ON THE LAW PATH

It is always interesting how, from the hundreds of conversations journalists such as myself have with accountants and lawyers over the course of a year, a handful seem to have a ring of something different about them. It might even be as simple as that they appear to contain a grain of true wisdom. It isn’t that the rest of the conversations do not produce useful information. Far from it. The myriad views I receive on the running of partnerships stack themselves neatly into easily retrievable categories on my own bookshelves of knowledge and opinion.

But it’s the exceptional ones that are bothersome. In a wealth of information they seem to be the catalysts helping to hone the sense of accurate perception.

They can never be pigeon-holed easily for some curious reason, and they stick in the easy recall part of the brain.

The two I had in mind relate to large service businesses running as partnerships.

The first came from Leon Boshoff, chairman of the new partner committee at the City law firm of Clifford Chance. It emerged during an interview with him about making up partners. He was explaining to me, at some length, the complex method of converting salaried solicitors into – lest we forget – owner-managers of the business, and it was so much different today compared to ten years ago. Bottom-line billing, business acumen, management skills, marketing ability, market needs, sheer personality and pizzazz all had to be added to excellent technical skills in the law before someone made the grade. ‘After all,’ he said with just a tinge of irony, ‘partners are harder to get rid of than spouses.’

The remark stuck because it was not a justification but an admission.

He was saying categorically that Clifford Chance had, in the past, over-partnered in certain sections of the business. In general terms, you could apply the same problem to dozens of other firms in the City, because they all took in partners who today would never make the grade. Yet they sit at the top of the peculiar ‘lockstep’ profit sharing system that rewards senior solicitors by age and punishes younger performers.

By itself this conversation might not have been so significant. It was only when I was talking some months later with another lawyer, again a partner, that it all fell into place. Finally, I could appreciate that in all sorts of private huddles of senior partners and younger partners, or combinations of both, that there was a deep-seated perception that structuring in UK firms was not as it should be.

The revelation hit home with stinging accuracy. It did so because it came from an extremely bright and perceptive corporate finance partner in a regional law firm that has a successful London office. Referring more, it is fair to say, to solicitors than accountants, this is what he said: ‘Most of the top 50 firms in this country could reduce their numbers of partners by 25% to 30% and still perform just as well. Literally hundreds, if not thousands, of partners in these businesses are dead wood.

They would be lucky to find a #40-60,000 a year job in industry. Yet for their lack of effort in partnerships they are drawing double or triple that amount.’

Unsurprisingly, this particular partner is not yet going on the record.

But when he does he can probably take the credit for providing the only real solution to making UK law and accountancy businesses as profitable as they need to be today.

Downsizing is a radical step, but distasteful as it may be, it must be confronted. Any partner, senior partner, or budding partner who doesn’t believe it need only look at the profitability of Wall Street lawyers, or, the Holy Grail of partnership – as opposed to corporate – structures, Goldman Sachs, to see why it will happen here. With not many more staff globally than the average Big Six accountancy firm in the UK, this king of investment banks made not far short of #2bn in pre-tax profit in 1996.

Of course, banks, some might say, are not professional services in the same ilk. But the principle is the same. And a closer look shows that lawyers and accountants in this country clearly tend to understand profitability in a less business-like fashion. Even on a net to gross measure there are European and American corporations, never mind partnerships, that achieve 30% to 40% – deemed ‘highly profitable’ by UK partnerships. And sadly only a handful in this country can boast those sort of returns.

Most legal and accountancy partnerships work on margins of 15% to 25%.

But this is thrown into confusion when measuring profitability because it always depends on how many partners are actually dividing up what’s left after the costs have been paid. So it can only be one aspect of real performance and I would be the first to admit that one should beware of over-simplification.

But I do agree, and so do many others I have talked to since, that there are too many partners. The 1980s saw solicitors and accountants making up partners as if the process were going out of fashion. Totally unsuitable candidates became owners because management boards did not understand the economics of gearing to the numbers of support staff.

That is why younger, high-performing partners in these firms are now privately talking serious downsizing. And putting pressure on senior management to stop ruminating. Their message is simple: Chop the ownership by up to a third, and the remaining owner-managers would not only personally profit, but the business would grow by giving partners an incentive to stay. This has happened regularly in the accountancy sector. It’s now starting to show up in the legal sector where young, high-performing partners resent seeing their colleagues through a recession and now watching them fill their pockets.

Current thinking is that a partner must generate at least #1m to #1.3m worth of business. How big his team is, to the odd two or three is irrelevant because cost-cutting can be taken internally to make sure profits are as big as possible. Currently, it will be in that 15% to 25% range, rather than the 30%-plus enjoyed by firms such as Slaughter and May and Allen & Overy.

But even that is not good enough compared to the profits generated by Wall Street law firms. Because they get that much, plus a lot more to invest in their global expansion. If City law firms don’t keep up and improve profitability by downsizing their equity they will lose that global race. They will neither keep their best or attract the best partners.

I suspect the lesson is not lost on the accountants.

Patrick Wilkins is news editor of Commercial Lawyer.