A little over five years ago Legal Business produced a cover feature dubbed ‘How to improve a law firm in 17 easy steps’. The piece – intended as a series of practical proposals to improve the working of law firms – has aged as well as anything printed in these pages.
And while point one – on overhauling lockstep partnerships for the age of global law – has been borne out, it is the second proposal, to phase out full profit distribution models, that is more pressing to the profession. Problems with lockstep are a peculiar challenge for London’s elite. In contrast, the historic model that has prevailed in legal partnerships of distributing the near-entirety of profits to partners annually speaks to an entire industry in danger of tipping itself over a cliff.
We have reached a stage where no-one seriously doubts there are structural challenges looming over major law firms, notably the question of whether legal practices of the future should be primarily investing in the platform or the people. For the firms we chronicle in these pages, people are still winning hands down.
New technology and a rising compliance burden on a global scale raise the likelihood that large markets will emerge for legal providers that can automate much of their service and potentially remake more of their products with more varied groups of professionals.
While many top or boutique law firms can conceivably continue with the current partner-led model, it is less clear whether the great swathe of the mid-market will thrive without considerable reinvention. And as we address this month in our interview with DLA Piper leader Simon Levine and a discussion on new business models, these scenarios suggest many firms will have substantial needs for capital in future. Capital they keep flushing out.
The truth is that it is very rare to find a law firm leader who believes full distribution makes a lick of sense for the industry as a whole or their institution. They simply fear that if they try to change their model – even with relatively modest levels of retention – they will lose core partners to rivals offering jam today. Good for recruiters and mobile prima donnas. Less good for the profession and long-term vision.
If this direct tension between the interests of key talent and the institution sounds familiar, it bears more than a passing resemblance to the conflicts that built up in the investment banking industry ahead of the credit crunch.
That’s not to forecast a comparable fate to the banking crisis – law and banking obviously have as many contrasts as comparisons. But it does speak to a danger that many law firms that could credibly evolve into potent professional services giants (of which DLA tops the list) may not only miss their shot for lack of investment and rigid structures, they could be left behind by new entrants with deeper products.
To squander the many admirable qualities of the legal industry in such circumstances would be bitter. For many law firms, even if initial moves in this direction are modest, ending the quirk of paying out all their profits annually will not only be good for business, it may just unleash their potential.