Law firm partners ‘overpaid’, says Mayson
Monday 02 November 2009 by Neil Rose
Law firm partners are paying themselves too much and their businesses will struggle to attract external investment because they are not worth as much as the partners believe, a leading commentator has warned.
Professor Stephen Mayson, director of the Legal Services Policy Institute, said partners have to rethink how they reward themselves and what they are being rewarded for. ‘What is the return they’re getting on their investment, not just their financial capital but their human capital too, their time and their expertise?’ he asked.
Giving the keynote address to a seminar organised by the Solicitors Regulation Authority in Warwick, Mayson said third parties will force them to differentiate between the elements that make up their net profit: ‘[There are the] returns on financial capital invested, returns on the labour they give to these businesses, and the bit the third parties are really interested in is whatever’s left.
‘And the sad news for many firms is that there isn’t anything left. If you actually worked out a return to financial capital and a return to labour, they are overpaid. Nobody’s going to invest in them. Nobody’s going to give them a cheque and say, “Waltz off, retire, play golf, go yachting, do whatever you like”, because that business isn’t actually worth what it is paying its current owners. So some firms will be in for a shock if they don’t start thinking about the investment and return issue, and indeed their own exit.’
Other elements of a new business model fit for the Legal Services Act 2007 future include how to create value for clients, especially in non-reserved activities which non-lawyers can provide for less. Mayson said it is a ‘flaw’ in the regime that non-authorised persons delivering non-reserved activities ‘are not, cannot and will not be regulated’.
Firms will also need to generate returns for owners, investors and staff. ‘The essence of this is managing for profit,' he said. 'Most law firms manage for turnover... Even if they can understand profit, there are too many profit-takers.’
The final element is the right resourcing, such as whether as many qualified lawyers are required as are now employed, and valuing management.
‘The old normal is not coming back,’ Mayson asserted, and while there would be a place for traditional providers, ‘there won’t be enough room for all those that want to remain traditional’.
Comments
Tesco law again.
The legal profession should not adopt a corporate business model similar to that used by Norwich Union or McDonalds as a way of dealing with the alleged problem of over paid partners in law firms.
The rule of law should be the paramount consideration when deciding the best model for the running of a law firm.
Every fee earner (qualified or unqualified) in a law firm should have an independent mind, be confident and principled enough to challenge his/her superiors and be primarily motivated by doing the job in a professional way. Will you get such personnel in a corporate model law firm where the "customer" is king and the bottom line for shareholders is everything?
The merging of a business culture with a legal professional culture is like cross-breeding a jackal with an owl. Seriously though, top businessmen (usually semi-educated) are often great characters with flair, innovation, energy, unique ideas and a lust for risk taking - people who live for the moment. I am not sure that I would like such a person to be MD of a law firm that I am associated with though.
Why would partners want to
Why would partners want to keep cash/profits in the business? What would be the point? Yes of course the photocopiers and computers should be kept up to date, but these are not the real assets. Law firms are by their nature not asset building business. What is the value of a law firm? It is not the brand name (apart from say CC, A&O and Slaughters), it is therefore the people. The people generate the revenue and are the only real assets of a firm. For an investor to come in and tell the partnership, "here is a big cheque, goodbye and enjoy!", that would be ridiculous. It would be like buying Tesco's and giving the food away for free.
As for outside investors forcing a law firm to differentiate their profit elements, of course they will. There will suddenly be another class of owners of the business, and this is bound to create friction. Professor Mayson is just using technical language to point out the bleeding obvious...
Anon
Oh Dear !
We know that only huge concerns are allowed to escape from market forces under this government. So, it is hardly surprising to find the Legal Services Act allowing the big boys to become rich, on external investment, whilst the High Street is going to be gradually strangled to death by ABSs. However, this article suggests that some of the big boys and girls may not attract quite the funding that they hoped. What a pity.
The problem with this profession is that solicitors do not understand that past privilege is no guarantee of future survival, once the privileges are withdrawn. There is also absolutely no concept of the common good. It is 'dog eat dog' all the way and this attitude will completely destroy us all.
In addition, we are such a joke that the government has ignored us. Safe in the knowledge that we are: hated by the public (unless we are needed, individually); quite happy to cut each others throats for a few pounds and in their view, we are not needed in the modern world.