Law firm finances: everyone’s business

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IBA ANNUAL CONFERENCE 2019

Presented by the Law Firm Management Committee and the Academic and Professional Development Committee

Wednesday 25 September 2019

Panel Co-Chairs

Hermann Knott  Andersen Tax & Legal, Cologne

Kathryn Rousin White and Case, London

Law firm finances are going through fundamental changes. Financial transparency, a more business-oriented legal market and the need to invest, in particular in technology, have changed the pattern. It follows from these developments that financial planning and continuous monitoring of key relevant data to meet financial targets have become the name of the game. Everyone’s cooperation and involvement is needed to fulfil those tasks. Transparency is a must. Law firm finances are no longer a ‘locked box’, visible only to the chosen few. Alternative, value-based fee models (causing irregular influx of cash) pose a challenge to the traditional model, where billing is based on hourly rates. Outside debt and even equity financing by third parties (including IPOs) have become available. This panel will discuss with the session participants how law firms should manage these changes, giving participants concrete takeaways for their own practices.

Panellists

Kevin Kim  BKL Korea

David Armitage  Gateley PLC

Hanim Hamzah  Zico Law Network

Nicholas Mavrakis  Clayton Utz

Quick survey of the Korean legal market

When Kevin Kim passed the Bar, only 300 students passed out of 20,000 candidates, and when Kim joined his firm, the biggest firm had fewer than 13 lawyers. They were all independent, small firms. Now, law schools in Korea tend to follow the United States model and 1500 lawyers graduate each year. There are approximately 30,000 lawyers practising in Korea. Kim’s firm is the biggest LLC in Korea. It had under 50 lawyers at the time of the Olympics and was the first firm in Gangnam. Now there are 650 lawyers in Seoul. Increasingly, Korean firms have adopted the US partnership approach: there are 200 partners (110 equity), many qualified to work in both Korea and New York. Korean lawyers often study for LLMs in the US. Korea has experienced great change in a relatively short period of time: for example, in cleaning up corruption. In terms of the partnership model, it is very democratic and merit-based: one partner, one vote and ‘eat what you kill’.

Managing financial performance

Nicholas Mavrakis described Clayton Utz (CU) (1200 lawyers, 180 partners). The firm takes a relatively traditional approach to performance and reporting. The Australian market is highly competitive. CU has a corporate-style approach with an audit committee. It is audited by the Big Four, and the board itself approves the budget. Line partners are very much accountable for the performance. The Chief Financial Official (CFO) is part of the senior leadership team and manages a P&L . Partners receive financial information in the form of a dashboard; they can also check the revenue of other partners, but they are not able to check the value of their equity. The firm takes financial reporting very seriously.

Net profit is a very important metric. Partners take monthly drawings. The firm also relies on commercial facilities from banks to even out cash flow. One of their key performance indicators (KPIs) is the volume of referrals between practice groups. In Australia, there is a peer review monitor. The top eight firms provide anonymised financial data to one consultancy, to measure themselves against their competitors nationally and city by city. In Australia, there has been no major challenge to hourly rate billing, so there is no real pressure to change. The big challenge is how to price large matters. In response, many firms have implemented pricing committees and novel billing arrangements. UC became a multi-disciplinary partnership (MDP) and also has a forensic practice. They also built an e-discovery platform.

Question: How do you track referrals and encourage teamwork?

Answer: When you call a colleague, this information is recorded, and you are recorded as the referring partner. This is an honour system. There is a KPI based on the minimum number of referrals you must achieve each year. The main basis of financial reporting is at a practice group level.

Alternative structures

Hanim Hamzah explained that Zico began in Malaysia, after the financial crisis, starting in Singapore. They identified the need for a new approach. There were many constraints in emerging markets and in 2014 they decided to set up the holding company offshore, taking the back office into the holding entity. The holding company was listed in the spring of 2014. There is a highly competitive market for talent in these networks, against the large international firms. Often their more unique structure attracts new talent. There is significant client demand for other services. Zico services is able to service other firms in theory (eg, they have a joint venture with the immigration lawyers Fragomen).

Zico holding company is a listed company; the law firm itself is not listed. The firm’s philosophy is to follow the client and not be active in markets where clients don’t ask them to be.

IPOs

Gateley (Holdings) PLC was admitted to the AIM market of the London Stock Exchange in June 2015. It was the first European firm to do an Initial Public Offering (UPO); there are now five others listed on AIM. The business structure is not significantly different; the major challenge in the United Kingdom remains the war for talent. Young lawyers no longer join a firm for life, but they may have up to three careers. The different ownership structure that a firm like Gateley offers can attract talent: everyone shares in the success and ownership of the firm.  When lawyers leave, they can retain their shareholdings.  The AIM platform gives the firm more ready access to capital and opportunities to reinvest capital, to build balance sheet strength and to make acquisitions issuing shares.

The first IPOs happened in Australia. They are not yet permitted by many jurisdictions and regulators, where there are restrictions on whether you can share profits with non-lawyers.  David talked through a few examples, such as Keystone: this is a virtual platform of compliance and back office services.

Gateley has doubled in size since its IPO.  Delivery of non-legal services complements the core business and helps the firm collaborate with clients; for example, this may include human capital and global mobility advisory services. Litigation funding is now frequently requested and offered and there are more lawyers involved in this. Most owners are lawyers at the firm and there are also some institutional investors and clients. As a mid-market firm, Gateley has been helped greatly by the AIM listing, with growth and talent attraction and retention and investment in the future.

Question: What was the client perception of the IPO?

Answer: There was significant demand from clients who feel that the IPO was valuable: that is, well-delivered and well-priced. Clients also appreciate the independence of the lawyers. The firm has not gone into accounting. The firm usually acquires established businesses which are complementary to Gateley. So far, the group is 90 per cent law and ten per cent non-legal.

Looking to the future

Korea follows the US model. All lawyers are independent and multidisciplinary practices (MDPs) have not yet been considered. They have hired CP to provide a diversified service. Access to capital is a challenge for traditional firms in Australia.

Summary of takeaways:

• The changes are a response to client demand and market shifts.

• The traditional law firm model is coming under pressure in some markets.

• There is an expansion of the concept of ‘legal services’.

• Different financing and reward models allow firms to attract talent.

• Balance sheet strength is a key advantage of ABS; however, the culture of law firms remains very traditional.

• Most capital is still borrowed via bank finance.

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