There’s nothing like a bit of schadenfreude when matters go awry and the collapse of Cobbetts as an independent entity has proved no exception. Since it was confirmed that the firm was to become the first major UK practice to fail since the 2010 break-up of its local rival Halliwells, plenty have claimed the end was inevitable and a direct result of over-reach.
That is par for the course in the legal industry but a neutral reading of its fate would conclude that Cobbetts took a not-unreasonable gamble in trying to refashion itself from Manchester also-ran into national contender. Had Cobbetts not run into the kind of sustained economic calamity that is well beyond the ability of mere chief executives – or journalists – to predict, then it would have probably worked out fine.
Under former leader Michael Shaw, Cobbetts secured five mergers in seven years and moved from a sleepy, property-driven regional firm into one that was far more ambitious. As the architect of Cobbetts’ rise and fall, Shaw certainly made a few mistakes along the way but, as law firm leaders go… well, the profession has produced a lot worse over the years.
What this wasn’t was a Dewey & LeBoeuf-style implosion in which a string of bad decisions interacted with a fundamentally flawed governance model. It was just business, as flawed as that can be.
It is not an accident that there have been so few law firm failures in the UK since the banking crisis hit. Management and financial discipline have been steadily improving for two decades in the profession. Also significant is the level of transparency in the UK profession – a development that had booster rockets attached with the rapid adoption during the 2000s of limited liability partnerships.
Ultimately the modern profession is about balancing risk and return.
Still, while the chances of a big run of UK legal failures look remote, there have been enough law firm insolvencies over the last ten years to draw some practical conclusions about the point where a strained balance sheet becomes structurally dangerous.
Certainly, it’s been proved beyond doubt that law firm partnerships are singularly ill-equipped to carry debt in any meaningful sense. Net debt of 10% of revenue is uncomfortable. Fifteen per cent is a problem. Twenty per cent is an accident waiting to happen. And that’s before you load on other fixed obligations like expensive offices.
Profit margins are also relevant – the implied ‘salary’ in equity partner remuneration means a firm can achieve a 15-20% margin and still find itself stretched. For related reasons, equity partner/fee-earner leverage over 1:6 can be a killer – Cobbetts had substantially increased its leverage in a restructuring just before the credit crunch hit. Leverage can get you in more ways than one.
But ultimately the modern profession is about balancing risk and return. When it goes wrong, assess why and learn by all means, but let’s forget the post-dated moralising. If it always paid off it wouldn’t be a risk.