Paddy Oliver, Lexcel Consulting

Slater and Gordon [and ] Shine … are subject to much greater public scrutiny… In this manner, their problems are brought out into the open, where regulators as well as investors and clients can react to them.

Australia-based Lexcel Consulting advises law practices in the areas of strategy, governance, pricing, practice management, project management, risk management and risk auditing.

I worked as a solicitor in private practice in Ireland for a number of years. I worked in law firms that had fundamentally sound client bases, but some of the firm leaders had little or no management skills and did not know how to price their work to any sophisticated degree. This lead me to develop an interest in management and then to do an MBA. At that time, given the changes in the UK in the insurance market for lawyers (a move from a mutual policy to individual, risk-based ones), I saw opportunities in risk management, and ended up working in that area. In these ways I developed an interest in the business of law, over and above simply being a lawyer.

In 2005, I moved to Melbourne. I had no job here, and I made the decision to start my own business. This was a tricky thing to do, since at that time here lawyers did not need to go to the open market to obtain insurance, with the result that risk management was handled more reactively than proactively. This led me to focus on the requirements for incorporated legal practices (ILPs) to develop and implement appropriate management systems (AMS). My thinking was, since they have to have them, then they must have the need for a consultant. What I didn’t realize was that, in contrast to New South Wales and Queensland, in Victoria the regulator (the Victorian Legal Services Board) had little interest the AMS rules, and took no action to educate lawyers about them, let alone enforce them or conduct audits.

In my opinion, the reason for this lack of interest at that time was because the Legal Services Board was inundated with complaints about lawyer conduct, and chose to focus its resources on handling the complaints. This is ironic given Christine Parker’s research demonstrating that self-assessments and AMS lead to fewer complaints. As a result of the regulator’s lack of interest, those who served in the legal practitioner director (LPD) role had little motivation to take their role seriously.

In fact, regulators have very little proactive power over law firms — most of the regulator’s power is reactive and after the fact. The only people who have any kind of proactive power over law firms — that can put manners in a law firm — are banks and insurers. I saw this in particular when the UK ended its mutual coverage, and law firms had to start proving they were a good risk. Insurers began to require firms to demonstrate their systems. I think this drove more change in England and Wales in particular, than any direct legal regulation did. As for banks — they can simply refuse to offer you a loan or an overdraft if they don’t think you are a good risk.

In my experience, only a minority of lawyers in Victoria are interested in the ILP structure for the possibilities it offers to run a legal practice as a business rather than a partnership. Most of the legal practices in Victoria that have adopted the ILP structure have done so for the tax and asset security advantages that it allows, notably in complex structures of partnerships of ILPs. In these cases, the legal practices themselves are, for the most part, run as partnerships, in spite of the use of the ILP structure.

Law is a fundamentally profitable business. But, for the most part, lawyers are not very good business people. I realize that this is a sweeping generalization. I make it having worked with lawyers in a number of places: England, Ireland, Scotland, Wales, and a number of Australian states. If you take the regulations away, the basic personalities are the same, and the way the firms are run is the same: generally badly. Lawyers don’t get any training in how to run a business. Training to be a lawyer is not training to run a business.

An interesting question to ask: is there a difference between legal ethics as compared to business ethics? I think that many lawyers will struggle to see a difference but, in my opinion, they are not the same things at all. There are many things that are ethical from a legal perspective, but not from a business one. Business ethics is doing the right thing. Legal ethics is entirely unrelated to that. Here are some examples: overcharging, poor client service, mistreatment of employees. Our legal ethical rules do not address any of those, which is why you see them occur so often in law firms. But from a business perspective, they are all unethical and should not occur.

Slater and Gordon is an interesting case. One of its core business strengths is buying law firms in order to integrate them. Its business model depends upon the acquisition of businesses in order to maintain revenue growth — revenue growth is prioritized over profitability. It’s reached the point where there are few firms left to acquire in Australia. The lawyers at Slater and Gordon as well as at Shine are perfectly good lawyers. They have developed some very interesting processes for handling high-volume work at fixed prices. From that perspective, they know what they are doing. But, like most other lawyers regardless of the structure they are in, they are not necessarily good business people.

Across countries (Ireland, England, Australia, Canada, United States…), many law firms have difficulties, and many law firms go out of business as a result of those difficulties. However, in nearly all cases, because those firms are owned exclusively by lawyers and are regulated exclusively by legal regulators, very little information is ever available about those firms and their problems. Outside of their clients who are inconvenienced (or worse), few people are aware of what is happening. The difference with Slater and Gordon as well as with Shine is that they are subject to much greater public scrutiny. In the first place, they are regulated not only by legal regulators, but also company regulators. Further, they are observed closely by investors, by analysts, by industry commentators and even by the general public. In this manner, their problems are brought out into the open, where regulators as well as investors and clients can react to them.

Take the valuation of work in progress, for example. Most companies are valued on the basis of revenue or profits. In contrast, Slater and Gordon as well as Shine in large part have based their value on work in progress.

Valuing work in progress is a very difficult thing to do. When a law firm does it, a legal regulator is unlikely to question it, on the grounds that it is not related to legal ethics. A tax regulator might simply suggest that it’s not done correctly. On the other hand, analysts and the market will take a hard look at how a listed firm values work in progress, and declare it to be either right or wrong. Analysts and the market are not satisfied with vague, unsupported estimates of the value of work in progress — they demand financial accuracy and proof of the value. Lawyers have never had to produce that before.

Further, it is difficult for law firms, including Slater and Gordon and Shine, to attract the finance and accounting professionals that they need. Typically the best ones are able to obtain higher salaries working with other types of businesses. In addition, the culture of most law firms is so different from the culture of other businesses that it is difficult for someone from outside the legal profession to integrate, let alone change the culture in the ways it needs to be changed to make it a better run business.

That being said, in my opinion, opening up the ownership of law firms to persons outside the legal profession, and, in particular, opening up law firms to the scrutiny of people like analysts and public investors, will lead to those firms to being better run. We are only beginning to see this in Australia — until now, the share prices of Slater and Gordon and of Shine have been high, and so no one asked too many hard questions. Now that the prices have gone down, hard questions are being asked. This can only lead to better management of these firms. It might not happen overnight, but it will happen.

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