Tuesday, June 26, 2007

Who Actually Sells the Law Firm?

Mid-market law firms in response to questions from The Lawyer are saying they would like to consider seriously an IPO or taking in external investment. This is all part of the post-Clementi maneuvering that is taking place as the Legal Services Bill travels its slow journey through parliament. I've indicated some of the potential pitfalls before.

While I believe the legal profession should be relieved of many restrictive practices and be given the freedom to organize itself how it likes, I do not believe lawyers are a knowledgeable group when it comes to making these kinds of decisions. Fundamentally, they are naive: they are not great business people, not when it comes to themselves.

If the Legal Services Act is like a Big Bang, lawyers will not have the technical savvy to compete with the private equity funds and banks. All the stockbrockers and jobbers in the City of London were eaten up after Big Bang.

Although lawyers engage in business and play an enormously constructive role, this does not mean they are perceptive analysts of their own situations. Lawyers are essentially technical underlabourers for financial institutions. Undoubtedly good, but they are not the leaders in transactions.

Here then is a possible scenario for the post-Clementi age. Everyone is excited about investors. Law firms are being courted assiduously. Within these firms--and this is mostly the mid-market ones--the senior partner (often a founder) will be sitting with his chief financial officer (probably an accountant), and one or two other senior lawyers. They will be planning their exit strategy, just like good private equity funds. They will have worked for a goodly number of years and comes the payoff. The crucial question is: how much of the equity can they sell off without causing a revolution in the partner-ranks?

Let us assume they work a wonder of spin and convince their partners that this is the yellow brick road for the firm. And let us assume that they decide to sell off 25% of the equity. Once the deal is clinched and the shares of the sale have been distributed, why would those senior guys stay around?

They won't. They will leave because there is nothing in it for them any more. It will be up to the remainder to knuckle under a different, and potentially harsher regime (remember how the unions have been complaining about private equity) with less of the pie than they used to have.

That's because they won't have thought of exit strategies like the others. I would suggest any partner should now plan a possible exit strategy and be prepared to execute it as soon as the chief financial officer and senior partner start walking around with slightly manic looks in their eyes.

Thursday, June 21, 2007

Article on Barristers' Clerks

My research on barristers' clerks is picking up. Counsel magazine has asked me to write an article on clerks. They want 1400 words by July 2. Why not? I think. Then the reality sinks in: this means there have to be all these words looking reasonably coherent on paper in about a week's time.

I have been promising myself that I would say no to requests, but I don't. I'm realising that there is a similarity between me and barristers. According to the clerks barristers are always anxious about where the next bit of work will come from and when. It doesn't seem to matter how eminent they are, they're nervous.

I'm the same about writing. If no one asks me then I'm lost in the wilderness, forgotten, adrift, never to publish again. It's stupid and so when I get asked for a chapter or an article for about a millisecond I will consider saying no, then I switch into normal mode and say, of course, yes.

The Reincarnation of Barristers' Clerks -- Part 1

When I first started this blog two years ago I mentioned in my first post that I had written a study of barristers' clerks. (The book is available for download here.) I have recently started a new research project which is to re-study them. The gap between the two studies is a long one, so one imagines that all kinds of changes will have occurred and that the entire scene will be quite different.

When I did my first study there were no mobile phones, faxes were rare, computers very rare, and email nonexistent. Clerks maintained large paper diaries for their barristers and someone had to be close to a (landline) phone. I don't know if the Blackberry had even been imagined: it was easier to expect to be beamed up by Scotty. Now it all exists, but are clerks any different?

First, let me sketch a clerk. The barrister's clerk must belong to one of the strangest and least known occupational groups in the world. They have been around for over two hundred years from what historical data exist. Their main task is to act as the interface between the barrister and the external world. Think of it as bridging the sacred and the profane. The law, following Mary Douglas, is pure and sacrosanct. It therefore requires a priesthood to celebrate it and to proselytize it to the world. In law, we can theoretically say this is the barrister, an individual who is immersed in the law and remote from the quotidian concerns of the client. Clients are managed by solicitors who engage barristers as advocates when a trial is likely.

The world beyond the law is profane and the law and its interpretation must be protected from it. The priesthood is guarded by the barrister's clerk. He, and most are he, arranges the barrister's diary, negotiates the fees, and, most importantly, counsels the barrister on career choices. These could be what area of law to specialize in, when to take silk, or when to take a holiday. (One barrister recalled telling her clerk she was to be married. The clerk told that the middle of December would be a good time for the ceremony.) The clerk is manager, promoter, administrator, and shrink.

Any job role analysis would have a fit trying to establish the "dimensions" of this one. There is no formal training for the job. The usual route is by apprenticeship. A young clerk starts by running around doing photocopying, pulling cases off the internet, taking bundles of paper to court. This makes the job a social one in that young clerks mix together in courts and in the Inns of Court, so that they also learn from each other by exchanging information and gossiping.

With experience clerks take on more responsibility and take on the fixing of fees and diary management. Fixing fees is as much an art as science. There are notional hourly rates; there is the value of the case; there is the amount to be saved to the client if the case succeeds; and there is the clerk's gut feeling as to what the case is worth. The clerk doesn't have to know anything about the law, although some do.

Here it's worth mentioning that the English legal profession is similar to the American one in that its configuration is made up of two hemispheres: the corporate and the individual, reflecting the clients and their types of business. Within the English bar the two sides are the privately funded and the publicly funded, which crudely correspond to the US version.

Until a few years ago, up to 50% of the bar's earnings came from legal aid. With the legal aid bill in the UK running at £2.5 billion a year, it's still pretty substantial. For clerks the distinction is vital. Fixing private fees, especially corporate, is a much simpler process than dealing the bureaucratic nightmare of publicly funded fees with their graduated fees, Very High Criminal Case fees, and soon the Carter revisions to legal aid fees.

Two instances demonstrate the differences: in one set of chambers I observed which does a considerable amount of publicly funded work, there were 3 people working full-time attending to fees. In the other, a "Magic Circle" set of chambers, the clerk admitted that he would not know how to set and handle publicly funded fees. To him it was another, remote world, but he did say that the difference could be expressed thus: "Their barristers earn in a day what mine earn in an hour."

Sunday, June 03, 2007

What is a Partner?

The figures for law firms' year-end earnings are coming in. The Magic Circle firms are breaking through the £1 million PEP barrier as Clifford Chance has broadcast. These results coincide with two other sets of results. First, trainees and first year associates are getting vastly increased raises for stipends and salaries. Second, equity partnerships are on the decline and have been for a number of years, while salaried partnerships and permanent associateships are on the increase.

So who exactly is sharing in these "spectacular" PEP results, as The Lawyer defines it? And, more importantly, how are these rare specimens--equity partners--being selected?

In situations like these it's worth going back back to first principles. Law firms are essentially flat institutions, but we can take a tripartite view which looks at lawyers in a firm as "finders, minders, grinders". Finders bring in the clients; minders look after them and supervise the work; and grinders do the grunt work."

But since law firms really only consist of partners and associates, these categories overlap. Associates are grinders and minders and partners are minders and finders. These days with the rise of transactional work the role of the finder is king. Work and clients is potentially fickle. Institutional clients always, or nearly always, obtain two quotations for a job. This can be fudged to ensure that the "desired" lawyer gets the transaction.

Finders have to focus on marketing and raising the profile of the firm to make clients want to keep instructing the firm. The lawyer therefore rather than the firm is the key to making this work. Some Magic Circle firms can rely on their brands to attract work, but that's no longer a shoo-in. The recent defection of partners from them to big US law firms demonstrates the brand isn't inviolable, especially when these lawyers take their clients with them to their new firms.

For the second tier and beyond of corporate law firms, where the brand is at best inchoate, the rainmaker is crucial to bringing in the work. And the expected result would be that finders would be rewarded and given equity partnerships above others. This is especially the case in firms that operate an "eat what you kill" form of remuneration over "lockstep" (managed or otherwise).

Merit will dominate and win. Well, maybe. It depends on who has been able to weasel their way into the management positions in the firm where partnership decisions can be influenced. It is the case apart from the founders and those who have been around for a very long time that minders have that spare time to take on the management roles. Finders are too busy. Emmanuel Lazega's ethnography of a northeastern US law firm illustrates these tensions quite well.

The upshot is that minders can be wary of finders because they represent that which they are not, or likely to become. They're a threat. Who better then to see promoted to equity partner than another minder who can be assured not to propose anything too radical. When this happens we see the exodus begin. Look, for example, at the numbers of lawyers who have left Allen & Overy. It becomes a race to the bottom, for once finders and potential finders suspect themselves of being sidelined, or not being given the resources they need, they will move elsewhere and, of course, take their clients with them.

I imagine in the last analysis, what I am describing might take place at the margins. We are seeing graphic examples of law firms being ruthless. Freshfields has de-equitized 100 partners (from 520 to 420), which means they were fired for not being productive. Mayer Brown has demoted or fired 10% of its partners (see Legal Marketing Blog) and there was the classic rout by Sidley Austin a couple of years ago. (According to the 7th Circuit Court of Appeals, these partners were employees [?])

Law firms must have and maintain the capacity to examine themselves ruthlessly and critically. The days of the cosy partnership with long lunches and a lifelong marriage disappeared a long time ago.