Lawyers know best: Is it time law firms left the LLP behind?
Recent legislative changes have paved the way for new, alternative structures in law firms, a sector that was previously dominated by traditional partnerships and LLPs – limited liability partnerships.
Alternative business structures (ABSs) – which allow non-lawyers to have a financial stake in a firm – have grown in popularity throughout the 2010s, and for good reason: ABSs can promote entrepreneurship, give lawyers greater control over their working lives, and provide law firms access to more capital, should they need it.
The Legal Services Act 2007 paved the way for ABSs, and from 2012 onwards, they came under the Solicitors Regulation Authority’s (SRA) regulatory remit, further legitimising the model.
Dominant models
Fast forward to 2021, there are now three dominant law firm models in the UK, not considering sole traders: the LLP, the legal consultant model and the corporate model. The latter two appear to be growing in popularity, while the LLP seems to be losing its shine.
Research suggests the legal consultant business model, operated by the likes of Keystone Law, Gunnercooke and Taylor Rose, will become the dominant model among mid-tier and high street law firms in the near future.
A survey by Arden, an investment bank, estimates that a third of all UK lawyers could be working under the legal consultant banner in five years’ time.
The legal consultant business model offers lawyers a central service platform, brand and management infrastructure from which to operate, in return for a percentage of the lawyer’s revenue. The lawyers are self-employed consultants, who retain an average of 70 per cent of their billings, with the remainder taken by the consultancy firm.
Separately, experts suggest that large, often City-based firms, could move from an LLP to more of a corporate model, and possibly list on the London Stock Exchange.
Bureaucracy
Gunnercooke has been operating a legal consultant business model for 10 years. Founder and executive chairman Darryl Cooke says the firm now works with around 235 lawyers.
Cooke reckons there are around 30 law firms operating the model in the UK, but believes the adoption of the model is likely to accelerate.
The appeal of the consultant model, says Cooke, is the element of entrepreneurship, and that it gives lawyers control and flexibility over their working lives.
Cooke also argues lawyers can earn more money under his model – if they have “the right mindset”.
I think what’s happening is that people want to get control of their lives,” he says, “and I always say, you don’t want to look back at the end of your life and say ‘I wish I’d done things differently.’
“That’s the main thing that started it, but I think what’s happened as well is people realising that they can earn more money under the model. 95 per cent of our lawyers earn more than they did previously. Most of them, the vast majority, will earn two to three times. what they did previously,” according to Cooke.
The executive chairman is quite dismissive of the traditional partnerships; he began his career first as a barrister at Lincolns Inn before working in the legal team at DLA Piper, a major international corporation.
“At traditional law firms you get remuneration committees, with people judging you, it’s quite bureaucratic, whereas in this model you take control,” he continues.
“When you’re an equity partner in a traditional law firm you have a certain percentage of the equity, but that can go up and down. With us, it’s just your own business. Our lawyers are not subject to what the managing partner nor what the remuneration committee thinks.”
The legal consultancy model relies heavily on entrepreneurship and self-confidence, which does not suit everyone. Cooke says his firm sometimes struggles with lawyers underpricing themselves to ensure they win work. Nevertheless, Cooke says it won’t be long before the legal consultancy model is a £1bn market.
LLPs down more than half
Figures from the Solicitors Regulation Authority (SRA) show the number of LLPs it regulates has gradually decreased since it began collecting data in July 2010.
In 2010, a third of firms regulated by the SRA were LLPs. Today that figure stands at just 14 per cent.
However, the SRA’s data is not an entirely reliable source. The SRA does not regulate every law firm in the UK, and because the data comes from Companies House, law firms could be operating as a traditional partnership or LLP internally, but officially registered as something else.
An SRA spokesperson estimated just over 1,000 firms registered with the SRA were operating an ABS model, meaning the other 9,000 or so firms it regulates operate more of a traditional structure, with lawyers at the helm.
One of the reasons ABSs are growing in popularity is because young, up and coming talent, typically does not have “a couple of hundred thousand pounds’ worth of bank debt” to put towards becoming a partner, argues Ince chief executive Adrian Biles.
Law firm Ince operates a corporate model. For Biles, it’s a “no-brainer”, as lawyers – still called partners at his law firm – do not have to stump up wads of cash to own a slice of the pie, nor do they face the risk and uncertainty that comes with being self-employed.
The corporate model is run much as any typical business. He says the UK is at the forefront of the evolution of law firm models, and is considerably more accepting of non-traditional models than Europe or the United States.
Unlike the vast majority of law firms in the country, Ince is a publicly listed company. It was the second law firm to list in the UK, after deciding it needed more capital for expansion. Ince is one of just a handful of listed law firms in the UK.
For large LLPs, Biles reckons the model will eventually become “niche”, although he acknowledges the legal profession moves at “glacial speed”; so it could take a while.
“Anything with real scale will take it on the chin and list, because ultimately the idea of 200 individuals financing a large business I think is quite old fashioned, so I would expect the corporate model to grow and the listed space probably to become a minority in that,” Biles continued.
“Listed law firms have been around for probably 10 years and there’s six, so it’s not exactly the speed of light, but I would have thought that over the next 10-25 year you’ll see a lot more of them.”
If it ain’t broke…
Despite the scepticism, and market competition from ABSs, partner models are alive and well in law firms throughout Canada.
Zulon Begum is a partner at boutique London law firm CM Murray. Her firm’s structure is that of an LLP, and she firmly believes there is still space in the sector for the more traditional model.
“We have seven partners altogether, and we sit around a table, virtually these days, and make decisions about the strategy of the firm, any people issues, and its finances. The traditional idea of a partnership is how we operate,” she explains.
She points out governance of partnership law firms is typically more flexible than that of a traditional business, and changes in how the law firm is governed, along with how its most senior lawyers are remunerated can be made quickly.
Additionally, she says partnership law firms are still successful, and when it comes to successful firms, why change what is already working?
“There is a real space and need for a model like a partnership, because essentially in law firms we’re people businesses, lawyers want the partnership status, and they have rights to key decision making, rights to the equity and a share in the success of the firm,” Begum continues.
“While some of that can be replicated in the corporate model, not all of it can.”
The partner adds the government’s recent budget favoured LLPs, as corporation tax had dipped so low that the corporate model was being favoured over the more tax-heavy LLP model, however with the rise in corporation tax to 25 per cent, that was likely to change.