Don’t use external investment to strip value from firms, partners warned

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By Legal Futures

20 January 2011

Wheatley Burt; firms risk partner exodus

Partners in law firms that receive external investment after October will alienate younger colleagues if they appear to be stripping the firm of value for future generations, a report has warned.

In a report on leadership for law firms, published last month by the Law Society, partners are advised that an exodus of talent could follow if investment is viewed as a means to monetise the partnership rather than an opportunity to improve the firm.

The report’s author, Patricia Wheatley Burt, a human resources management specialist at Trafalgar, said leaders from across the City and elsewhere told her that “by taking out value today, the partners are effectively denuding the firm for subsequent generations, which will not entice younger talent to stay”. The report quotes Tim Nash, chief executive of 33-partner City firm Edwin Coe, who said: “In part, it is a generational thing – so if the current partners take out the money, it leaves nothing for the next generation.”

Ms Wheatley Burt continues: “Investment is not about getting money out of the business, but how to deliver better service, by investing in the structure, de-skilling processes, recruiting talent, embedding technology, managing insurance risks and clarifying leadership and control.”

According to the report, if they are interested at all, investors are likely to focus on firms in the top 30 to 200 that appear to give “scope for replicable, scalable and sustainable legal services delivery”. But the loss of control that results from external investment and the scale and speed of returns sought by investors will prove unattractive to managing partners, it adds.

Many private equity firms have no interest in investing in law firms, the report said. It quotes Jeremy Hand, managing partner of Lyceum Capital, as saying: “I have never been keen on investing in a traditional law firm, whereas streamlined new business models are more appealing, including areas such as legal and business process outsourcing and technology – areas aimed at increasing efficiency and effectiveness in the legal process whilst driving down the cost.”

Disputing this view, Tony Williams, principal of law firm consultants Jomati and a former managing partner of Clifford Chance, told Ms Wheatley Burt that outside capital will have a role to play, although what firms might do with the investment is unclear: “Devising methods to retain talent with, say, share options or to ease out baby boomers at low enough prices, will enable the firm to invest in talented people for the future.”

The report is downbeat about the prospects for high street practices. With little or no economy of scale, limited brand name appeal and a weak market position, their future may lie in “affiliations or quasi-legal processing ‘factories’”, it says. High street firms’ liabilities, including run-off insurance, staff, buildings and loans, will all contribute to making such practices “unappetising to an acquirer or investor”, unless they happen to possess “some star quality, a niche practice, or are highly profitable”.

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