I’m all for shaking up the legal market and the way lawyers do business, don’t get me wrong. Many solicitors have for too long benefited from a protected market which allows them to eschew innovation and create what are effectively skill- or reputation-based cartels which support eye-watering charging mechanisms.
I remain, however, unconvinced that private equity is a viable and sustainable solution to the problem as regards commercial private practice.
To clarify, I can perfectly well see that the injection of private capital into a consumer-facing business where the client (consumer) has a one-touch relationship with the firm might be successful. In this case, it doesn’t really matter who is doing your will or whiplash as you’re unlikely to repeat the experience; the service only needs to be ‘good enough’ and new clients can be attracted via shiny branding and attractive commercial propositions. Fair enough.
For BigLaw – I attach this moniker to every commercial firm – the challenge is much greater. There, the relationships are ongoing ones, heavily-dependent on which individuals are transacting the work. Client inertia may give the impression that brand is more important than it is. The ability to recruit and retain good people is vital, as your people are your product.
Which brings me to Dragons’ Den star James Caan and his much-talked-about investment in well-regarded Newcastle-under-Lyme firm Knight & Sons, the first serious move of private capital into the hallowed halls of commercial private practice.
I find it interesting that Caan draws the comparison with recruitment businesses in his interview with The Lawyer.
“[Recruitment businesses] are sold in the market for five to six times earnings,” he says. “The market will pay that. The reason it wouldn’t pay that for a law firm is that each year the profit is taken out.”
As a former recruiter myself, and one who has been through the legal recruitment market’s largest ever acquisition at the time – that of QD Group by TMP Worldwide in September 2000 for £45.5m (Source: Reuters) – I think Caan needs to be very careful in drawing too much from the comparison, which flatters to deceive.
While TMP acquired what was at the time the most successful legal recruiter in London, two years later only I and one other senior legal recruiter remained with the company, and we both left shortly thereafter. In the meantime, TMP had successfully recruited other recruiters to fill the gap left by what became known as the ‘QD Diaspora’ (which spawned such successful recruitment companies as SSQ, First Counsel and Abrahams Russell), and retains a good legal brand today as Hudson. But the fact remains that all the senior people from QD, all the star QD recruiters if you like, had left just two years after the acquisition.
Now, while I’m sure that wasn’t its intention when it bought QD, you can roll with stuff like that in recruitment, as TMP proved; but if it happened to you in law, you’d be sunk.
The primary reason TMP was able to ride the wave is that while QD’s star recruiters took their excellent client relationships with them when they moved, those client relationships also remained largely intact back at TMP. In other words, they took relationships, but not necessarily the income relating to those relationships. Legal spend is not like recruitment spend; in recruitment you get paid by results or not at all.
Caan’s second pause for thought should hover around the personality of lawyers and their relationship to reward. He may be unaware of the case of South African firm Edward Nathan & Friedland, taken over by South African bank Nedcor in 1999 for $65m. Nedcor sensibly put the firm’s partners on a five-year lock-in when it bought the firm, but then ended up having to sell the firm back to the partners for $9m five years later when it realised that they would all leave, taking their clients – and Nedcor’s business – with them. So much for law firm branding. The lesson here? The further up the law firm food chain you go (and EN&F was one of South Africa’s premier firms) the greater the reliance on repeat work from important clients and the greater the reliance on the reputation of individual partners or groups of partners. And, as every lawyer knows, if you’re any good, your clients will come with you. That, to my mind, should send shivers up the spine of any would-be investor in commercial law firms.
A third pause should come from the likely relationship between lawyers and private equity investors. This is far more ‘gut-feel’ than provable, as we have no evidence to go on. But one of the intriguing things about all the star QD recruiters I spoke about earlier was that they were all former lawyers. Lawyers, in my experience, like to be in control. One of the factors I know which was difficult for these guys was the loss of control and the feeling of being subject to the vagiaries of a Nasdaq-listed business. Similarly, having some private equity investor constantly looking over their shoulder and exhorting them to bill more is not, I fear, going to be conducive to the average lawyer mindset, without even mentioning the potentially disastrous combination of commercial law firm and stock market listing, which would make football clubs look like sound and stable investments.
Caan also quotes the example of Mexican Wave, the proposition whereby some real estate work was outsourced by Lovells (as was) to a range of quality regional law firms, including Knight & Sons, where Caan is investing. It seems that extending this formula is top of his agenda.
Personally I always thought Mexican Wave was an under-developed idea which had far more potential than Lovells’ partners were willing to allow it, but my knowledge of it was limited. My sceptical side, however, thinks that if it were such a marvellous, broadly-applicable idea then a) Lovells would have been doing it in every department and for every major client (they didn’t); and b) everyone would be doing it, given that it ain’t exactly rocket science (they aren’t).
That then leads me to think that perhaps Mexican Wave wasn’t as broadly-applicable as one might think, and that perhaps there wasn’t quite the client interest or demand in it and perhaps the benefits weren’t quite as evident as one might have thought. It is interesting to note that other City firms, including Allen & Overy and Simmons & Simmons, have chosen to set up proprietary ‘insourcing’ outposts to offer lower-cost solutions to clients rather than to establish Mexican Wave-style relationships with quality independent regional firms. The national firms, of course, can already offer this through fully-integrated networks, so Knight & Sons will have a battle royal on their hands to win market share.
Now, I could be completely wrong about all this and part of me hopes that Caan’s vision does take hold, if only to give a concrete view of an alternative path for ABS. But my gut tells me that this will not be the new frontier of legal services provision.
There is an old saying that there are two great days when you own a boat: the day you buy it and the day you sell it.
I wonder what we will be saying about buying law firms, ten years hence.