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Unravelling the Gordian knot of law firm ownership

19 August 2016

Matthew Still considers the relationship between ownership and operation for UK legal services.

Law as a cottage industry

It is sometimes said that law in the UK is one of the last cottage industries, notwithstanding the incremental growth of a still-small number of big city firms.

This is not necessarily a critique of the legal market, because by all appearances this industry fulfils a particular demand, whether through domestic or business-related legal services. Indeed the term 'cottage industry' is synonymous with a close interaction between provider and client, often essential when the service is sought on the back of an emotion-laden issue.

The Gordian knot

A common feature of cottage industries and in UK legal services is the link between ownership and operation. Unlike many non-legal industries where shareholders and salaried executive are kept separate, significant operational decisions in law firms are usually made by solicitors, who almost exclusively also happen to be the business owners. 

For years this made a lot of sense. After all a non-fee-earning non-solicitor was another mouth to feed, and most law firms seemed to get by well enough with solicitors running the show.

But has the time come to untie the 'impossible' knot?

The singer, the futurist

To borrow from Bob Dylan, when it comes to legal services, the times they are a changin'. The Law Society's 2016 report The Future of Legal Services highlights the following key drivers to change:

  • global and national economic business environments
  • how legal services are bought
  • technological and process innovation
  • new entrants and types of competition
  • wider political agendas around funding, regulation and the principles of access to justice 

With change of course comes opportunity, but in addition to the benefits, the profession is facing consequential anxieties around client retention, regulatory burden, succession-planning, commoditisation, outsourcing/insourcing, business development etc. All of which can make it less attractive and certainly more complicated to run a legal services business, big or small.

The expert in the room

Through training and employment, solicitors have a rightly-held reputation as being experts in their fields - as solicitors. It does not necessarily follow that they are equally expert at running a complex business and in anticipating, let alone reacting, to changing circumstances.

However, the number of non-solicitor CEOs in UK law firms relative to the number of legal providers is tiny. Similarly the number of non-solicitor-owned regulated legal providers barely registers unless they form a division of a broader non-legal business service, such as with PWC. 

Years of tradition can be hard to break, and the incentive for solicitors to go down new routes of ownership hasn't been strong.

The push for change

In the absence of a pull for change within the legal profession, the government brought in the Legal Services Act 2007, in an attempt instead to push forward change. Although Alternative Business Structures, introduced on the back of the Act, seemed to herald in a new era of competition and innovation the reality has been more muted with some prominent entrants quickly withdrawing (remember AA Law?).

Equally changes to law firm ownership, whether through internal John Lewis-style shares, or a Slater & Gordon floatation, haven't gained traction.

Challenging the order of things

Who can really blame equity-owning solicitors for not wanting to lose control, authority, dividends and retirement plans to outside owners and competition?

This attitude is fine though so long as the legal services market itself isn't changing. But it is, albeit still slowly. Those first challengers to the old order will be followed by others, tapping into advances in artificial intelligence and looking for new ways to draw in business.

This could mean a re-examination of the traditional ownership pyramid of law firms, which usually has junior solicitors at its base, followed by associates, partners (salaried and equity), and capped at the top by a managing partner.

The problem with this pyramid is that owners are naturally cautious when it comes to change for fear of diminishing their income and investments. Coupled with the fact that most solicitors have spent their careers being expert in law rather than being embedded in other business enterprises, the chances of any speedy response to a changing environment are reduced.

New stars on the horizon

However, as many UK firms have grown in size over the past 20 years (either organically or though merger) so has the necessary reliance on non-qualified solicitors increased to support business development or other operational activities. Alongside a now-familiar use of finance, compliance, and HR support, an increasingly common sight in most law firms with turnover over £6 million is the operations and business development managers and directors. 

These roles appear to embrace the spirit of entrepreneurial-ism, and offer an alternative to the traditional pyramid. But a little digging under the surface reveals the frustration many within them feel at the way they often play second-fiddle to qualified solicitors who see their own roles as having greater significance to the business.

The commonly used term 'fee earner' exacerbates this demarcation, by suggesting that only the client-advising solicitor is an income generator, whereas many other roles will be playing important functions in generating and retaining business, as well as keeping the whole operation going.

Of course it goes without saying that law firms rely on legal experts for their existence. However to use parallel examples, do airlines rely solely on pilots, or music companies on singers? Or do both understand the wider value of including other experts in the operational process?

Skillful and ambitious individuals naturally gravitate to businesses providing the best opportunities for growth and reward. Legal environments are no different.

Time for change?

Whether it is time for the solicitor-owners to relinquish some control and ownership to others is an issue that needs facing. Ignoring it risks businesses being unable to innovate or reacting properly to change. It also risks non-solicitor stars looking elsewhere for personal growth. And when they do, "the fault dear solicitors, won't be in those stars, but in yourselves"*.

*The fault, dear Brutus, is not in our stars, but in ourselves, that we are underlings (Julius Caesar, I, ii, 140-141)

Download our Future of Legal Services report

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Tags: strategy | law management | leadership

About the author

Matthew Still is a legal services consultant specialising in business development and relationship management. He previously worked for the Law Society for eight years and started his career as a litigator at Wragge & Co Solicitors.

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