A blog by Joel Barolsky of Barolsky Advisors

Posts Tagged ‘professional service firms’

The empire strikes back

In Articles, Commentary, Legal Technology on 8 October 2021 at 11:20 am

The full text of my opinion piece first published in the Australian Financial Review on 7 October 2021.

The biggest structural change in the Australian legal market over the past 30 years has been the growth of in-house legal teams.

 But while the vast majority of current in-house solicitors received their initial training in private law firms and then moved across to the client side, I predict that the next decade will see a reversal of this trend, particularly at more senior levels.

 In comparing the employee value proposition of in-house versus private practice, there are five areas where law firms are fighting back.

Flexibility

In a post-COVID-19 world, very few law firms will return to a work schedule of 9 to 5, five days a week, in the office. They will be far more accommodating of lawyers seeking to work from home for part of the week, or those wanting to work across different time slots in the day or to limit the number of workdays.

Any perceived advantage that in-house roles were more flexible has been eliminated by law firms learning to operate effectively in an anywhere anytime model.

Workload

For many years, the lure of in-house has been roles with more work-life balance, less stress, and no timesheets. 

While no timesheets are still a point of difference, most in-house lawyers are now reportedly working extremely long hours and are stretched thin. The pressure for them to do more with less is incessant, and the demands on their time are likely to grow rather than diminish. 

On the other side of the fence, many law firms are rejigging the workload of graduates and early career lawyers to be far more sustainable. They have also stepped up their programs focused on employee mental health and wellbeing.

Technology

Association of Corporate Counsel research suggests General Counsel are constrained in adopting technology by restrictions on capital expenditure and a lack of time to implement new systems.

Many law firms, in contrast, are ramping up their technology investment and experimentation. The recent Thomson Reuters State of the Legal Market found that law firms spent over $22,000 per lawyer on legal technology in FY21. The same paper revealed that 30 out of the 50 largest law firms in Australia now have an innovation function.

Over time, the technology gap between in-house and private will grow. A career move in-house may become to be seen as a step back in time – a move to a job using old and blunt tools of the trade.

Income

Data from legal recruiters Mahlab suggests in-house teams pay more for 3 to 7-year PQE lawyers, but after that, the differential starts to swing the other way. Equity partners in premium law firms are now earning incomes that far exceed their peers in in-house roles, save for a few GCs of major listed companies that enjoy exceptional incentive arrangements.

Private practice salaries and benefits are estimated to increase by 8 to 10% in the coming years. It will be very hard for in-house to price match given budget constraints and the need for consistency across organisation-wide pay scales. To the chagrin of many CFOs, in-house lawyers are already the most expensive people on their payroll outside the C-suite.

Culture

“It’s a boys’ club”, has been a common refrain of female lawyers leaving private practice. With an industry average of just under one-third of female law firm partners, their complaint may have had just cause, till now.

Most of the top 30 law firms across Australia have fully committed to a 40:40:20 or an equivalent diversity goal at partner level. Significant efforts are being made to address unconscious bias and to eliminate sexist language and behaviour. More senior leadership roles are filled by women. Comprehensive diversity and inclusion programs are now the norm.

The progress is slow, but the prevailing culture across many law firms is shifting on gender issues.

If trends in the five areas described above persist, the employee value proposition of in-house will become less compelling. With increasing demand, in-house teams will have to build their own capacity by hiring more graduates and invest in early-career legal and commercial training.

This is good news for law firms; after years of training young talent only to lose them to in-house roles, the shoe will comfortably fit on the other foot.

The Big 4 in law – failing again?

In Articles, Commentary on 4 September 2021 at 12:13 pm

The full text of my opinion piece first published in the Australian Financial Review on 3 September 2021.

In 2018, PwC announced that it aimed to be a top 20 law firm in the world within five years. KPMG and EY also stated their intentions to significantly grow their legal teams.

While these ambitions of global domination are noteworthy, the progress of the big four in law has been underwhelming.

On one tangible measure of progress – the number of Australian-based partners – the evidence suggests PwC Legal has gone backwards, KPMG Legal has stalled, EY Law is growing, and Deloitte is still making up their minds.

If one added all the big four law firm partners and made one firm, this new player wouldn’t even make the top 15 in the latest Australian Financial Review Law Partnership Survey.

On other metrics, like lead roles in major M&A transactions, they’re hardly making a splash. They’ve made no attempt to enter the litigation space and recent headlines have been more about departures than new hires.

While the big four have made some inroads in managed service and volume legal solutions, this is mostly impacting in-house legal teams rather taking a lot of work from established law firms.

There are five major reasons why the big four might be struggling in law.

#1 The one-stop-shop

The essence of the big four value proposition is a one-stop-shop: buy all your business advisory services from us and there will be lower transaction costs, more integrated advice and a better client experience.

The problem is many sophisticated clients just don’t buy it. They regard the one-shop as risky and lazy.

These buyers prefer horses for courses and back themselves to pick out tried and tested specialists. They recognise the benefits of cognitive diversity and are wary of groupthink. They feel it’s easier to hold a specific firm accountable for their advice when it’s more discrete.

#2 Brand limitations

In another related market – management consulting – high-end strategy advice firms like McKinsey, BCG and Bain still have the lion’s share of the best work. On the supply side, top MBA graduates generally prefer jobs in these places than the big four.

I think there are similar limitations when it comes to premium legal work. When clients have a bet-the-farm legal matter, the big four are not naturally considered as part of the tier 1 set (tax excepted).

For smaller matters and operational work, the big four are not naturally in the tier 2 consideration set, as they mostly price themselves above it.

#3 Conflicts

The big four are just that. Four! This has inevitably put limits on their penetration of the legal market.

It is estimated that the ASX50 is served by more than 300 law firms, barristers, freelancers and other legal consultants.

One of the key reasons for this fragmentation is conflicts. Most legal clients are particularly sensitive to the same advisers being involved, directly or peripherally, on both sides of a transaction or a dispute.

The threshold test of perceived conflict in legal matters is also much higher than, say, helping competing companies implement an enterprise software system.

#4 Leadership

Tony O’Malley at PwC and Stuart Fuller at KPMG led the way in growing their firms’ legal practices in Australia.

Interestingly, both these leaders were promoted to senior global roles about two years ago.

While it’s hard to quantify the impact of such changes, it seems that some of the drive and energy of the local practice has been lost with these promotions.

#5 The club

For the big four to make serious inroads into legal, quickly, they would have needed to poach some heavy hitters from heavy-hitting firms. Assuming they can match incomes, they would be asking these lawyers to leave their club.

This is how a typical lawyer rainmaker might weigh up a move.

“The new club is a lot, lot bigger and I will have even fewer decision rights. The new club will pander less to my specific needs, given it already has dozens of heavy hitters. The new club will ask me to fit into their service style and product ‘packaging’.

“The new club will be run by bean counters. Nah! I’d rather stay.”

Is your practice in the right shape?

In Uncategorized on 14 August 2021 at 12:10 pm

The full text of my opinion piece first published in the Australian Financial Review on 12 August 2021.

The start of a new financial year often coincides with law firm partners updating their budget and doing a strategy health check.

Targets are usually set around revenue, margins and headcount, as well as qualitative indicators such as client service and staff engagement.

This is great, but there is one critical thing missing.

Practice shape is one of the most important drivers of success but seldom gets a mention. By shape, I mean the number, type and roles of practitioners at different levels within a practice team.

David Maister, in his seminal work, Managing the Professional Services Firm, stated, “many factors play a role in bringing goals [of client service, staff satisfaction and financial success] into harmony, but one has a pre-eminent position: the ratio of junior, middle-level, and senior staff.”

Getting it wrong

Poor practice design can be a handbrake on practice performance.

Being too ‘top heavy’ can result in mid-level lawyers leaving to join other firms with better promotion prospects. It could also lead to deep discounting so as to match competitors with more appropriate leverage.

A ‘bottom-heavy’ practice runs the risk of producing lower quality work and creating burnout and stress for those left to carry the load. (Bottom-heavy is also a good description of me after 18 months of intermittent Covid-19 lockdowns 😀).

A ‘missing middle’ often leads to practice stagnation and major financial opportunity costs. Interestingly, many premium firms are facing this issue right now partly as a result of reduced graduate intake in the mid-2010s.

Bad design can also contribute to systemic under-delegation. Partners who hog all the work make their practice far less competitive over time, not to mention sapping the morale of their people.

Succession is also a whole lot easier when the next generation is there trained, ready and waiting.

AFR August 2021

New shapes

The world has changed since David Maister first published his book in 1993. New technologies, providers, channels and delivery platforms have created new design opportunities beyond the traditional pyramid.

With the rocket model, the left and right corners of the pyramid are cut out and most low-level process work is done using a combination of legal technology, paralegals and law @ scale outsource providers. Rocket practice teams generally have fewer entry-level lawyer positions and more legal operations roles.

The hub and spoke model has a partner at the centre of a network that brings in a range of different resources and modular solutions to solve a specific client problem. These resources may include full-time lawyers in their firm as well as advisors from other professional service firms, the bar, data analysts, client resources and third-party software platforms.

The agency shape splits a practice into specialist groups focused on what they’re best at. A great example of this is the award-winning ad agency, Thinkerbell.

Thinkerbell has two groups: Thinkers and Tinkers. To quote their website, Thinkers are “a cross between strategy-types and suity-types, they ask a lot of questions and listen very carefully for the answers. They’re problem-solvers.”

It says Tinkers are “creativey-types and producery-types who pull things apart and put them back together again. They hit things with hammers and fiddle with knobs and buttons. They experiment, and play and build.”

Revisit your design

So, returning to annual budgets and strategic plans, practice leaders need to ask themselves a few critical questions about their current practice shape:

  • does it help or hinder career advancement and learning opportunities?
  • does it fit with the mix and complexity of the work?
  • does it optimise the business model i.e. how the team makes money?
  • what should the shape look like in three years, and in seven years?
  • what alternatives could be considered?

The agency model might not be a realistic alternative at this time, but it’s essential that leaders keep thinking and tinking when it comes to practice shape.

Karate Kid lesson for law firms

In Articles, Commentary on 12 July 2021 at 11:49 am

There are two broad scenarios for the future of the Australian legal market: Vax On and Vax Off (with apologies to Karate Kid fans).

Vax On describes a scenario of buoyant demand and a growing legal market. Vax Off is the opposite.

Events over the past three weeks have increased the odds of the Vax Off scenario from highly unlikely to a distinct possibility.

The scenarios

Vax On is centred on the idea that Australia will be successful in vaccinating its population relatively quickly and emerge strongly into a post-Covid normal state within six to eight months. Most of the current drivers of legal demand are positive and will continue to be so in a Vax On world.

The Vax-Off scenario is based on slow vaccination rates and conservative health policy settings.

On 2 July 2021, the Morrison Government announced a four-phase plan to return to Covid Normal. If the snail-paced vaccination rates continue as they are, we may only reach Phase 2 in the second quarter of 2022 and Phase 4 in 2023.

Vax Off will mean we stay with closed borders and disruptive lockdowns for quite some time yet. A prolonged period before Phase 4 will have significant implications for the broader economy and law firms.

#1 Brain drain

In the Vax Off scenario, the UK, USA and other legal centres may return to a Covid normal state 12 months ahead of Australia. Many ambitious, talented young Australian lawyers will see major benefits working and living abroad. The pitch is compelling – do great work, earn good money, live without lockdowns, and put your passport to good use.

The current tide of talented ex-pats returning home will shift from a small flow to a major ebb.

This brain drain will hit Australia’s law firms when these resources are needed the most and firms have few viable Plan Bs. A second-order impact might be a significant spike in average salaries and benefits paid to those lawyers that have remained at home. 

#2 A depressed commercial property market

Lockdowns mean full-time work in the office is off the table. Border closures will result in fewer international students, tourists and migrants.

In combination, all these factors point to a significant drop in demand for commercial properties, hotels and high rise residential real estate.

A depressed property market will directly impact real estate lawyers, but it could also affect other related areas like construction, banking, project finance, and funds.

#3 Collapse in travel, tourism and education

Government support packages and insolvency moratoriums since April 2020 have kept most businesses in the travel, tourism and education sectors alive. In a Vax Off world, a vast majority of these businesses are too small to save, and the liquidators will eventually move in.

At one level, that’s good news for law firms’ insolvency practices, but the flow-on impact of significant job losses and the fall of iconic brands will lower consumer confidence and GDP. 

#4 A return of protectionism

Leading economist Saul Eslake recently argued that the long-term economic damage from closed borders might have a similar impact to the trade barriers that lowered Australia’s living standards up until the 1980s.

An extended Vax Off period runs the risk of Australian businesses and law firms becoming less relevant in global markets and losing out on major deals and projects.

#5 Disrupted operations

Almost all of Australia’s Top 30 law firms have some kind of international alliance or connection. Herbert Smith Freehills, for example, is a financially integrated global partnership. Maddocks is a member of ADVOC – a network of independent firms spread across the world.

Most cross-border collaboration is going to be negatively impacted in a Vax Off scenario. There will be no physical meetings and limited joint business development activity. International client and referral relationships that have taken many years to cultivate will weaken.

Scenario planning is often done when there are two or three alternative futures that are possible, uncertain and beyond any party’s direct control. In the case of the Vax On or Vax Off scenarios, our political leaders can have a major influence on which future we have.

Let’s hope they soon find the courage of Karate Kid’s Daniel Laruso and the wisdom of Mr Miyaji.

Hey partner, do you know where you sit on the career curve?

In Articles, Commentary on 28 June 2021 at 7:59 pm

The full text of my opinion piece first published in the Australian Financial Review on 10 June 2021.

In nature, a seed is planted, begins to sprout, matures, becomes an adult, and then eventually regenerates. While not as unequivocal as the laws of nature, the careers of partners in premium law firms generally go through five distinct phases.

  • Phase one: find my feet. Partners typically work hard to validate the business case for their promotion. They spend time working out how things really work, who calls the shots and what it takes to succeed.
  • Phase two: create backbone. Partners cement their anchor clients and referrers. They build the team and technology necessary for efficient service delivery and a compelling client experience.
  • Phase three: make hay. Partners really hit their straps and use their strong personal brands and honed business development skills to win and deliver an increasing flow of profitable work.
  • Phase four: widen contribution. In addition to growing their own practice, these partners collaborate actively across the firm, expanding existing client relationships, cross-servicing and seeding new opportunities. They share their knowledge and contacts widely and help monetise their IP in new algorithms, products and thought leadership. Some also take on practice and firm leadership roles.
  • Phase five: transition to others. Senior partners in this phase commence the development of designated successors. They start to let go of the reins and lend their social capital to others.

Proactive conversations about a partner’s desired career curve – shape, angle, timing and gaps of the phases – can be of significant benefit to the individual and the firm.

The shape of the arc

The duration of each phase varies significantly from person to person. It is not simply an average 30-year partner tenure divided by five equal phases.

Many partners would have a career that follows a classic “S” curve, with ordered progression through the five phases. There may be a few “J” curves or hockey-sticks that reflect a flat or declining phase one followed by continued rapid growth.

There are partners who have a career arc that looks like a series of angled “Ws”, going from boom to bust to boom, reflecting an innate ability to reinvent themselves.

In more recent times, there are career arcs that have missing chunks as people take extended time out for other commitments.

The early days

In the past, it was common for phase one and two partners to be left alone to sink or swim. It was assumed that, on promotion, the individual became all-knowing and capable.

But many progressive firms now offer tailored training and coaching support to build resilience and keep them on a positive trajectory. Most firms also recognise that these early days often coincide with major changes in partners’ personal lives, like starting a family and taking on more debt. Work-life integration at these early stages is beset with competing demands.

A missed opportunity

A firm filled with phase three “haymakers” sounds wonderful, but recent Harvard research indicates that there is much more to gain if they instead develop a strong collaborative culture with a healthy cohort of phase four partners. These benefits include more valuable client work at higher margins and greater staff engagement.

But going from phase three to four is easier said than done, especially for those individuals who are hard-wired to work autonomously.

Each firm should clarify what the “widen contribution” phase looks and feels like to them and whether there are any practice-area variances. Alignment of measurement and reward to create more phase fours is a good next step, with measurement used to improve not just prove.

Leaving well

Phase five is quite often dealt with too late or superficially. This may be due to a reluctance of a senior partner to let go, the inability of the next generation to step up, the risk of client defections and/or the financial circumstances of the individuals involved.

Like at all other phases, every partner should be asked, and should ask themselves where are they on the career arc, what to prioritise to succeed in the current phase, where next and how?

How law firms can do more with less

In Articles, Commentary, Legal Technology on 5 March 2021 at 6:22 pm

The full text of my opinion piece first published in the Australian Financial Review on 4 March 2021.

Commercial law firms face constant pressure from clients to do more for less.

They can respond in three ways: say it can’t be done and risk losing out to competitors, drop their prices, or make a step change to improve productivity.

Most are pursuing option 3 and are looking to legal operations to make it happen.

What are legal operations?

Legal operations usually include some or all of these disciplines:

  • Business Management – commercial managers focused on improving profitability, increasing revenues and optimising efficiency.
  • Service Design – workflow and client experience specialists that evaluate, accelerate and support legal process improvement projects. They also often assist with new product development and act as incubators for new business ideas.
  • Legal Project Management – project professionals that make legal work tractable, trackable and transparent, for both lawyers and clients.
  • Pricing – pricing experts that help partners to have better client conversations, align price with value, protect margins, and where appropriate, use alternative fee arrangements.
  • Alternative Legal Services – a team of paralegals, legal technologist and lawyers focused on high-volume process work including e-discovery, transactional and dispute support, language editing, document review and IP management.

Australian experience

In Australia, some very large national firms have embraced a centralised approach to legal operations. Others have adopted a more decentralised model with each major practice group acquiring the resources specific to their needs. 

Over time, I would expect most firms will move to a model of centralised governance to avoid duplication and facilitate the sharing of knowledge and applications. At the same time, operational specialists need to work right at the coalface to find smarter ways to deliver more for less.

Innovation roles will be also subsumed into legal operations. Legal secretaries and assistants will still work directly with local lawyers but will be more connected with and directed by legal operations.

In medium-sized and smaller law firms, a new business service function will likely emerge with the status of HR, marketing and finance. It will often start with outsourcing basic IT services – hardware, software and helpdesk – and the insourcing of specialist tech-savvy resources to help lift productivity and client connection in key practice areas. Once this is established, other roles involved in supporting legal service delivery will enter the legal operations orbit.

New career pathways

This emerging area of legal operations is also creating an alternative – and attractive – career path for lawyers.

They benefit from a deep knowledge of the intrinsic needs within a legal workflow, but also enjoy the respect of the various stakeholders involved in migrating to a new way of working.

MinterEllison offers new lawyers the option of entering its Legal Operations Graduate Program. The program gives candidates exposure to lean six sigma, design thinking, change management and agile methodologies. The firm recently graduated its first cohort and is reported to be delighted with the outcomes so far.

The growth of legal operations is not just confined to law firms.

Stuart Fuller, the global head of KPMG Legal Services, recently predicted that “half of the [in-house] legal team will not be lawyers by 2025”.

Fuller says the use of automated solutions, chatbots and other forms of productised legal services will rise, and these will need support from lawyers as well as a more multidisciplinary workforce with different skill sets. As a result, the proportion of legal work done by paralegals, data analysts, operational experts and other specialists might rise to the point where legal professionals become a minority.

The key message is that the path to improved productivity is not pressuring lawyers to bill more time, but rather working smarter with the evolving disciplines of legal operations.

Partners or owners: the law firm divide

In Articles, Commentary on 14 December 2020 at 9:40 am

The full text of my opinion piece first published in the Australian Financial Review on 11 December 2020.

One of the most striking statistics from The Australian Financial Review Law Partnership Survey is the wide variation in the ratio of equity to non-equity partners across Australia’s top 50 law firms.

In some firms, like Colin Biggers & Paisley and McCabe Curwood, only 20 per cent of partners have an equity stake.

At the other end of the spectrum, nine firms report that 100 per cent of their partners have equity. However, partners in these firms are often not on an equal footing. Newly minted partners in these firms can earn as little as 25 per cent of a full share. In other firms, individual partner earnings are based more on an assessment of their annual contribution instead of the level of their shareholding.

Further analysis of the survey data suggests there is no discernible factor that determines the equity ratio. Variations can occur within and across tiers, service range and practice area.

The role of non-equity partner was first introduced as a form of trial period to assess whether a candidate should be made an equity partner. The “partner” title would allow the candidate to command the respect of clients, peers and staff necessary to build a successful practice and prove their worth. Being extra cautious in the final step to equity was prudent given the complexities in dealing with bad choices or established equity partners leaving.

In a similar vein, firms used the non-equity partner role as an entry point for new lateral hires on their way to equity partnership.

Over the past decade, the non-equity partner role has evolved into a de facto career position in some firms with the candidate having little chance of being offered an equity stake.

A large non-equity partner cohort can improve profitability – by lifting leverage and average billing rates – help share some risks and distribute the management load.

Challenges

While there are these benefits, a tightly held partnership does come with potential challenges:

  • An “us and them” schism emerging between the two classes of partner;
  • Flight risk of those non-equities who feel they can get a better deal elsewhere;
  • A lack of drive among non-equities who feel their careers have capped out;
  • A perception of inequity when the firm records super-normal profits that accrue only to a select few;
  • A cynicism that the non-equity role allows the firm to achieve its partner diversity targets without the need to share power;
  • A narrower base of internal funders and underwriters;
  • Duplication of partner communications and meetings; and,
  • A smaller pool of partners to select from for senior leadership roles.

A widely held partnership, on the other hand, faces the risk of being too conservative and too slow to promote top talent. A burgeoning bottleneck at the senior associate level can set the scene for a feeding frenzy for aggressive competitors.

To create a sustainable business and a positive culture, it is critical to make all partners, regardless of stake, feel and behave like business owners. They should be guardians of the firm’s assets and values, while embracing the agreed principles and disciplines of partnership.

Financial gain or pain

With senior equity partners, the money does a fair bit of the talking. The prospect of immediate financial gain or pain can help facilitate a proprietorial mindset.

For those with a little or no equity, their voice is often a bit softer, the risk is a bit higher and the task is that much harder.

The determining factor is the quality of leadership.

It means working with each partner to align firm and individual purpose, communicate what’s expected, provide the requisite support, give and get feedback – and hold them to account.

Is HWL Ebsworth Limited a buy?

In Articles, Commentary on 30 August 2020 at 12:35 pm

Full 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.

Screen Shot 2020-08-30 at 12.18.35 pm

#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.

HWLE external shareholders will not be buying a company with a strong brand with sticky institutional client relationships. They will be buying a collection of individual portable practices, each with their own reputation and client following.

#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!

How your law firm can limit virus hit to bottom line

In Articles, Commentary on 7 August 2020 at 3:42 pm

The full text of my 7 August 2020 opinion piece first published in the Australian Financial Review.

There is every chance that COVID-19 will mean a big hit to your firm’s revenue for the 2020-21 financial year. So, what levers are you using to limit the downside impact on profitability?

Greg Keith, the chief executive of accounting firm Grant Thornton, recently indicated he was anticipating a decline of 8.5 per cent in revenue and 33 per cent in profit.

It means that for every 1 per cent drop in income, they are forecasting a fall of nearly 4 per cent in profits.

Accounting firms, like law firms, are mostly high fixed-cost businesses that are super-sensitive to changes in revenue – both on the downside and the upside.

To limit the profit impact, firms tend to first cut non-essential spending like travel and entertainment. After these “easy” savings are exhausted, reducing staff numbers comes into the frame.

While there are obvious short-term benefits – staffing can comprise 60 per cent of all expenses – there’s a significant risk of not having enough of the right resources on hand when demand picks up. So, the 2020-21 saving needs to be weighed up against the full cost of re-hiring and training in the future.

In my view, there are two areas where firms could do a lot better to enhance profitability without letting people go – pricing and the sharing of resources.

Pricing for profit

Over the last few years, most mid-sized and large firms have worked on their pricing practices.

With a significant market downturn and price war on the cards, one firm recently redoubled its support for partners to preserve and capture value through price. This included video training modules on value articulation, gamified programs around price negotiation, improved analytics, new pricing tools [like Price High or Low 😀] and more direct hand-holding for new business pitches.

Some firms are adopting a range of creative strategies to meet client needs rather than merely dropping price. They include:

  • Adjusting payment terms and conditions so strapped clients are more willing to brief the firm rather than others;
  • Offering non-time-based pricing structures such as subscriptions, contingency fees or amortising fees;
  • Special promotions in ‘ring-fenced’ service areas to avoid across-the-board rate cuts and safeguard the firm’s brand position; and
  • Offering options at different price points.

One law firm offers its clients three pricing options on every new matter. They’ve adapted Qantas’ pricing approach by offering the equivalent of the airline’s Red e-Deal, Flex and Business Class options.  As with Qantas, each option has the same core benefits around quality and reliability but differ in terms of the format of the deliverables, roles, timing and scope.

Another firm analysed their top 100 clients to determine how each was being affected so they could tailor messages and offers. In one instance, this led to a new digital service offering as some clients moved to virtual selling and distributed operations. In another case, they shifted to a self-service model for a client going through a major cost-cutting exercise.

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Resource sharing

I was recently advising a law firm where analysis of time records revealed that some individuals and teams were extremely busy while others were well below capacity.

When I asked why resources were not shared to even out workloads, the most common response was that lawyers could not easily work outside their area of specialisation.

Not satisfied with that objection, I delved a bit deeper. My enquiries revealed a range of constraints – cultural, structural and personality – to collaboration. For some partners, “letting my people go” was a sign of failure. For others, they didn’t see any direct financial incentive to share resources, so they didn’t bother. In one office, each practice team saw itself as a self-contained business, and the prevailing mindset was more competitive rather than co-operative.

In good times, there’s often enough fat in the system to ignore these problems, But if your firm is looking at an equation that means every 1 per cent drop in revenue leads to a 4 per cent drop in profits, then you might need to change your thinking.

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