Addleshaws redundancies provoke debate

Law firms have traditionally trotted out the well-worn cliché that “our people are our most important assets”, but in recent months that is starting to ring increasingly hollow. 

Redundancies are a sad fact of life in difficult economic times, and many firms have found themselves in a position of having to let good people go in order to dig the firm out of a deteriorating financial situation.  It is sometimes undoubtedly the right thing to do in the interests of the firm as a whole, and whilst those impacted may feel aggrieved at losing their positions, by and large even they understand that the action is motivated by necessity. 

However, in the last couple of years we have seen redundancy programmes being put in place by firms whose profits are rising strongly, apparently with the sole motivation of maximising already healthy profits per equity partner (PEP).  And I can’t help but wonder whether firms will, in time, rue the day that they decided to do so.

It was reported this week that Addleshaw Goddard is to make around 24 senior (non-partner) fee-earners across its offices redundant to “rebalance the mix and skills and experience across each UK office” because their staff attrition, particularly at more senior levels, has been lower than they anticipated.   Of itself, this is not particularly remarkable, but it comes at the same time as the firm has posted a 5% rise in turnover for 2011/12, and a whopping 30% rise in profit.  Average PEP rose 37% from £328,000 to £450,000.

These figures are not as stellar as they might at first appear – they need to be read in the context that the rises come after a disappointing 2010/11, when profit fell by 17% and PEP dropped by 23%.  In response to the problems in 2010/11 the firm cut around 40 support staff jobs in May 2011 – in my view a reasonable and sensible response to the decline.  However, as an outsider looking in, whilst it seems to me that the measures taken in 2011 were proportionate and undoubtedly effective (the gains posted in 2011/12 have more than made up for any lost ground caused by the drop in the prior year), implementing a further round of redundancies now will be a bitter pill to swallow for people for those affected by the cuts and could cause long term damage to the morale of those who remain.   

Law firms are businesses, and as such the partners are entitled to try and make them very profitable.  I am not trying to espouse some socialist ethic whereby the spoils of business must be shared equally between the workers.  But to make someone redundant is a big step – particularly in a harsh economic climate such as this – and something which should be done only where really necessary.  Senior people may find it particularly difficult to secure new roles elsewhere, as firms tend to try to keep their bright young (and cheaper) talent, rather than hire senior (and therefore relatively expensive) lawyers from outside.  Staffing levels can be rebalanced over time through natural attrition, and redundancies should in my view be reserved for situations where there is insufficient time for this mechanism to work without damaging the economic health of the firm.

I personally would find it quite difficult to look someone in the eye and tell them that they are to lose their job when I had benefited from a 37% increase in my profits.  And I would also worry about the impact that it will have on those who remain.  It is a moot point whether we have reached a point in the legal business where the old days where there was a constant war for talent have gone.  Some would argue that there are now too many lawyers in the market, and that we are unlikely to return to the old days where the biggest head-ache that firms had was how to recruit and retain enough people.  Others think that once the economic situation has recovered, then we will be right back into the talent war.  I don’t know which view is right, but if indeed it does turn out to be the latter then those firms who chose to sacrifice the careers of good people even whilst PEP was rising steeply may live to regret the day they did so.  When people chose where to work money is a significant factor, but another is the culture of support and working together through hard times.  That will be a difficult story to spin for firms who have over-used the redundancy tool when times got tough.

I am perhaps being a little unfair in singling Addleshaws out here – they are certainly not the only firm who are taking similar steps to maximise PEP and in one sense you could commend them for not trying to bury the PEP statistics whilst they go through this process, or to hide the job cuts through compromise agreements with tight confidentiality clauses.  However, they are a very clear example from which to launch a debate about the right balance between profitability and a wider responsibility to employees.

Knights attract a Dragon

It would be true to say there has not been a flood of private equity houses seeking to back legal businesses in the wake of the Legal Services Act reforms, but there have been a small handful of deals done, and a number (such as Irwin Mitchell and Keoghs) are believed to be interested.

Today, Midlands-based commercial law firm Knights Solicitors, become the latest to attract PE investment, from Hamilton Bradshaw, a PE house headed up by ex-Dragons' Den star James Caan.  The deal is still subject to regulatory approval from the Solicitors Regulation Authority, and if the experience of others is anything to go by, then they can expect some significant delay before the green light is officially given to the deal.

Knights, which specialises in commercial and wealth management advice currently has 23 partners and 150 staff working across offices in Newcastle-under-Lyme, Cheltenham and Alderley Edge in Cheshire, but has ambitious growth plans, aiming to be in the top 100 of revenue earners within a 3 year time frame.  This would mean the firm needs to be generating revenues of roughly £22 million, a more than doubling of its current £9.2 million.

Entrepreneur Caan will join Knights' board as part of the deal, working alongside managing partner David Beech.  It will be interesting to see whether an person from a strong business/entrepreneurial background will thrive in a professional services environment – in my experience, the politics of getting things done in a law firm are very different than in many conventional businesses, and whilst many lawyers like to describe themselves as entrepreneurial, very few truly are.

Knights are following a path trodden by Parabis, who obtained investment from Duke Street earlier this year, in the first leveraged PE deal in the sector, by Quindell Portfolio’s acquisition of Silverbeck Rymer, and by QualitySolicitors, the High street law firm franchise, which secured investment from Palamon Capital Partners.  Knights seek to differentiate this deal on the basis that it is the first commercial, as opposed to consumer, focused PE investment – although Parabis for one would not be happy to be labelled as a consumer business.  

Riverview open US office

Riverview Law may only be a few months old, but it is already showing its clear expansionist ambition, with the announcement of the launch of a New York office.

Riverview is an innovative law firm which offers corporate clients the services of solicitors (through Riverview Solicitors) and barristers (through Riverview Chambers) for a fixed annual or multi-year fee.  The business is part-owned by international giant DLA Piper, and partly by a number of other investors including AdviserPlus Business Solutions (from whence the head of the new US office, Andy Daws, will come), and, controversially, some of the DLA partners individually.

The firm is not offering US law advice, but will instead be aiming to market to American clients which may need legal representation in the UK.

Riverview’s COO, Adam Shutkeyer, said “We believe that there is significant demand from US clients for simpler and cost-certain access to the English legal system. The volume of cross-border activity, along with the impact of extraterritorial legislation such as the Bribery Act and Enterprise Act, means that many international corporations and professionals have a regular need for advice and representation in the English system, yet are often frustrated by the inefficiency of having to appoint, separately, both solicitors and barristers. At Riverview, we have removed these inefficiencies.”

Co-operative Legal Services to create 3,000 new jobs

Detail is starting to emerge about the proposed scale of some of the new legal services businesses being establish in the wake of the Legal Services Act, and it seems that at least one of them, The Co-operative Group, is not so much dipping its toe in, as plunging head-first into the market with a gusto which may take some of its more traditional rivals by surprise. 

When The Co-operative Legal Services (CLS) was one of the first three alternative business structures to be approved in March, it was said that it planned to recruit 150 members of staff in addition to the 450 staff it already had operating from its Bristol base.  However, CLS has now announced that it in fact intends to offer 3,000 new jobs in its legal services arm, 90% of which will be legal roles, creating what it claims will be "the largest consumer law business in the country" – a lofty ambition indeed.

The recruitment drive will be spread across Bristol and five new regional hubs across England and Wales to be created, as well as a new London-based family law operation.   Chief executive, Peter Marks, has confirmed that it is CLS's intention to use its existing 330 high street businesses as outlets for its legal services, after a successful pilot in 30 bank branches and that he believes that the plans will offer particular opportunities for younger lawyers and aspiring-lawyers.

CLS will offer a range of consumer focused services including family law, wills and probate, conveyancing, personal injury claims, and employment law advice - via telephone, internet or face-to face.

CLS’s pioneering approach to the provision of legal services has already been recognised through one of the industry's top awards for innovation.  The Legal Industry Pioneer Award, given to the organisation which has taken the boldest steps in pursuing alternative business models or new ways of delivering legal services, was awarded to CLS at the prestigious Financial Times Innovative Lawyers 2011 awards.

The Co-op has been involved in a variety of professional services markets for many years, including banking, insurance, funerals and pharmacy services, which may explain why it is prepared to be bold in its latest moves into the legal sector.  Peter Marks said “We already have a first class reputation for delivering professional services.....We see the law as yet another area where a Co-operative solution can be successfully applied for the customer’s benefit. Over the next five years we want to fundamentally change the face of legal services and make access far easier - today’s announcement underlines that ambition.”

Dewey & LeBoeuf to close on Friday? Lessons to be learned for all law firms.

Over the last few years quite a bit of attention has been focused on the financial difficulties experienced by some smaller and mid-sized law firms as a consequence of the global economic conditions.  Many would have thought that the larger firms would continue to thrive even in a downturn – after all, distressed situations for client companies tend to generate lots of work for lawyers as they seek to restructure or renegotiate contracts, and economic downturns often lead to a rise in white-collar litigation. However, the sad tale of Dewey & LeBoeuf should serves as a timely warning that no firm can consider itself immune to failure, and that in a people business once things start to go wrong they can unravel with appalling haste.

From the outside, Dewey looked like it had it made.  The firm came about as the result of the merger of two venerable old firms (LeBoeuf, Lamb Greene & MacRae and Dewey Ballantine) in 2007.  At its peak, the merged firm (“Dewey”) had more than 1,100 lawyers in 26 offices spanning major financial markets around the world, was one of the largest law firms in New York City and one of the largest US firms located in London.  It was a multiple award winning business – it was ranked in American Lawyer's prestigious A-List in 2011, which ranks the top 20 law firms in the US according to their revenue per lawyer, pro bono activity and commitment to associate satisfaction and diversity, and was ranked as one of Vault's "20 Best Law Firms to Work For."

When Dewey & LeBoeuf reported a revenue increase for 2011 to $935 million, up $25 million on the previous reported figure, it seemed that things were going reasonably well.  Profits were reported as $340 million, up 1% on the prior year, which was not a stellar performance, but hardly disastrous. From the outside, Dewey seemed to have things pretty much under control.

But that is when things started to go seriously off-track.  The first sign of difficulties was that some key lawyers started to leave the firm – such as the New York insurance law team.  Rumour has it that this was at least partly the result of dissatisfaction between different stakeholders in the business – particularly salaried partners whose pay was cut significantly to enable the firm to meet guaranteed payments to laterally-hired “stars” who, in many cases, had not yet generated the income levels expected of them. 

Then the American Lawyer magazine, which had reported the figures set out above, subsequently revised the 2010 and 2011 financial numbers it reported for Dewey.  The re-examination of the Dewey numbers appears to have been prompted by an article that appeared in Bloomberg where Richard Shutran was quoted as saying the firm earned $250 million in profits for 2011, far less than the $340 million figure reported by AmLaw three weeks earlier.  The Bloomberg story itself followed a Wall Street Journal piece in which former partners said the firm’s 2011 revenues were around $780 million. 

As a consequence the revenue figure for 2011 was revised by AmLaw to $782 million, up 3% from the previous year’s revised figure of $759.5 million.  So although the actual numbers for both years were considerably lower than originally reported, they still showed an upward revenue trajectory.  At the time, Shutran explained the discrepancy in the numbers as being the result of the fact that the American Lawyer uses different metrics to measure firm revenue than those used in the firm’s normal budget calculations, and that may well have been correct, but it seems that the reporting fiasco had turned a difficult situation into a disastrous one.

By April 2012 it was reported that the firm had retained bankruptcy counsel, its 2012 summer associate programme was cancelled, and the trickle of exiting lawyers became a flood.  Despite the management team having tried to keep a brave public face on the situation for as long as possible, stories began appearing in the press that the firm’s own leadership had discreetly advised partners to seek employment elsewhere and on 4^th May 4, it is believed that the firm sent "conditional advance notice" to all US employees under the Federal WARN Act that their employment may be terminated - the first formal acknowledgement to employees that the firm could ultimately close. 

By the second week in May, it was being reported that approximately 200 of the 300 total partners had left the firm, and it is now being openly speculated that the firm will enter bankruptcy in the US, and administration in the UK, as early as this Friday.  Although there has as yet been no formal confirmation of this, it is impossible to see how any firm can recover from such a position, and it seems that closure is indeed inevitable.

Doubtless over the coming months and years many people will look in detail at what has caused the demise of such a once-great business.  From the outside, for the time being, all we can do is to speculate.  But the one thing which is already crystal clear is that in businesses which depend on their people as their number one resource, as all law firms do, then a few key defections can lead to  panic and a rush to the exit door, with devastating consequences. 

It is astonishing that a firm which was still making quarter of a billion dollars in profits by the end of 2011, and one which was still winning awards both for the quality of its work and as an employer, has collapsed as quickly as Dewey has done.  Clearly the firm had problems which it needed to address, such as the tensions within the firm between those seen (and remunerated) as “stars” and those who were not, but these should not have been insurmountable.  

There will be lessons to be learned by all firms from the aftermath of the Dewey saga, and managing partners of firms across the world may sleep less easily in their beds at night having seen how a firm can get many things right, but still fail spectacularly quickly.

Freshfields Continuum Launch

People costs are invariably the largest cost category for a law firm, and the art of maximising profitability is to maintain a delicate balance between having sufficient lawyers on the payroll to cover peak activity periods, whilst not being over-staffed in quieter times.  Nothing will hit the bottom line of a firm faster than having lawyers on six-figure salaries twiddling their thumbs.  As a consequence, in the economic downturn of the last few years, many firms have attempted (sometimes successfully) to maintain profit-per-equity-partner ratios by ruthlessly culling excess staff.  In the short term this clearly works from a financial perspective, but it will be interesting to see whether, once the war for talent heats up to previous heady levels, those firms who aggressively downsized in difficult economic times will be able to compete with those who took a longer term view.  Whatever the outcome, it seems that the bumpy road of the last few years means firms are now trying to take a more innovative approach to staffing levels, and relying less on the traditional employer/employee arrangements.

Previously in this blog, I have commented on Berwin Leighton Paisner’s Lawyers on Demand business.  Now Freshfields Bruckhaus Deringer has officially launched its own contract lawyer initiative (branded Freshfields Continuum), whereby the firm will draw on its 3,500-strong pool of former senior fee earners on an ad-hoc basis to provide additional temporary staffing during busy periods, for periods of up to six months at a time.   It is likely that most of the roles will be predominantly behind-the-scenes rather than key client facing or negotiation roles.

The aim appears to be to target principally Associate level alumni (presumably on the basis that to have made it to Associate level they must have earned their spurs at the firm to some degree in the past, and therefore should be capable of slotting back in quite quickly without too much hand-holding required).  However, other levels of seniority will also be considered, with pay being set at one of four bands – junior, mid-level, senior and partner.  Alumni will be permitted to apply for work on projects below their level of experience, but if they do so they would only be paid in accordance with the rate of the position advertised, and not at the rate of their own experience.   This should be a benefit to clients, who will therefore not be paying inflated rates for an over-qualified lawyer to do a relatively straightforward task.

This is believed to be the first example of a law firm attempting to commercially leverage its alumni network, other than through simply winning business from the alumni when they move on to client company positions.

The firm plans to review the scheme in six months’ time, at which point a decision will be taken over whether it should be rolled out further to include the firm’s international network.  It is difficult to know what Freshfields would consider to be success for these purposes - there is no target for the number of candidates it is aiming to sign up, but the firm’s alumni network currently stands at around 3,500 fee earners.

From Freshfields’ perspective, it is easy to see why this would be an attractive proposition.  It gives the firm maximum flexibility to tailor its human resources to match the ebb and flow of client work, without the fixed costs associated with hiring permanent employees, and without the risks of hiring contract staff who are not known to the firm and who are not familiar with the way it operates.  For a small number of Alumni, it may also be an interesting prospect, but I would not expect that there would be a flood of people signing up for the scheme.  I assume that a significant majority of the Freshfields Alumni are now happily working in other jobs that would preclude them from taking up the offer of being included in the Continuum bank of contractors.  This means that the likely candidates are those who chose to step off the conventional career treadmill.  However, I question how many of them would leap at this opportunity.  For those who need the stability of a regular income, this scheme is unlikely to be ideal and there may be other contract lawyer or flexible working arrangements (including as a Freshfields employee) which can probably provide them with a steadier stream of assignments and a greater degree of flexibility regarding working arrangements.   But it might be an attractive prospect for those who want to work in short bursts to enable them to travel, or to fit in around family arrangements, or who want to dip their toe back in to the legal market after a career break, for example, or those who simply don’t like to countenance the monotony of a full time permanent role.  I am sure there will be some who fit the bill –I just doubt it will be a large number.

But as someone who has been critical of law firms’ lack of imagination and ability to innovate, I hope that Freshfields Continuum does indeed have success with this initiative.  Anything which increases the flexibility of working options for talented individuals who might otherwise be lost to the profession, has got to be applauded.

Eddie Stobart aims to shake up access to Barristers

Eddie Stobart has kept my children entertained on long car journeys for years – spotting a member of the smartly liveried logistics fleet was usually rewarded with a sweet, and often resulted in the kids staying on-task for far longer than tended to be the case with school assignments.  But never in my wildest dreams did I think that the trucking business would have any connection whatsoever with my professional sphere (except as a paying customer for legal services itself).  Well, it seems I was wrong. 

Eddie Stobart has just launched a new service to link members of the public and businesses direct to a barrister without needing to employ a solicitor to act as “middle man”.  There has been a huge amount of speculation about which businesses might choose to enter the legal markets as a consequence of the LSA changes; Tesco, Co-Op, Saga and WHSmiths have been widely discussed and debated for a number of years now, but I don’t know of anyone who saw this one coming.

Stobart Barristers, will be offering access to a network of approximately 1,000 specialist barristers across the UK, for a wide range of legal specialisms, mostly in the contentious field.  The barristers will be remunerated through fixed-fees on a ‘pay-as-you-go’ model during the litigation process.  Once a barrister’s opinion has been obtained through the service (and Stobart are hoping to be able to turn round opinions in under 7 days) if a decision is taken to go ahead with litigation then a sister company (Stobart Barrister Support Services) can provide a back-up team of paralegals to help prepare a case on a cheaper basis than if a solicitor was doing it.  Stobart expect that the total costs of litigation may be as much as 50% cheaper than instructing in the normal way through a solicitor.

As a model seeking to change the way in which barrister’s services are provided, I think this is an interesting and innovative move.  Members of the public cannot instruct barristers directly at present, and most would have no idea that there was any way of securing services from the Bar except via a solicitor.  It is no great surprise that a fear of the cost of litigation is a deterrent to taking action for many, and for simple litigation matters the involvement of a solicitor may sometimes add an unnecessary layer of expense.  I have certainly seen situations where having a solicitor as a “middle man” has slowed the process down and increased cost, but provided little by way of added value.  Equally, I have seen many examples where getting good and timely advice from a solicitor has prevented a considerable waste of money in pursuing weak cases. 

I am therefore not against this move by Stobart as a matter of principle, particularly in relation to relatively straight-forward cases.  Disintermediation as a concept is something which is sweeping many different areas of business, and lawyers would be foolhardy to think they are exempt. I do think there are areas where great care will need to be taken, particularly with the “pay-as-you-go” concept.  Members of the public can sometimes be quite naive about the complexities of litigation and how many steps there can be in the process before the substantive issues are actually heard in court.  The danger with a “pay-as-you-go” model may be that unless the consumer is well aware at the outset of all the different steps that are likely to be involved, then he may find that he feels committed to continue a weak case on the basis of costs already expended to date.  But these are not insurmountable problems, if handled properly.

What really fascinates me, however, is of all the businesses which could have chosen to offer these services, why Eddie Stobart?  What does a logistics business have to do with legal services? 

Well from Stobart’s perspective, it seems that the initiative has at its roots the fact that Stobart itself has been employing its own barristers without a solicitor since 2008, and has seen significant cost savings as a consequence.  I guess, therefore, it thinks that it can use the knowledge it has built up to benefit others.  And you could also say that Stobart is a brand name which people generally know, like and trust. But I can’t help thinking that it is stretching a brand to breaking point.  Surely the core competencies of running a logistics business and the provision of professional services are fundamentally different?  Just because a customer trusts Stobart to get goods from A to B, that doesn’t mean that the same customer would want to entrust them with a bitter divorce case.  And just because a company has successfully re-engineered its own method of handling legal cases, this doesn’t mean that it will be any good at offering to do the same for third parties.

In getting this initiative off the ground the group’s legal director, Trevor Howarth, has a big task on his hands.  He has been quoted as saying that the aim is to generate £10m in fees over the first three years.  I wish him all the best in his endeavours, but I’m not sure I would want to be in his shoes.