So the latest news on private equity investment in law firms is that, as far as the City firms are concerned at least, the investors have gone cold.While a year or so ago, when there was not much else to be investing in, some of them started looking at the profits a lot of firms were making and thought they might like a slice of the action, they have since had better ideas. Investing in a business that is so very reliant on the individual partners, who are free to walk whenever they choose, is not such an attractive prospect after all.
But now private equity has spotted another opportunity. Investors have switched their focus from law firms themselves to the companies that provide them with technology and legal process outsourcing.
What private equity recognises is the massive cost savings to be made by taking the vast swaths of low-level corporate work – document drafting, due diligence, all the boring stuff that everyone hates – out of the hands of qualified lawyers, or expensive law firms. If LPO providers, with the help of some pretty hefty external investment to get the right IT systems in place, can provide all this at a far lower cost than law firms currently do, then what is there for general counsel not to love?
Private equity can see the opportunity, and so can the LPOs. But whether law firms have really seen this coming is another matter.
So what, you might think. We may lose some of that dreary low-margin work, but we are focusing on the high-end stuff. Quite right, too.
But hang on a minute. The partners will be concentrating on the more sophisticated aspects of legal work that really add value to the client. But what will a firm’s junior lawyers be doing?
If general counsel start passing all their low-grade contract work straight to LPO providers, which will carry it out cheaply using technology and paralegals, what will newly qualified solicitors cut their teeth on? And what will trainees be doing?
Once you have a situation where employing a trainee to do the commoditised corporate work becomes so much more expensive than the price at which an LPO could do it, will firms even want to employ trainees? Particularly given that there is no guarantee that the trainee will remain at the firm and become a partner.
This might sound like doom-mongering, but it is something that many consultants in the know think could become a real issue. Firms should at least be thinking about what the rise of LPO providers could really mean for them. And, at the moment, it is simply not on their radar.
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