The Lawyer’s groundbreaking survey of nearly 3,000 lawyers, carried out in association with polling company YouGov, highlights two very different issues for two very different sectors of the profession.
First, the City is struggling with associate retention, a challenge that ultimately threatens the entire business model of City firms. And second, smaller firms are either tantalised or threatened by the monumental changes in the Legal Services Bill.
Both issues represent massive challenges to the profession. The City model is creaking under the strain of the M&A boom, while the rest of the profession faces threats from the likes of Tesco or Norwich Union.
“It’s difficult to see change when you’re in the midst of it. Clearly the profession is in the midst of great change and it’s not always easy to see where it’s going to end up,” says Kendall Freeman managing partner Laurence Harris.
Which issues concern which lawyers seems to depend on whether or not they are located in London. More lawyers at firms outside the capital are concerned with the Legal Services Bill and business rivals, while those in London believe the biggest issues are associate retention and globalisation.
Fifty nine per cent of those working in London thought associate retention was one of the three most important issues facing the legal profession, compared with only 36 per cent in the regions.
Forty nine per cent of those based outside London think that the Legal Services Bill is one of the most important issues facing the legal profession, as opposed to only 28 per cent in London.
These trends are repeated when looking at the responses of firms of different sizes. Only 15 per cent of partners at the country’s top 10 firms think the Legal Services Bill is one of the most important issues facing the profession.
CMS Cameron McKenna managing partner Dick Tyler says: “The Legal Services Bill appears to have been written under the assumption that the consumer is demanding better competition between law firms. But if you ask any partner at a City firm if there’s enough competition in the market they’ll tell you there is. It’s a ridiculous notion.”
Concern about the bill peaks among firms with turnovers of between £5m and £25m, a band which covers the entire Rising 50 and the lower reaches of The Lawyer’s UK 100. Sixty three per cent of partners in this band believe the bill to be one of the most important issues facing the profession.
Avalon Solicitors in Warrington is a perfect example of the type of firm that is hoping to benefit from the bill, with the bulk of its business being high-volume personal injury work.
Senior partner Andrew Nulty’s target is to float Avalon on AIM. “That’s our ultimate goal, but as yet we’re not allowed to,” he told The Lawyer last year (4 September 2006).
Nulty is first and foremost a businessman and his approach to the Clementi reforms reflects this. “I’d like to be placed on the same platform as any other business,” he says. “I welcome Clementi. I feel law firms have been held back not only by the Law Society, but by the profession and lawyers themselves.”
Liverpool’s Silverbeck Rymer is another classic example. The firm is a niche high-volume business specialising in providing legal services for road traffic accident victims.
Legal director and senior partner Kingsley Hayes says: “We provide commoditised legal services. It’s a very quick turnover of cases. For us, that’s what the Legal Services Bill is about, rather than for the guys in the City who are practising what I call ‘real’ law.”
Silverbeck is preparing itself for outside investment by converting to a limited-liability partnership (LLP), installing a corporate structure and a non-lawyer chief executive to make it more attractive to outside capital.
“Lawyers have a focus on being lawyers and providing the best possible legal solutions, but not necessarily providing the best service to the customer. We have to focus on that. The constraints of partnership and capital retention stop that,” says Hayes.
Eversheds straddles the divide. It has a City office and an international network, yet it also has regional offices and a high-volume business that might be vulnerable to competition from IT companies.
Eversheds chairman Alan Jenkins says: “The alternative business structure thing, to me, is an unnecessary distraction. We’ve got the legal systems group, which is an integral part of our business model, because it brings processes to those parts of legal work which are required by clients to be done on a more efficient basis.”
While Jenkins acknowledges a threat, he sees it as a very far-off one. The bill is three years from being an act and businesses still need to be set up. They will also be new businesses rather than an established business such as Eversheds.
Jenkins says: “Ultimately – and this will be music to the ears of our Indian brethren – we may need to look at outsourcing there. But I see this as an evolutionary thing, not a revolution in the way we operate.”
Kendall Freeman is a small firm by City standards (it turned over £16.6m last year), but it competes with the large City firms for international commercial work, and so is a world away from the high-volume firms.
Harris says: “There are two different professions that are operating as solicitors. You have firms large and small that operate in the commercial environment doing corporate and commercial work, whether contentious or non-contentious. Their markets are international.
“Then you have a whole part of the profession working in the domestic arena, which is not high value. Therefore the commoditisation risk is substantial. To them the reforms in the Legal Services Bill are absolutely fundamental. A lot of work being done in smaller firms is capable of being revolutionised by the Legal Services Bill.”
The main concern of those City firms with turnovers of more than £250m – the top 10 firms in the UK – is associate retention. Seventy seven per cent of associates and 64 per cent of partners at firms in this band chose this as an important issue.
The figure peaked at firms with revenues of between £100m and £250m, with 79 per cent of associates and 65 per cent of partners particularly concerned with associate retention. That includes firms such as Berwin Leighton Paisner, Camerons, Denton Wilde Sapte, Hammonds, Nabarro Nathanson and Pinsent Masons. As Camerons’ Tyler says: “It’s pretty near the number one issue on my agenda at the moment.”
As a smaller firm with a lower attrition rate and a different model, Harris believes Kendall Freeman has avoided the City anguish over associate retention. “Larger firms are built on an economic model that makes them more vulnerable to a higher level of associate turnover,” he explains. “The drive for size, increased turnover and profitability, which afflicts all major firms, gives rise to its own problems. The partnership model is being replaced by a corporate structure, but people still expect the partnership ethos. Profit per equity partner is a real driver and that’s inducing quite a shift in the culture, and I’m not sure that people have seen where it will end up.”
Many law firms are feeling the strain of the M&A boom. Lawyers are working harder on more deals. And as the stresses of work go up, people expect better compensation.
But the drive for profitability means that more profit is leveraged up to fewer partners. As associates see partnership become more remote, the more disillusioned they become. Excluding those who are already partners, nearly two-thirds of those in organisations with £250m-plus turnovers are not aiming for partnership.
However, Tyler does not think these issues are unreconcilable. “What is unreconcilable is salary inflation going up faster than chargeout rates,” he says. “Economically that’s impossible. The only way you can counter that is by making people work harder… It’s a fool’s game to increase salaries at a higher speed than chargeout rates. I’m not sure associates understand that.”
But of those that answered the question, 48 per cent of associates in the UK’s top 10 firms say they would take a drop in salary to ensure a better quality of life.
The recent media furore surrounding the death of Freshfields Bruckhaus Deringer associate Matthew Courtney has increased the pressure for firms to look at their working cultures.
Harris reflects: “You can’t drive on the business without increasing profitability. We’re players in a competitive global industry, but there is an external climate. If the wider society perceives that unattractive things are happening, then eventually governments have to act.”