The traditional law firm model does not support entrepreneurs who want to build and sell a business, according to the solicitor who last week sold his company for £61m.
Mark Ellis said the key to building value in a service business was to create a recurring revenue stream not dependent on any individual.
He founded Chester-based Ellis Whittam (EW) – an employment law, HR and health & safety business built on fixed fees – in 2004 and sold it last week to Marlowe plc. His minority private equity investor also exited.
Mr Ellis is retiring from the business and in an interview with Legal Futures said that one of the reasons he left his equity partnership at Cheshire law firm Aaron & Partners was that he wanted to build something to sell.
“If your main career motivation is to be a great lawyer and to make a good living, private practice is a good option. However, that wasn’t me… I hadn’t seen many – or any – traditional firms scale up quickly and exit successfully.”
Decisions ended up being made by committee and slowly – amid the well-worn conflict between maximising annual earnings and investing for the longer term – and Mr Ellis said he felt the pressure to maximise billing contradicted the notions of fair fee and value.
“I wanted to provide great service but for a fixed fee, regardless of usage. I wanted clients to have absolute certainty of cost and peace of mind. I wanted to grow a business quickly, to disrupt the market and to become a market leader.
“Importantly, I was really clear from the outset that I wanted to build something to sell.”
This meant creating a “fast-growth” service business rather than a “slow growth” traditional law firm – and outside of a regulatory environment. EW did not need to be regulated and he saw no reason to take on the burden, although since last year changes in the rules mean that the solicitors the company employs no longer have to describe themselves as non-practising.
The key to success, he advised, was identifying recurring services that could be sold on long-term contracts – a model employment law suited perfectly. “The quid pro quo for the client committing to the contract is the certainty of a fixed fee.”
Mr Ellis acknowledged that this was harder with occasional services like litigation, property and commercial.
“However, doing so in some areas will help to retain clients in others. Think outside the box, be creative and be brave.
“Think about selling or giving away other services that add value and create stickiness and that encourage client inertia, such as self-serve case management software, HR software, a precedent bank portal or working with other professionals to offer additional relevant white-labelled software services.”
He pushed back against the notion that fixed fees lead to cutting corners and lower profit.
“Fixed fee is about quality, fair value and cost certainty. I don’t see those things as mutually exclusive. The lawyers at EW don’t have billing targets and are measured on a set of service based key performance indicators.
“EW has demonstrated that it’s perfectly possible to provide a profitable, high-quality fixed-fee service.”
He explained that a “proper” fixed-fee model worked when risk was shared with many clients, meaning the focus was on the profit made on the whole book.
“It gives me a lot of satisfaction when an employer paying an annual fee of, say, £5,000 uses services that might otherwise have cost £10,000 in a year – that’s the model working so long as the margin on the entire book is at target. That’s good for the client and good for the lawyers.
“What’s important is a long-term contract, working hard internally to drive up quality of service, whilst at the same time working smartly to drive down cost to serve and cost to acquire and, of course, making sure that the fixed fee is right.”
Mr Ellis said it was still important to record time to measure profitability on a case-by-case basis. “Assuming that pricing is right, over the contract term in most cases the margin levels out.”
EW grew quickly by employing salespeople: “You can’t grow a firm quickly by relying solely upon reputation and networking. Good lawyers are good lawyers, not good salespeople.
“I dread to think about the amount of time wasted by lawyers going to networking events that they don’t want to be at and at which they don’t win new work.”
EW’s “small” sales team, because it had the right people and support, brought in new business with a contract value in excess of £1m per month even during Covid. A good sales team should convert at least one in every three leads, in his view.
“Get used to the idea of your top salesperson earning more than your CEO or managing partner,” Mr Ellis said.
He predicted that law firms doing employment work would only face more competition – there has been a steady trickle of other employment and HR consultancies becoming alternative business structures (ABSs) and Mr Ellis said this only chipped away further at law firms’ differentiation.
In particular, the “mid-market” businesses of 500 to 5,000 employees – which generally appointed large commercial law firms for their employment work – were in the sights of consultancies as the moved up from their traditional SME focus. “One of the great opportunities for EW is to attack and grow in that mid-market,” he said.
There is increasing talk – not least from the government – of introducing some level of regulation to the unregulated market; while the debate usually focuses around private client services such as will-writing and estate administration, employment is one of the main unregulated sectors.
Mr Ellis doubts that it is needed. “It’s self-regulating really. The results speak for themselves. People are happy with the service, so why interfere?”
However, he would be comfortable with the possible move to at least allow consumers of unregulated legal services access to the Legal Ombudsman: “It’s something that nobody should fear.”
For him, the future for the traditional law firm was in providing “a boutique, high-quality specialist service” because in any area the work law is often repetitive or transactional in approach, “it can be provided well by qualified but less experienced lawyers in a fixed-fee environment”.
Asked to summarise the lessons he learned that could help law firms, he said: “Build a book of recurring business in those areas where you can do so, demonstrate strong renewal rates, successfully cross sell non-fixed fee services to the fixed fee book, build a reputation as thought leaders, invest in state of the art digital marketing, build a strong flow of inbound leads, build a successful sales conversion process – to demonstrate strong new business growth that is not dependant on individual lawyers – invest in great customer relationship and case management software, and focus on quality whilst also measuring cost to serve, cost to acquire and client profitably.”
It was also “really important” to clearly visualise your end game from the outset and “never ever forget that your people are your most important asset”. Ultimately, you need to “build a business that runs itself”.
Mr Ellis is taking a few weeks off now, but said that if you have built a business like EW, “you can’t sit still for too long”.
He is looking at other entrepreneurial opportunities, but – no doubt to the relief of those in traditional legal practices – said they will be outside the law.