Buying Turnover

Times are tough - and lawyers in England and Wales are certainly noticing.

In these straightened times, it seems that firms and chambers are reacting by wanting to appear successful and strong. I have discussed at length the difficulties of firms using the right measurement and the fascination that stills seems strong for the use of turnover as the primary measurement. Turnover is up and so we must be doing well - that seems to be the system in place.

Sadly, even though firms tend to use turnover because it is the easiest to understand and to feel that you are affecting, increasing turnover is not that simple.

Lawyers can't simply put their prices up. They are being squeezed in every area - and those involved in publicly-funded work and being squeezed more than any. Clients have a bit of an upper hand at the moment - meaning that prices are, if anything, going down or at least remaining constant. It is a brave client partner or senior clerk who discusses an increase in rates.

So where is this perceived success to come from. Where are firms and sets to find the increased turnover?

Simple - they are buying it. Much of the legal news at the moment is about mergers or acquisitions. Whether it is Herbert Smith Freehills, Norton Rose Fulbright, or Finers and Howard Kennedy, firms are looking to bring extra turnover into the firm by the simple expedient of merging with another firm. They're almost all at it - Field Fisher Waterhouse are still trying after a number of false starts.

This may well be a normal and even sensible reaction to a difficult market - but much like an endlessly-upward equity market, its not sustainable growth. In fact its not really growth at all. The market is, if anything shrinking and so the apparent growth gained from mergers is simple re-allocation of turnover within a market.

It is possible, in fact, that there will be a downward blip in turnover as the newly merged firm works out what it is doing and as it reassures clients from both firms. Profitability will certainly be affected, at least in the short term - there will be layoff costs, integration costs and, usually, there is a good deal of marketing and PR to be done, to explain to clients and the market why the merger has been a tremendous thing.

Perhaps a little more time spent on planning and implementing more profitable work would be a more efficient use of the time spent? I don't object to mergers - but let's not pretend that we are generating real  sustainable growth, or that we are doing anything that create a strategic advantage.

New Year, New Start?

The first full day of the working year, and the first article in the legal press about meeting the challenges of the 2010 economy for the legal sector. For example I give you today's lead story from "The Lawyer" ("Law Firms ready to ring in the changes for uncertain 2010"). I will start the year as I left 2009 - slightly incredulous at how late law firms are in making strategic and structural changes to their business model, and shocked at how un-aware firms seem to be at their own failings (being "busier than ever - don't know why" is no response to being told your firm is inefficient or badly run...).

Law firms are in the second difficult year - and most have done all the easy things, or all the things they know how to do, to address the difficulties. They are now stuck - and in a position where well managed firms will thrive at the expense of the poorly managed firms. To quote "The Lawyer":

Some have suggested that the leaner, more demanding marketplace of the future could even spell the end for firms with weak management strategies.

This is not the future however - this is now. Sadly I do not believe that many of the firms making up the 30-100 ranks of the Top 100 firms (or smaller firms) are up to the task. Let's look at the advice from "The Lawyer":

• Charles Martin, senior partner at Macfarlanes:
• "Sharpen efficiency levels"
• "Look at better client service"
• "Improve ways of organising themselves internally"
• Gavriel Hollander (the article's author)
• "Efficiency - whether changes to outsourcing policy, client charging or further rounds of redundancies"
• "Diversify"
• "Merge"
• David Stewart, managing partner at Olswang
• "Strong client relationships"
• etc

So - efficiency seems to be a major theme. Why are law firms focussing on  that only now? Perhaps the large profits, and large revenue increases in the years before 2008 suggested that there was no need? Perhaps firms couldn't be bothered to making structural changes to instill efficiency when the firm's owners were earning plenty? Or perhaps, since the Board and/or the Partners were running the firm part-time, there just wasn't time to make changes?

All of these things are probably true, although I suggest that there is more of the latter reason than any other. Law firms are unusual in that they are generally run part-time by a sub-set of the owners as they continue to engage in the task which "won" them ownership. How many other firms are run in this way. How many firms - and remember that these are multi-million pound, national or multi-national firms which employ hundreds of staff - are run like this in other industries?

I'm all for efficiency but many firms confuse that with "cost-cutting". The two are not the same. Mr. Hollander suggests that there may be more redundancies coming - I agree, there probably are. It is unlikely, however, that these will lead to efficiencies. Unless a firm is really incompetent, it will have got rid of any poorly-performing staff already - so only good staff remain to be made redundant. Mr. Martin sensibly suggests improving customer service. How will that be achieved with fewer (good) staff?

Most commentators suggest that the UK will move out of recession this year (yes, there may be a "double dip" coming, but who can tell) - if that is the case, expensive redundancies will be followed soon after by expesive recruitment, leading to two more years of "one-off HR costs and write-downs".

I'm concerned, too, about mergers - or rather the word "mergers". I imagine the partners saying "wow - we're having real problems generating income and becoming efficient. I know - we'll merge with another firm, become larger and that will be easier!". I do not beleive we will see poorly-performing firms saved through merger - they will be bought out by more efficient and better run firms. Actually it may not be be necessary to buy them out - better firms (particularly those few which have built a reputation for treating all staff reasonably well) can simply get in contact and poach the best people without the need to collect expensive buildings too.

In this new year, I hope to see law firms starting to act more like businesses and less like personal projects. I suspect that, if they are to survive, that's what's necessary.

Spent it Now!

Having just blogged about not panicing (see my last post), I'm back on my favourite theme - that of short-termism in the industry. What is it about partners and those running law firms that makes them focus so much on this month, this quarter and, in we're lucky, this year - while seeming to ignore next year and the longer term?

Look at this news story from "The Lawyer" entiled "Lovells partners in line for post-merger windfall". The  story explains that with the merger of Lovells and Hogan & Hartson, partners will be eligible for performance based bonuses. Lovells were in the same publication last week in connection with half year results - where they were predicting flat results. Now that is better than most firms at the moment - but is it the sort of results that should merit additional bonus payments.

More importantly (because I think the move to a meritocratic system is a good one, all things considered), I can't find any information about the proposed merger that talks about investment in the new business. There seems to be lots of news about the benefits to the partners - but none about the benefit to the firm itself. In fact I couldn't find any news about the merger on Lovell's web site at all. Hogan & Hartson's did carry a news item (see here) which does seek to show benefits for clients - although these are mostly along the lines of "we'll be bigger and bigger is better - right?".

I would be really impressed if the firms had made an announcement that any additional bonus payments would be based on longer term objectives and measurements (sounds like the suggestions for bankers, doesn't it?), or if the news talked about investment for the future. Instead the news (and I acknowledge that "The Lawyer" is looking for a good story rather than anything else) is all about short term, personal, benefits.

Isn't this one of the issues that helped cause the recession?