Mergers are not enough

The problem with partnership structures is that they facilitate financial incompetence, a risk heightened by the Legal Services Act 2011. This has created confusion between ownership and management within firms, causing many to lose control and direction at a time of unprecedented change for the professional services market.

At a basic level, the very model of partnerships is flawed, with partners splitting up profits and leaving little for contingencies or investment.

Part of the difficulties at Manches, now merged with Penningtons, seems to have been disconcertingly straightforward: money set aside to pay partners’ tax liability was used as working capital.

Some firms have recognised the predicament, using a hybrid limited liability partnership and company structure to keep profits in the business. 

The merger talks between Wragge and Lawrence Graham suggest an attempt to find synergies including, one assumes, cost savings. The biggest costs for such firms are their staff and the office rent. But mergers alone are not sufficient. After the champagne corks are popped the implementation of a strategy to deliver the synergies and an integrated firm requires strong leadership.

Law firms need to think much more carefully about how profits are dispersed for other reasons, too. They rely on partnership loans to pay for acquisitions and property. But banks now view partnerships with some caution and want to see profits playing a greater part in financing the practice.

A further awkward truth is that law firms are often run by old hands with little thought or interest in succession, something that includes buying out retiring partners’ profit shares.

But there are things to do. The first is not just leaving the business side of the partnership to a management board, but full engagement by all partners in the financial and business strategy. Large legal firms should consider appointing non-executive directors and perhaps even the CEO from outside the firm to bring in wider commercial experience and objectivity.

More planning needs to take place, with realistic cash flow forecasts stress tested against external advisers to avoid an obvious folly. A five year plan would help to map out retirement plans for partners and how the capital is to be replaced.

Partnerships may be flawed, but these flaws are not necessarily fatal, and where they are, as recent events show, the wounds often appear self-inflicted.

Fiona Hotston Moore is a senior partner at Reeves

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