Editor's blog | Catching the eye of the dragon

Ears pricked up on the high street at the news a month ago that Dragons’ Den James Caan was looking to invest into law firms. For lawyers on the high street worried at the arrival of new entrants, this gave hope of a dignified way out. No more nightmares about empty waiting rooms and declining profits as clients queued up outside Co-op Legal Services down the road. Instead, smaller practices could dream once again of bustling offices and lush profit margins, with venture capitalists taking on the risk.

But roll back to the early days of the Legal Services Act and the take on external investment was very different. Australia’s Slater & Gordon, the only firm at the time to have gone down this route, was seen as an oddity, the exception confirming the rule. Now three independent surveys in different parts of the sector have returned comparable results, suggesting that the mood is changing.

Being able to access private equity was a major incentive to convert to ABS for just over half of the 100 commercial law firms surveyed in the Fox Williams – Jures report, with 77 per cent saying access to finance was an important factor when converting to an ABS.

A few days later, a survey of 75 SME legal practices in the South of England by accountants HW Fisher & Company found that 26 per cent were looking at external investment. That’s fewer than the Jures survey but the sample is more diverse. Significantly, that number is up 11 per cent from the previous year.

Both sets of results also show a shift in management structures. Thirty nine per cent of the Jures-surveyed firms have changed their management strategy, 63 per cent are contemplating a change in partnership structure, and 14 per cent have already appointed non-lawyer partners.

Meanwhile the sample surveyed by HW Fisher found that seven percent of the firms had brought in a non-lawyer partner and that one in three were “actively intending” to bring non-lawyers into their business.

The third survey, by accountants BDO, focused on law firms’ attitude to mergers but also found that, overall, lawyers were positive about non-lawyers in managing partner or CEO positions – 27 per cent already had one and a further 30 per cent were in favour. That survey didn’t look at external investment but it provided a further perspective on the new underlying business mindset in some sections of the profession.

The real question however is whether investors are interested in what law firms are doing. For every firm with a clear growth strategy, sound business vision and a corporate structure to match, there will be dozens struggling to catch the eye of the dragon.

In none of the surveys is there any mention of a strategy behind the change in attitude. In fact – although I may be reading too much into this – there is even a feeling that law firms are looking at external investment as a miracle cure for the impending challenges without a clear plan in place. The lack of succession planning highlighted in both the Jures and the HW Fisher reports is symptomatic of a profession going through fundamental transformation.

But prospects aren’t necessarily grim. A large number of the firms interviewed for these surveys were looking at the future with optimism. That is perhaps the best achievement of the Legal Services so far: not so much allowing new entrants to come into the market but forcing lawyers to think about their firms as businesses. The next step will be to reconcile cherished concepts such as ‘professional services’ as lawyers come to terms with the idea that business shouldn’t be a taboo word: that being a business shouldn’t be an end in itself but a way of achieving efficiencies and that if this is what firms say they are doing, then they should do it properly.