Fault, responsibility and strategy - or none of the above...

Dear oh dear - what a mess.

Ian Austin, the former Managing Partner and Executive Chairman of Halliwells, has been talking to "The Lawyer" (see here for their story) - or rather he has been giving his version of their descent into administration. It turns out that it was the partners' fault, or the external consultants, or the boards' or... someone else's decision or fault. I quote one example from Mr. Austin:

the decision to move into Spinningfields was a decision taken by a board, by external consultants [Sheppard Robson] in conjunction with group heads. This was not a decision of my own making..

What? He was the Managing Partner - his is the responsibility, whether or not it was his fault. He is also quoted as saying that the loss of the insurance team in December last year was the "straw that broke the camel's back". One of the comments on the story points out that his firm was still recruiting & promoting 6 months later.  In a limited company or a PLC surely this would be "trading insolvently"...?

I suppose I should be more shocked at the lack of responsibility that is shown here and at the lack of strategic thinking that allowed the firm to distribute £15million to the equity partners in 2008 (keeping  a whole £5million for investment in the future - well in the firm's future). Mr. Austin's excuse/justification for this seems to be along the lines of "the money was there and we wanted it" or "at the time everything looked rosy". On a much larger scale this is like saying "I didn't need an umbrella - it wasn't raining yesterday. It's not my fault I got soaked". I'm not sure this even qualifies as short term planning.

As I said in a previous blog (see here), one of the most shocking aspects of the Halliwells debacle is that the equity partners walked into new jobs - the very people responsible for the mess are those least affected by it. Mr. Austin himself negotiated his own safe transfer from the sinking ship before the deal on Halliwells' assets was completed - an action he justifies as being "...the right thing for me."

That last phrase sums up the state of management and ethical behaviour in Halliwells - the equity partners removed £15million of cash from the firm 18 months before it went bust because they wanted it; the same people walked into new roles, leaving trainees and junior staff to their fate, because they could and it was the best thing for them. With that level of strategic thinking and personal thinking rather than firm thinking, my only wonder is that it took them so long to go bust. I'm sure Manches are heaving a huge sigh of relief that they didn't merge (or buy) with Halliwells in 2009.

Halliwells - should we be surprised?

It is always sad when a firm files for bankruptcy as Halliwells did this week - as reported in "The Lawyer" and the rest of the legal press. It should not, however, be too much of a surprise.

Like many firms during the glory days of the mid to late 90s, Halliwells embarked on an aggressive growth strategy. Sadly they appeared more focussed on turnover rather than profitability - and on taking as much money from the firm as possible, rather than re-investing in it.

I quote from "The Lawyer":

The firm, which posted record profits and turnover during the bull market, ran into difficulties when it took on new Manchester headquarters at Spinningfields in central Manchester in 2007, paying top-of-market rent believed to be £35 per sq ft. It subsequently distributed a property-related windfall to partners as opposed to investing it in the business.

Let's just have a look at this in more depth, because this paragraph sums up the problems with the firm - and the problems that are likely to face more firms in the near future. Halliwells posted record profits and had record turnover - but seems to have decided that this market was normal and expected that the record level of turnover and profitability would continue. Not only that - they appeared to make no provision for the future. Look at the last sentence above - the owners of the business rewarded themselves with a windfall rather than investing in the business. Just imagine if the directors of a listed company had acted in this manner - even if the windfall was given to the shareholders rather than just the executives. They took one-off profit out of the business with no thought for the firm's needs in the medium and long term.

Looking at Halliwells' results, however, suggests that they have not focussed on profitability for a while. I am finishing off an in-depth analysis of law firm results with a view to proposing new measurements, some of which I will preview when talking about Halliwells. On the traditional measurements of law firm success - turnover and PEP - Halliwells were 38th in rank by revenue and 61st in rank by PEP. So they have already dropped considerably down the table when profit starts to be considered. In 2009 their net profit was 14.2%. It becomes more interesting when one considers other profit-based measures.

Looking at Net Profit per Fee Earner, Halliwells dropped to 86th place; and they were 82nd in Net Profit per Total Staff. All rather poor for a firm with pretensions to grow.

Not only has the firm appeared to concentrate on the wrong things, they have consistently removed cash from the firm whilst appearing to give little thought for that "rainy day" that was surely coming (to be fair to Halliwells, this equity payout at the expense of investment in the future does seem to be the industry standard).

A parting thought - have the equity partners, who benefitted year-on-year from profits, considered funding the firm through this crisis. Perhaps they could repay super-profits and that property windfall? After all, their last published results (for 2009) show PEP of £280,000 and an equity spread of £110,000 - £400,000. Even using the average - and asking for 50% re-investment in the firm - the 38 remaining equity partners could offer £5,320,000 in immediate cash, and this is without asking the fixed equity partners to join in...



The full report analysing 187 law firms and suggesting new benchmarks will be published soon by Mar-aon Consulting.