a financial partner, Lyceum does not want control. What we do want and need to see is an effective management structure. We can play a catalytic role in improving management structures, in investing in IT, workflow, staffing, strategy, and planning. We offer a lot of business expertise and work on a partnership basis. On the issue of exit, we make clear what the structure is, which could be sale to a bigger privaty equity firm, a public listing (though that could be hard), a trade sale. In any investment, we make sure expectations are aligned.

Q: You see legal market becoming more business-like. Won’t some partners fear moving from owner to highly-paid employee? Will that diminish motivation?
Whether lawyers like it or not, the Legal Services Act will create market pressures. Firms will have to respond one way or another. Partners should want to work in a winning organization. To win, they may need to change.

Q: Do you want to see more non-lawyer managers and executives running firms?
Firms could probably be better run by professionals who have had more experience running businesses. We don’t necessarily want hospitals to be run by doctors. Why do we think that lawyers promoted into senior role will be successful because they are good lawyers?

Q: Let’s turn to technology… how do you see investment in technology playing out? Will some firms make massive investment and leap over their competitors?
On the commoditized end of the legal market, technology will have a huge impact. Tech will likely move up the value chain. But the large firms are already investing in technology. But I do see some dramatic changes possible form IT. The future for good technology people might well be better than it is for some lawyers.

Q: How will the Act affect different segments of the legal market?
We are only now just delving into the different sectors. On the commodity end, you need scale, fantastic technology, and direct access to your clients so that you don’t lose margin to distribution channels. On the complex end, deep expertise and deep understanding of customers and full service will be key. But some elements of work even on the high end need to be commoditized. In the middle, there are elements of both end. You’ll need scale and specialization.

Q: What form will the typical investment take?
By 2011 or 2012, the playing field will be clearer. Prior to that, I foresee some investments within existing regulatory structure. Post 2012, a public listing is a possible exit strategy. Loans with conversion to equity are another possible.

Q: What sort of interest have law firms expressed to date?
A huge amount of firm have “come have a chat.” We are having some serious discussions too with prospects. Timing is key though. Outside of legal services, there are organizations that are thinking of how to enter the legal market. They are getting their act together. I think there will be many new entrants before 2012. It’s not too early for law firms to be formulating their strategy.

Q: What advice do you give to firms now to prepare?
Think hard about your strengths and unique selling propositions. If you don’t have any, then you are at big risk. It’s difficult to do do a good self assessment. Firms need to talk to experts on strategic innovation and finance to develop plans. You may need to develop partnerships to be properly positioned. “Don’t put it off.”

Q: Bar associations outside of the UK do not share the UK view. Does this affect your view of firms with an international presence? A&O for example, has more than 1/2 its lawyers outside the UK?
Yes. But we think the rest of the world will eventually follow the UK.

Q: Is it likely this will lead to outsourcing a lot of jobs?
Yes. I think it is likely. There is nothing special about what a lawyer does. The distinction of lawyer v. non-lawyer is very artificial. We are repeat investors in regulated industries such as health and education. I believe that many current lawyer activities do not need to be done by qualified lawyers. So yes, work will move offshore. Lawyers in India could do a lot of the work.

Q: What sort of lawyer – what skills and characteristics – will win?
High quality service will always be key. They need to understand customer. But they have to avoid raising obstacles. They need to be business advisors more than technicians. They must be less forgiving of inefficiency. Be braver about risky investments. Welcome new working practices.

This interview certainly engaged the audience of law firm CIOs and other senior IT managers. Many lawyers in the US probably think they need not worry about the issues Mr. Hand raises. In this age of globalization, however, that is a risky position to take.