Full text of my opinion piece first published in the Australian Financial Review on 9 July 2020.
Most practice teams in the larger law firms have been set up with partners as the “finders” and “minders” and associates as “grinders”.
A decade’s worth of time records analysed by Thomson Reuters Peer Monitor shows that associates have around 10 more billable hours per month on average than partners in the same firm.
However, in April and May 2020 – the first full months of the COVID-19 lockdown and remote working – this long-term trend reversed and partners recorded more billable hours than associates.
There are two questions worth asking. Why are partners producing more now? Can all the new partners in the Financial Review Law Partnership Survey expect a permanent change in their role? In other words, will they have to be finders, minders and grinders?
Why now?
Many law firm clients went into crisis mode with the onset of the coronavirus. Deals needed to be completed quickly. Funding needed to be secured urgently. Disputes on unfulfilled contracts needed rapid resolution. Almost daily changes to government regulation needed interpretation and action.
To deal with these pressing and complex issues many clients indicated a strong preference to get more direct access to partners. This meant fewer opportunities for delegation to associates.
Cost-conscious clients also had less tolerance for juniors being allowed to learn on these matters. As one general counsel put it to me: “I was happy to see one maybe two people [from the law firm] on [Microsoft] Teams, but not a football team.”
Another factor that has led to the increase in partner hours at some firms is partners holding on to more work due to fear of a broader market slowdown so they can hit their personal billing targets.
During the GFC, many large firms cut partner numbers through a combination of de-equitisation, early retirements, dismissals and reduced promotions.
While many firms now prefer measuring the contribution of a team rather than an individual, having a healthy personal practice can strengthen a partner’s case for retention if things get tough. In recent weeks, it appears that some partners and associates have been getting a little tired of working from home.
After the rush of adrenalin in dealing with the crisis and keeping connected during March and April, there’s now slightly less enthusiasm for the weekly video drinks – and growing frustration with the clunkiness of a distributed workforce.
Supervision, training and delegation is hard enough when everyone is co-located and physically present in a purpose-designed city office. It’s that much harder when associates are working from a kitchen table in a shared rental apartment with variable NBN speeds.
As time moves on, some partners might resort to the easier – though strategically flawed – option of doing most of the work themselves.
Will there be a permanent change?
No, and yes.
Leverage of non-partner fee-earners is at the heart of the law firm business model. The economics of having lots of associates doing lots of production will not change in the years ahead. Effective and efficient delivery of larger transactions, projects and disputes will still require teams of lawyers, paralegals and legal technologists at different levels.
Over time, firms that don’t tailor their approach for each project will lose out to those that do.
When demand returns, the issues around less delegation should ease. Intransigent hoarders will get caught out and move on – or be moved on.
As technology and workflows improve over time, the clunkiness of the remote workforce should diminish and become less of a handbrake.
One change that will hopefully stick is that of the law firm partner as the client’s primary strategic risk advisor. The coronavirus crisis has revealed the relevance of experienced lawyers in assisting clients on things that matter. This period should hopefully build their confidence as strategic advisors from a legal perspective and not just narrow technical legal specialists.
The discussion above suggests that perhaps the finder minder grinder characterisation is a little out of date.
A better description of the role of partner is that of a strategic advisor and leader – a thought leader, a team leader, a client account leader, a project leader and a sales leader.
The winners will be those firms that recruit and develop outstanding legal leaders and not just see their associates as high-billable grinders.
business, client loyalty, client relationships, culture, executive leadership team, governance, growth, innovation, Leadership capacity, professional service firms
Is HWL Ebsworth Limited a buy?
In Articles, Commentary on 30 August 2020 at 12:35 pmFull text of my opinion piece first published in the Australian Financial Review on 27 August 2020.
Earlier this week, the Australian Financial Review reported that HWL Ebsworth (HWLE) was preparing to list the firm on the ASX with a $1 Billion-plus valuation.
While details are scant at this stage, it is worth asking whether stockbrokers will recommend a BUY when the HWLE Limited prospectus is issued?
My prediction is they will give this IPO a thumbs down for five main reasons.
#1 Insufficient surplus
As a listed entity, HWLE partners will have to share a portion of the firm’s profits with external shareholders. For the sake of argument assume the current partners enjoy average earnings of $1.5 million per annum. In the future, partner earnings – salary plus bonus minus profit share – might reduce to say $1 million. The incumbent partners will most likely accept a reduced annual income given their significant capital gain upon listing.
This business case seems logical but misses one key point – there is a fiercely competitive market for top talent. Many of the best HWLE partners are proven rainmakers will still be able to command incomes around $1.5 million or more at other non-listed law firms or by setting up their own practice when their employment and escrow handcuffs come off.
At $1 million – the maximum the firm can pay and still maintain dividend payments – HWLE Limited will be way off the mark in attracting any new ‘$1.5 million’ partners.
Over the long term, there’s insufficient surplus to keep both partners and external shareholders happy.
#2 Clients don’t buy the firm
When Shine Justice Limited first listed on the ASX, they presented strong evidence that their personal injury clients chose them because they trusted the firm’s brand and were largely lawyer agnostic. When IPH listed, investors were enticed by a large proportion of annuity income from patent and TM renewals and an ambitious plan to scale.
When it comes to HWLE’s mostly business-to-business relationships, research shows that clients are much more discerning around who does their work.
#3 Vague growth story
External shareholders examining the IPO prospectus will be looking for a compelling growth story. They will want to see how a fresh capital injection will drive shareholder value.
Under Juan Martinez’s leadership, HWLE has a solid track record of acquiring legal practices without the need to splash much cash. Economies of scale work well in mining but less so in premium legal where even boutique firms can generate supernormal profits. Despite all the hype, there’s no legal technology yet available that will create a sustainable cost or client service advantage. Creating a multi-disciplinary practice or moving offshore is fraught with risk.
So, unless I’m missing something, the growth plan beyond more of the same seems less than convincing.
#4 Key person risk
From interviews with former staff, it appears that Juan Martinez has a robust directed leadership style. Overheads are kept to a minimum and all lawyers are encouraged to be on the tools all the time to compensate for below-market pricing.
This is the operating model that has been the bedrock of HWLE’s success to date.
Given Mr Martinez’s tenure and track record, the market will have many questions over the strength of HWLE’s bench. If the proverbial bus had to arrive who will keep the firm together and herd the cats? I’d imagine the firm’s value will be discounted heavily because of this key person risk.
#5 More losses than wins
Future investors in HWLE will have a good look at the investment category and proceed with caution. A 20-year analysis of law and accounting firm IPOs in Australia reveals far more losses than wins, especially for external investors. This includes firms like Stockfords, Harts and Slater & Gordon.
One of the reasons for these failures is the loss of the partnership culture that underpins their initial success. This culture comes from the incumbent partners’ sense of proprietorship, stewardship, collegiality and identity. Shifting from partner to employee is a big shock to many. Financial transparency, share price volatility and an added compliance burden all often have a negative cultural impact.
In conclusion
I have drawn strong conclusions about the potential float of HWLE without access to any specific details. I look forward to reviewing their IPO prospectus and seeing how wrong I am. But if I’m not, buyer beware!
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