Nice work – The LB100 debate finds law leaders in strangely upbeat mood

Mark McAteer, Legal Business: How are you feeling going into the next financial year?

Nick Scott, Brodies: I am buoyed by the resilience of our clients.

Sebastian Prichard Jones, Macfarlanes: Mildly surprised that the economy is still as strong as it is, but very pleased.

David Patient, Travers Smith: I am hoping for the best but planning for the worst.

Simon Boss, Shoosmiths: On the one hand I am utterly frustrated with our politicians – all of them; on the other, I am surprised things are not worse than they are.

David Pester, TLT: Has the uncertainty and pausing that has happened in the market fed through yet? If it does feed through, will it affect the second half of next year more than we anticipate? I am a bit like David in that current performance is strong, but you have to have in the back of your mind an alternative set of plans dependent upon coping with probably larger peaks and troughs in trading activity.

‘Quite a few firms do not want to open international offices. We have invested in signed strategic alliances in a more meaningful way.’
David Pester, TLT

Glen Atchison, Harbottle & Lewis: We have seen a number of clients go a bit bearish on the UK, with a hold on making certain investment decisions that we might otherwise have expected, but we remain consistently busy. However, I worry that some clients might be fiddling while Rome burns. I am reasonably optimistic that if we get some more certainty relatively soon, whatever that is, then we should see a bounce and a very positive second half to the year.

Declan Black, Mason Hayes & Curran: One of Ireland’s chief civil servants said there is a view that the Irish economy is overheating, and a satisfactory resolution of Brexit would inject even more optimism into the Irish economy and double down on an overly positive cycle. The room was stunned to hear it from a civil servant, but that was the narrative.

Jeremy Shebson, Holman Fenwick Willan: We have gone up in turnover by about 25% in the last two years and profits have been robust, but we have made some significant investments. We have set up six new operations since 2016, so I suspect we will experience consolidation and will move on over the course of the next five years. Sixty percent of our turnover is international, so a lot of the partners in our business are probably not that concerned about Brexit.

Simon Boss: We are in the middle of budget setting right now and what I am hearing anecdotally is a degree of caution from the team leaders for next year, which I can understand. What I am also hearing is, if we do get some certainty, there will be a bounce. But for how long? That overheating point may come into play further down the track. I am personally a bit torn. From a business perspective, I would be uncomfortable with delay coming into the process. A year or two years pushes a whole load of things down the road and the uncertainty would continue.

Mark McAteer: Where are you in terms of Brexit contingency planning? Have you been able to do anything meaningful?

Simon Boss: I am sure we have all stockpiled olive oil.

William Carmody, Mason Hayes & Curran: I thought that you were going to say ‘stockpiled people with Irish practising certificates’.

‘We raised cash when we floated, but then realised that we did not actually need it.’
James Knight, Keystone Law

David Patient: If we were to crash out without a deal, does this cause an issue for any of your employees? Are there any issues with making payments? Do we have enough paper in the cupboard? There is all this sort of stuff. We have a small office in Paris and were thinking, until relatively recently, that we would have to restructure our LLP there. And then the French government came out with an ordinance a few weeks ago that said, if there is no deal, branches of LLPs will be able to carry on operations for at least another year.

Whether you can really plan for what might happen to your own clients’ business, other than think about how you can advise them on the implications of the various outcomes of Brexit, I really do not know. However, I suspect everyone around this table is thinking carefully about the size and shape of their business, and being cautious about recruitment.

Glen Atchison: It is not just Brexit. For our private wealth and private capital practices, the biggest fear coming out of this uncertainty is a potential change in government. Anecdotally, clients tell us of numerous multi-millionaires and billionaires choosing to leave the UK rather than risk the potential impact that such a change could have on them, especially since many were historically non-UK domiciled and the non-domiciled benefits of the UK have already been almost eliminated, with this trend looking likely to continue. This might be a bigger issue for us than Brexit, but I appreciate this is probably more true for a firm like ours than for many of you with more institutional clients.

Mark McAteer: Is Brexit forcing some firms to think about their strategy in terms of having an international hedge?

David Pester: Quite a few firms that we have talked to do not want to open international offices. We have invested in signed strategic alliances in a more meaningful way. There is a point about how well networked you need to be for inward investment in whatever shape or form into the UK if you’re not an international firm like others here.

We have reviewed options arising from Brexit, but we also need to pay attention to what is happening with the US economy. The US has a significant influence on UK economic indicators coupled with the uncertainty from Brexit. That is probably something I am more concerned about. Although our business is generated predominantly from the UK, our clients are international in their operation. Current economic uncertainty from Europe and the US could cause a pause in investment activity.

‘If you have partners who are only driven by cash in their pockets, you’ve got an issue.’
Stephen Gibb, Shepherd and Wedderburn

Chris Lowe, Watson Farley & Williams: Strategically, everyone around this table has already taken a view on Brexit and factored it into the shape of their business one way or another, subject to some ongoing technical issues. We are putting more people into Paris, Frankfurt and Madrid, and all the places you would expect us to have more people to benefit from any impact of Brexit, and have taken on more space to accommodate this build, but nonetheless and in any event, we are also very optimistic about the London market.

Jeremy Shebson: We should not underestimate the resilience of the institutions within London. They will find a way to continue to do business. We did some research recently, which indicated that 80% of maritime arbitrations and shipping – so a third of our business – is within the London market. That is not going to change overnight. Contracts have been written and, it being arbitration, it is not really caught by Brexit, in that enforcements are dealt with through the New York Convention and the like. There is reason to be calm that we will be able to continue to do business.

Mark McAteer: The issue of retaining capital for investment has intensified in recent months, but what about external capital? Is there an appetite for it?

Stephen Gibb, Shepherd and Wedderburn: We do not think we need it. We have no debt, we have cash in the bank and a development fund factored into the budget every year. We have funded all our acquisitions and office openings from cash reserves, and it has worked well for us. We have also made a significant investment in client-facing technology, which is a key focus area for us, however, this is now a revenue cost rather than a capital cost.

Sound stewardship is key to retaining capital. If you have partners who are only driven by cash in their pockets, then you’ve got an issue. If, on the other hand, your firm’s ethos is delivering high-quality work, while making a decent living and ensuring you are continuing the business for the next generation of lawyers, then you are in a much better place.

James Knight, Keystone Law: We raised cash when we floated, but then realised that we did not actually need it. To be honest, most people float because they want to raise cash or exit and we did not want to do either. We are just an ambitious firm, and we wanted to do something that would enable us to raise our profile and engage with a more sophisticated client. It has been largely successful. The money that was raised sits there and then will probably get distributed back to shareholders by way of a special dividend at some point. It is a little bit of a strange situation, but it worked out.

‘Who would invest in any business just to enable a small elite to retire rich?’
Simon Boss, Shoosmiths

William Carmody: It is a concept that is easily grasped: more capital for expansion of the business. But there is an almost existential point from the view of our businesses as law firms. Our best retention tool is the promise of future ownership of the business and the external capital model dilutes that immediately. There is a tension there.

James Knight: That is the beauty of our structure. Let us say that you sell off 30%. It has not affected any of the fee-earners at all, because they have signed up to a completely different deal. Contrast that with the conventional law firm partnership model. The challenge with that, of course, is that their motivation is shareholding, and so everyone gets given shareholdings and they have lock-ins. But then, of course, the lock-ins expire and they leave, and they can take their shareholding with them. But if we are going to bring in new partners, what is the hook? It has to be more shareholding. They can issue new shares and do it that way, but then what you are getting over the course of years is a constant dilution of the shareholder base. Over the course of time, that can build up to be quite a significant amount of money.

That is not something that we had to struggle with, because the structure is well suited to IPO and it is what investors liked about it. This dilution does not apply just to law but to any professional practice partnership in exactly the same way. Maybe it explains why so few accountants have gone down this road.

Mark McAteer: We have two different models that are going to the market almost simultaneously. You have got Axiom, which lends itself to raising money in the markets, and then you have DWF which is making a play. We are probably going to be in a position where we will see whether that is going to work for what is regarded as a traditional partnership.

James Knight: Nothing could be simpler than Axiom’s situation. I am surprised it did not happen a long time ago. This is a US flotation where they are a corporation. They are not a regulated entity anywhere. They are just a provider of individuals. They have a certain amount of income. It is certainly pretty sustainable and pretty predictable. I am sure they will be very successful. Very simple. Relative to DWF, it really is a walk in the park.

Simon Boss: Right now, a traditional law firm would want to think very carefully about going down this route, because it is all about people. It is all about the partners and it is all about the other people in the business. Keeping that culture going and building it – the togetherness of partnership – is ultimately a one-pot responsibility and also the ambition that flows through.

James Knight: I am definitely not thinking that it is a good idea necessarily. DWF is incredibly ambitious. It seems to have worked OK for Gateley. If a traditional partnership is doing well, it has not got debt, it is managing its people and finances properly, then I wonder what the reason is. Our reason was a little eccentric, but that was for us. It does not apply to a well-established, reputable law firm. It would be a kiss of death in many cases.

‘We need to be able to stand up and engage openly and honestly with our clients.’
Chris Lowe, WFW

Glen Atchison: Lawyers may drive change as well, with Millennials making different career decisions. I am not convinced that you can rely on the existing partnership model continuing ad infinitum, with lawyers just wanting to get to the top of the tree and share in the ownership of a firm. Change in attitudes might in fact drive structural changes. However, this does not mean that the partnership model is dead, but we might need to adapt and include other models within that, like ABSs.

David Patient: Unless you are a partner, in which case you may have cashed out, you cannot really participate in the profits of these firms, other than in a straightforward income-bonus scheme. A lot of these lawyers will be looking at a very different partnership model and saying: ‘I am not sure that that is the path I want to go down.’

William Carmody: Raising capital is about what you are going to do with that capital. You should only raise capital if you are going to be able to use it to grow your business. You only get to raise capital once and you then have to think very carefully about how you spend it.

Simon Boss: Who would invest in any business just to enable a small elite to retire rich?

William Carmody: This is the point. That is exactly it.

Mark McAteer: What is the number one threat to your business and the business of law generally right now?

Declan Black: Talent management and talent retention. You must have a very authentic and real narrative for people, that they buy into in relation to progression and belief in the business and the firm.

David Patient: The talent point is very important, not just for partners and associates but for all of the other people that we now need to deliver legal services – from the data people to the cyber people to the e-discovery and project managers, and so on and so forth.

David Pester: Can you create something that is compelling and exciting, that people want to be part of and is relevant in the 21st century, when you are competing against dynamic businesses that have a whole range of other attributes and might be competitors for the talent that we need? To echo David’s point, this is not just the legal talent but all of the other people you need to have assembled in the organisation to deliver the services we are going to need to deliver in the next ten years. That balance between the business model, the talent attraction and retention is really key.

Sebastian Prichard Jones: Is a ten-year-old kid today going to want to be a lawyer in 15 years’ time? That is the biggest threat we face and it is a threat that derives from whether we are going to be enjoyable places for these people to work, and the competition we are all facing, the fact that there are so many of us, the pressure of margins, etc – is that going to turn us into places where the kids of today are not going to want to work? Those of us who have grown up in a different era cannot really conceive of that, but it is going to be very relevant.

‘Is a ten-year-old kid today going to want to be a lawyer in 15 years’ time? That is the biggest threat that we face.’
Sebastian Prichard Jones, Macfarlanes

Nick Scott: We need to not dumb down what it is we do as a profession, nor get lost in the noise around Brexit or technology, and remember what it is that we are selling. And that is people and their judgement being bought by people who want that judgement. We as professionals need to always remind ourselves of that. If you get that bit right then you would hope that there will be enough people who are willing to pay a fair price for that judgement.

Chris Lowe: The elephant in the room is that some clients will take advantage, if they can, and law firms often let them, as the profession operates with higher profit margins than many other businesses. When you go to your dentist, they take your credit card and you pay immediately after they have provided their services, whereas partners in law firms still take a view that we can wait to be paid a lot later than the payment terms agreed with the client.
Also, how many times do people around this table have conversations with their partners where the partners come and say ‘I want to agree a 25% write off’ and you say ‘well, let us start with 7.5%’ and then they tell you they have already done the deal? Once this behaviour is established, clients will continue to operate in this manner, because they know that they can.

David Patient: I have very little sympathy for us as an industry being beaten up by clients over fees. If I want to go and buy something more cheaply, then I will go and buy it more cheaply. At the end of the day, I have to make a decision about what it is that I am buying. We ultimately have a choice as to whether or not we do work for certain clients. If we think that certain clients are going too far in terms of what they are asking for, then we will stop doing work for them, and they can go elsewhere. Where we as lawyers, however, sometimes need to be more savvy is around the discounts we offer. Sometimes these are appropriate, but not always, and I do have a problem with partners who rush to give them too quickly.

Yes, we are a very successful industry, but most clients look at law firms and say: ‘Good for you. I want to carry on supporting that,’ provided that they are happy with what they are getting.

Mark McAteer: There is also the issue of the services you offer as firms to clients because they want a particular service and having that self-realisation discussion as to whether or not the service you are offering serves the firm itself, and whether that is profitable work or not.

Chris Lowe: We need to be able to stand up and engage openly and honestly with our clients. That is where we are in agreement: that if you do not have an equal and healthy relationship with your client base based on mutual respect, then client relationship issues will arise. There are a number of law firms which are exposed as a result of poor client relationships.

Stephen Gibb: It is our job as managing partners to look at the work that people are doing, assess whether it is profitable or not and, if it is not, to deal with it.

Mark McAteer: That seems to be a good point to end. Thank you all very much. LB

mark.mcateer@legalease.co.uk

For the 2018 Legal Business 100 report, please click here.