Fear and growing in the downturn

What is it with lawyers and performance incentives these days? Ian Shovlin, senior partner at Midlands firm Higgs and Sons, received five times as many 'thank you' notes for the chocolate eggs he handed out at Easter as he did after the pay rises he awarded earlier in the year.

Shovlin's candid account elicited chuckles from participants at the joint NatWest-Solicitors Journal roundtable last week, but it is symptomatic of a growing malaise at senior levels in mid-tier law firms. The present generation of lawyers takes monetary reward as a given, an attitude at odds with sound financial management and a more business-like approach to running a modern law firm.

What's more, Generation Y does not appear to have the same appetite for partnership - and the risks and responsibilities that come with it - as its elders. And without a new generation willing to take the reins, an otherwise prosperous firm can find itself with no future, its partners with no retirement plan, and - more worryingly - a shortage of cash that could precipitate its closure.

MORE MANAGEMENT, LESS LAW

The problem is not lack of competent lawyers, but more and more, it seems, the generations that have come out of law school in the past decade have different aspirations altogether. Law has become a different profession, with much greater awareness of the need for law firms to operate as businesses, where partners do less law and more management. And today's lawyers don't always want to follow in these freshly created footsteps.

"I started 20 years ago, and being a lawyer then was completely different from now. The younger generation doesn't have the same appetite - some associates still want to but now more are interested in a better work-life balance," says Shovlin.

For Malcolm Dickinson, managing partner at Michelmores, greater mobility has been a contributing factor. "The new generation is much more mobile - and it's not just the legal profession," he says. "When I joined, you probably only expected to work with one firm, but lawyers now will have several jobs over their careers. The whole Gen Y have a totally different outlook."

There is also a new sense of entitlement, which according to Ian Rosenblatt, founder and senior partner of Rosenblatt Solicitors, has become endemic. "They all have this incredible sense of entitlement - they've done all the right things, gone to a great school, got a 2:1 from a good university, and therefore they're entitled to be paid a lot of money, have a great job and have a career, without realising that firms are run like businesses," Rosenblatt says.

The net outcome is a growing disconnect between the expectations of lawyers at the more junior end of the profession and the aspirations of partners keen on securing a solid succession plan for their firms. Changes to the role of partner have further accentuated this divide. Partners are no longer just the owners of the business, they are expected to run it more actively.

Alun Jones, managing partner at Cardiff-headquartered Hugh James, says there is a "ready and willing market with supply and demand". His firm is based outside London and, like many around the table, has benefited from a rising number of lawyers seeking to relocate. "Lots of people want to make sure they are in the right place, and likewise, progressive firms are looking for good people; the question for law firms is picking the right partner," he says.

TOMORROW'S PARTNERS

As a result, new internal mechanisms to assess the suitability and performance of partners are being developed. At Hugh James, would-be partners sit through a formal process to ensure that they understand what is expected of them, and vice versa, what they expect from the partnership. Once inside, remuneration is based on a point system - published internally - with strict criteria which partners must convince a review committee they have met.

"So there is an element of performance-related pay," Jones continues. "And that's driving behaviour, not just of the business - i.e. 'is this person satisfying these standards' - but also of people looking up, some of whom may think they don't fancy that and would rather stay doing what they are doing."

Sussex-based Rix and Kay has introduced a specific development programme for senior fee-earners with partnership potential. A traditional high street practice turning over 1.8m 12 years ago, the firm has moved into corporate work and now has a turnover of 6.5m. But for managing partner Bruce Hayter, this is still not large enough to minimise risk in the way his counterparts with turnovers of +20m can.

For firms like his, Hayter says, the challenge to get the right people at the right level and whether they can become partners is greater than in larger firms. The firm's management training programme has had positive effects because it has allowed the firm to identify people who can come through to partnership. But, Hayter confides, "it has also raised difficulties because not everybody makes the grade. Not everybody is a great manager or team leader, so how you retain these lawyers who are good fee earners is yet another challenge."

Then there is the near-inevitable risk that promising associates depart to a rival firm where partnership prospects are more promising. A concern that Hayter doesn't delve into at length but which is shared by others in the room. Robert Mowbray, however, accountant and co-owner of business consultancy Taylor Mowbray LLP, brings a level of reassurance by suggesting that all firms above a certain size are exposed. "In big firms, associates don't want to become partners, in part because the partnership is so big that they don't think they could influence it. It's going to be the same issue with firms of your size. Lawyers may think they could do well in a ten- or 20-partner firm, but they are also not sure whether they will be able to change the way things are done, so will be off elsewhere," he says.

Stephen Chalmers-Morris, partner and practice manager at Stockport-based Gorvins, makes a similar point: "People want to be in a firm where they are part of a small team where they can make a big change together."

NEW FACES

An accountant by training, Chalmers-Morris is representative of a new breed of professionals increasingly being seen in modern law firms.

Squeezed between the Legal Services Act and insurance or lender panels driving down prices, traditional law firms are facing unprecedented pressure on margins, calling for smooth processes and greater efficiencies. "One sign of change in the past decade is that there are now accountants running legal businesses," Chalmers-Morris says, "because we have to make sure that simple things happen properly."

Commenting on the recent set of firm closures, he suggests the practices concerned took risks in the boom times, going through mergers or investing in significant property expansion - planning on the economy remaining buoyant, until suddenly the recession kicked in. "Lawyers now realise that they have to be more professional when dealing with these kinds of issues; that's why people like me have come into the business."

"Bringing accountants and management accountants has been critical to our growth," Hayter concurs, saying it has helped drive the firm through change from a position where conveyancing represented 30 per cent of turnover 12 years ago, to one where it now only represents 6 per cent.

Ian Shovlin reports a similar process at Higgs and Sons, whose finance director is an accountant, where conveyancing now accounts for just 4 per cent of turnover.

While advocating a more business-like management, Chalmers-Morris remains a strong supporter of the collegiate approach, which he says can provide an effective management structure.

"It's about the mechanism for decisions: if you have a small management committee, provided that long-term investment decisions are referred to the partnership, that should work," he says.

Rix and Kay have a similar mechanism, where the board approves the annual business plan, delegating its implementation to a management committee. "Far from slowing things down, it accelerates decision making," Bruce Hayter says. "The partners realise that they need a strong business going forward in order to be able to be paid out their capital on retirement; there's a balance to be made, as a businessman, in terms of whether the decision to be made is a good one for the long term."

And making the correct investment decisions is what holds the key to a firm's growth and its profitability. It is what will make it a sustainable long-term venture and what will attract new talent to the partnership.

MAGIC FORMULA

While there may be a tendency to equate growth with growing fees, Robert Mowbray warns this approach is "completely flawed". "You should aim to be growing your profit, because to grow your fees you need to take on more people, which would probably change your culture, whereas if you aim to grow profit, it's about efficiencies. Neither is right or wrong, you need to decide what you're more comfortable with."

Hayter agrees: "Our finance director focuses on profit, growing fees is one thing but that's nothing without profitability."

Echoing Mowbray's words, Ian Rosenblatt comments that "the trick is to grow profit without increasing overheads". "The only way you are going to grow your margin to get an absolute return on the fees you're charging is to find the magic formula to persuade a client that they need to pay more because either they can't get it from somebody else or that you'll do some magic for them". Rosenblatt's own secret formula is based on lawyers aligning their interests with those of clients and taking a risk alongside them. This includes CFAs, DBAs, and "very small drop-dead fees on corporate transactions in return for much higher fixed fees on successful completion of other things". By his own account these options are "nightmarish because all sorts of horrible things can happen", but overall the outcome should be positive because "most deals complete and you do win lots of cases".

One major obstacle is that clients buy on price: "Irrespective of your expertise or track record, the first question is always 'how much'."

The solution, according to Mowbray, is for lawyers not to answer with a price but to ask instead what the client is expecting from their lawyer.

This approach is also supported by Ian Shovlin. His firm, Higgs and Sons, has an arrangement with nearby Aston Business School. Last year the school looked at the pricing structure for every department in the firm. "It was a fascinating insight - the key element is talking to the client and ask what they want out of this job, what's success for them, how much are they prepared to pay for it. That's been revolutionary."

Malcolm Dickinson also suggests lawyers should consider charging for non-legal services. "We need to ask ourselves where we can add value - project management, for instance. As lawyers, we're good at it, it's added value, so why not charge for this service," he asks.

But in a world where a large proportion of legal work is commoditised to some extent and where new entrants are forcing the issue of fixed fees, pricing and setting fees at the right level will become increasingly critical. So what does the panel make of the commonly applied principle that fees should be set at three times salary costs?

Responses are mixed. "It's a model," says Alun Jones flatly. For Bruce Hayter: "it's only applicable in certain areas"; a view shared by Ian Shovlin: "it will be more in some areas, less in others".

But generally the consensus is that in areas under pressure from panel work, personal injury and commoditisation, the ratio would be low, even where salary costs are kept low too - for instance by assigning the work to non-solicitors. The key, according to Alun Jones, is to have the right management information to be able to analyse the outcomes. And where firms carried out commoditised work and high-value custom work, different KPIs should be applied, suggests Stephen Chalmers-Morris - and they should also be kept "very simple".

After the collapse of the likes of Cobbetts and Atteys, and the disclosure by the SRA last week that 150 firms were in serious financial trouble, the question of financial stability is firmly on the agenda for the mid-size sector.

The firms that took part in our panel discussion represent perhaps some of the best practice among traditional partnerships that have managed to survive the downturn. But with few signs that the economy will improve anytime soon, they may have to sharpen their act yet further and be even more disciplined about growing profits.