Will All Law Firms Eventually Corporatize?
INTRODUCTION TO CORPORATIZE TOPIC and CHRIS BULL
I recently spoke with my former colleague Chris Bull who made the interesting observation that law firms will corporatize. I was intrigued about what he meant and why, so interviewed him.
Chris is the Executive Director of Kingsmead Square, a UK-based legal consultancy. His background includes experience as a former large firm COO and expert in Alternative Business Structures. He and I worked together on the management team at legal process outsourcing provider Integreon. His recent engagements include working as KPMG’s ambassador in the UK professional services vertical, developing best practice guides in LPM, eBilling, legal process improvement for law firm network Lex Mundi and working with law firms to leverage data and analytics to make insight and evidence based business decisions.
INTERVIEW WITH CHRIS BULL ON WILL ALL FIRMS EVENTUALLY CORPORATIZE?
Ron: You commented when we spoke over the summer that large law firms that “corporatize” would be more successful long term. I was intrigued by the comment. But what exactly does it mean?
Chris: I think the term can be confusing as there isn’t a black-line where firms become corporatized, but a corporatization spectrum. Let’s also agree at the outset that the UK, where regulators and tax authorities have helped stimulate the shift, is pushing this trend hardest.
At one end of the spectrum, it involves both existing firms and a high percentage of new start-ups and spin-outs choosing a limited company structure over partnership. In some jurisdictions, it also means legal businesses that are partially or wholly externally funded and owned, including by non-lawyers in places like the UK and Australia.
But my interest and attention focuses on the middle of the spectrum – where many law firms are adopting corporate management and governance. Many firms, especially global ones, keep the partnership exoskeleton but behave more like corporations in many ways. I would probably describe this as an inevitable shift for most firms; only those who handle the change well will be successful.
Ron: What drives the corporatizing trend? Is it alternative business structures (ABS) in the UK, client pressure, alternative providers, more competition, firms getting bigger, or something else?
Chris: Multiple factors drive the trend, all pushing in the same direction for at least the last ten years:
- Scale is a big one; maintaining a traditional partnership model with high levels of autonomy becomes very challenging as firms get large and spread globally. Corporates developed successful, proven models for managing scale a long time back and the larger professional services firms have been adopting many of those.
- Professional Business Management. The hiring by many law firms of numerous experienced business professionals from the corporate world has introduced more corporate management styles,
- Alternative Business Structures in the UK have introduced non-lawyer ownership and, with that, has come both professional management and corporate governance.
- Alternative Legal Service Providers (ALSP). In the last few years, as alternative legal service models, start-ups and now a new ecosystem of legal tech have emerged, conventional firms have begun to adopt some of their features.
With these changes, I see a fundamental tipping point. As with many critical shifts, this one has gone largely unremarked: the default business model for a new legal service business is no longer the partnership.
Ron: How exactly are firms corporatizing?
Chris: Let’s focus on larger US and UK firms that have kept their legal and tax status as partnerships but are adopting ‘corporate practices’ in five ways at varying speeds. Firms that embrace all five will, I predict, incorporate as soon as they can do so without suffering substantial tax costs or liability risks. The five practices are:
- Effective Control by the Executive. Many successful and dynamic firms have introduced a compact Executive Committee or Board with extensive authority and responsibility, entirely separate from a Board or Council that represents the views of a broad range of partners on risk and long-term strategy.
- Demise of the Partnership Vote. This is a companion to #1 above. Many firms have reduced levels of regular all-Partner engagement in firm management. All-Partner meetings with any meaningful decision-making powers are becoming rare in the larger firms, shifting towards the format of a corporate Annual General Meeting of corporate shareholders. Partners, particularly those outside of the most senior equity positions, retain significant status as talented and critical client-facing resources but have less say in or knowledge of the overall firm’s most sensitive performance and decisions.
- Professional Management. Increasing numbers of powerful and well paid executive roles are no long held by Partners or lawyers. A growing band of firms have redefined their senior executive role as CEO as opposed to Managing Partner. In some cases, this role is open to and has been successfully filled by executives hired from outside the firm and outside the law. In many more instances, powerful COO roles are being created that are most commonly held by professionals not trained as lawyers. A wide range of other business leadership ‘C-suite’ roles are also becoming common in firms – with responsibility for once niche areas such as Strategy, Innovation, Pricing, and Business Intelligence. In the more corporatized firms, the number of these roles sitting at the senior executive table outnumber those held by lawyers.
- Corporate Pay Structure Partnership remuneration and structure has been spliced with corporate employment models. In many firms, the traditional holistic Partner Profit Share is being broken down in corporate style, with an ‘annual salary’ component separated from any return on capital and performance bonus. UK top 20 firm Irwin Mitchell have probably taken this unbundling further than anyone. Those (enlightened?) firms where a profits-related annual bonus is available to all staff, not just to Partners are moving even closer to a ‘best practice’ corporate model. Partnership models have also shifted quite dramatically over the last 15 years with massed ranks of salaried, fixed share or junior partners now outnumbering equity partners in some firms. Post-global financial crisis, some firms have rigidly withheld new partnerships, shrinking the equity ownership base and beginning to look much more like a founder or family owned private company than the fluid, meritocratic partnership model.
- Independent Boards. More firms are appointing independent external Non-Executive Directors (NEDs). I have been examining the trend for UK law firms to appoint external NEDs to sit on their Boards and now estimate that over 1/3rd of the top 200 firms have one, sometimes more, NEDs. In some cases the NEDs are replacing the Senior Partner in chairing the firm; some high-profile Chairs have been appointed from outside the firm’s ranks, including Tony Angel at DLA Piper and, recently, Sir Nigel Knowles at DWF in the UK. Pioneer firms brought independents into the Boardroom to advise the Partnership many years ago but the trend is now to formalize these as full-member voting roles. The increasingly large, ambitious law firm operating in a more competitive, global and technologically enabled market is recognizing that a Boardroom composed of just lawyers (with maybe one accountant to report the numbers) is recognizing that it doesn’t possess the diversity of experience or expertise required.
Ron: Many of these trends can be seen in many firms, but do you really feel that adds up to an inevitability that law firms will corporatize?
Chris: I do. With the caveat that tax and regulation can make it tough for existing partnerships to take the final, formal step to become a corporate entity, I believe that we are seeing multiple factors that shift the way in which our law firms works much closer to corporations in other sectors and away from the conventional partnership.
[End of Interview]
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