A lot at stake in today's law firm

Richard Hill By Richard Hill
from Stepien Lake and chair, ILFM

This blog post was also featured as a column in issue no.2 of Legal Practice Management magazine. Download LPM magazine to read the issue in full here (8MB file).

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Let’s reminisce for a moment. Do you remember when a quick phone call to your friendly bank manager was all you needed to request some partner capital or extend the overdraft, with little need to produce financial information to back up the request?

It may well also now be a distant memory that, every August, you would renew your professional indemnity insurance (PII) with a quick chat with your broker. Sometimes there was even the odd discount thrown in for good behaviour (no claims), and that was that. Not any more.

We have seen the emerging influence and interest that external stakeholders, especially banks, PI insurers and regulators (that is, the SRA) have in today’s firms. The need to demonstrate sound risk and financial management to these stakeholders has never been greater, because of their vested interests in a firm’s success or, more significantly, failure.
 
The firm’s existence can even be threatened by these stakeholders, whether it is by an SRA intervention (or implementing compliance officers into the industry), the bank refusing overdrafts, or even insurers refusing PII cover. There have been many criticisms of the PII market, where underwriters can ultimately determine who practises, with a reduced supply of insurers forcing many to seek cover with unrated insurers.

Mendelow’s matrix is a grid used for identifying and measuring stakeholder power and interest in relation to a firm’s actions. If you compare a matrix from 2004 to now, you’ll see a changed world. Some would say legal is catching up with business, triggered by competition, the financial crisis and the liberalisation under the Legal Service Act 2007. Clients have driven a hard bargain on fees, with an erosion of time-based billing that many firms still have trouble with. Many firms have been profoundly affected by legal aid cuts and new legislation.

Perhaps the firms with the most interesting and challenging balancing act will be those that have sought external investment (adding onto Mendelow’s matrix a stakeholder group that did not exist before 2011), and any firm that follows the path of the Australian firm, Slater & Gordon, the world’s first publicly traded law firm.
 
Law firms must balance the ethical nature of providing legal services in a heavily regulated environment, while ensuring the profitability of their work. Firms must also ensure good communication with shareholders – a key part of good governance that stakeholders wish to see.

I expect practice managers to be pivotal to overcoming the old-fashioned reluctance to provide information on the firm. They will also be in a position to install the systems to capture and provide the operational information in a well-presented manner to banks, regulators and insurers. After all, there is a lot at stake.

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