A blog by Joel Barolsky of Barolsky Advisors

Not quite the life of Harvey Spector

In Articles, Commentary on 2 February 2019 at 2:40 pm

Full text of my op-ed published in the Australian Financial Review on 1 February 2019.

The Australian Financial Review December 2018 Partnership Survey is fascinating for what it shows and what it doesn’t show. On the surface it reveals overall market growth as a result of the Haine Royal Commission, major infrastructure projects, real estate investment, regulatory change, private client wealth transfer, litigation funding and class action defence. It also reveals the rapid ascent of the law divisions of the Big 4 to a total of 87 partners.

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AFR print edition

However, the AFR Partnership Survey doesn’t show the names of four major firms that, for all intents and purposes, failed: Henry Davis York, Dibbs Barker, TressCox and Kemp Strang.

Paradoxically the latter firms weathered all the ups and downs over the past decades but failed in a rapidly growing market. Their demise can be traced to a combination of competitor aggressiveness, poor market focus and internal instability. The loss of key rainmakers to highly-acquisitive firms HWL Ebsworth had an immediate back-pocket impact on their high fixed cost business model. Profits took a further hit by a primary focus by some on commoditised banking, property and government work with a non-commodity low scale service delivery model. Coping with all these pressures with consensus-based decision-making significantly hindered rather than helped.

A broken talent supply model

Many of the law firms interviewed for the AFR survey indicated that they will be significantly increasing their graduate intake in 2019. The data revealed a rough ratio of 0.6 new graduates for every existing partner. The total of partners listed in the survey, plus the no-show Minter Ellison, is 3,560. At the 0.6 ratio we’re talking roughly 2,200 new graduates to be apprenticed at the elite level in 2019. Add another 1,000 for quality commercial and plaintiff firms and organisations not listed in the survey and we get a total of 3,200.

Australia’s 39 law schools produce around 8,000 graduates per annum. This means an immediate attrition rate of 60%. And 2019 is a boom year for graduate hiring.

Graduates then join our top law firms expecting to be Harvey Spector (or your favourite TV law hero) on Day 20 and find out that it’s not so glamorous. In fact, if one takes indicative employee experience data from Glassdoor.com.au, we see that many find it pretty average (ratings out of 5 for the top 5 firms):

·      HWL Ebsworth: 2.5

·      Clayton Utz: 3.6

·      King & Wood Mallesons: 3.1

·      Herbert Smith Freehills: 3.7

·      Norton Rose Fulbright: 3.4

Within three years of working in a major firm, a number of disillusioned trainees leave and seek employment elsewhere. This ultimately results in a shrinking talent pool of quality mid-level 3 to 7-year PQE lawyers.

Paradoxically, we have 60% over-supply of legal graduates but a significant shortage of trained lawyers. Surely, there must be a better, fairer and more sustainable way to supply top talent to our top firms?

Three strategic questions

There are three strategic questions have taken up thousands of partner decision-making hours across many of the firms listed in the AFR Survey in recent years:

·     Should we join up with a global firm?

·     Should we change our partner remuneration model?

·     How do we differentiate our firm?

Using partner numbers and growth as a proxy for success, the AFR survey reveals that both global and domestic firms are thriving. In the Top 20, we have seven globals and 13 locals (including Minters). It appears that there is a compelling argument that both models work.

The data indicates that there is no correlation with any particular partner remuneration model. Amongst the Top 20 firms we have strong individual performance-based models in firms like HWL Ebsworth and Mills Oakley, lock-step equal share models in firms Hall & Wilcox and Maddocks and hybrids like Allens and Baker & McKenzie.

If market differentiation was a critical success factor then one would expect three or four standout brands, like a Qantas and Virgin in airlines or Coles, Woolworth and IGA in grocery retail. The AFR survey reveals 54 brands with no obvious differentiation within broad peer groups. Given that many of the first listed are highly profitable it appears that there many more important factors that determine success than market differentiation.

In my view, firms would be far better off worrying less about globalisation, rem models and pursuing differentiation. The things that really matter are growing the pie through effective firm and practice leadership, nurturing a strong organisational culture, strategic focus and operational excellence.

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