Tag Archives: legal services

Does my BUT look big in this?

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As we move closer to October, I have an increasing sense that the reality of change is hitting home. Nevertheless, there are still some nay-sayers and delaying tactics in evidence. Here are the common objections, along with my response.

“I didn’t become a lawyer to be a businessperson”
Maybe you didn’t, BUT that’s what it takes in the 21st century, so if you don’t want to do it, don’t: shut up shop.

“I can’t make enough money from what I’m doing”
You’re right, and I sympathise, BUT to make more you need to change what you’re doing or how you’re doing it. You won’t make enough from doing the same things in the same old way.

“The Law Society should do more to represent us and protect us”
To whom and from whom? You have a point about your representative body, BUT remember that there are members who welcome the changes and the opportunities right across the spectrum of size, type of practice and geography, and there are many clients who are desperate for more relevant, accessible, user-friendly and cost-effective legal services. There are a lot of disparate and conflicting views to represent!

“The SRA should protect us from competition”
Wrong: that’s not part of a regulator’s job. BUT what the regulator should do is create a regulatory playing field that’s level (in the sense that all those who fall within the regulated community should be subject to the same ‘rules of the game’).

“It’s not fair, though, because we can’t compete on equal terms”
You’re probably right. The regulatory playing field might be level, but the competitive one isn’t if others have more reach, more resources, better technology, closer contact with consumers, and so on. BUT that’s what competition is about – winners and losers. Find your competitive advantage by offering something that’s more meaningful and valuable to your clients, and you won’t lose them to anyone else. That’s fair, isn’t it?

“We’re too small to invest in technology and marketing”
You might be right, BUT you do have the opportunity to combine with others to offer a broader or deeper range of services and provide a platform to investment and development. Do it.

“We act for vulnerable clients, and they won’t be able to afford access to justice if we pull out”
This might be true, BUT it’s a political issue, not a regulatory one. The advent of ABSs is not inherently likely to reduce access to justice or quality (and might improve both); and the regulatory objectives in the Legal Services Act require us all to work to improve access to justice.

“ABSs don’t offer anything to me; and I don’t want to grow, or be managed by someone else, or have external funding”
It’s your right to make that choice, BUT what you want and what you need aren’t necessarily the same thing. The days of being the only arbiter of how you’re in business are now behind us.

CPD: compliance, competence or development?

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I attended the Bar Standards Board’s Clementi Debate on 26 May.  The subject was whether the education and training of lawyers in England & Wales is fit for purpose.  The content and debate, however, were more narrowly focussed on the fitness for purpose of continuing professional development (CPD) for barristers.  It seems to me, though, that the issues are of broader application and importance.

I don’t need to rehearse here the content of the presentations.  Thankfully, not all speakers started from an assumption that the present approach was fit for purpose.  What disturbed me was my own growing sense of unease through the evening – for reasons I couldn’t initially pinpoint.

All present seemed to agree that CPD was ‘a good thing’, with its implicit consequence that lawyers who undertook sufficient and relevant CPD would be (and were) better practitioners.  I would not dissent from that proposition – even if we might (and the panellists did) differ on the meanings of ‘sufficient’, ‘relevant’ and ‘better’.

What the Debate did not address, despite some suggestions that it should, was the public interest in regulatory intervention in CPD.  It is a regulator’s function to determine whether or not a practitioner is competent to practise.  It might even be their function to require CPD to be undertaken.  But how prescriptive should that requirement be?  And in whose interests is the intervention made?

The current approach is to require a certain number of hours to be undertaken (the proposal for the Bar is that from January 2013 this should rise to 24 hours a year).  My sense of the meeting was that all agreed that a ‘one size fits all’ approach was not sensible, because the nature of practice changes over time, as do personal development needs.  I must be missing the point, though, because it seems to me that a universal requirement for 24 hours a year is a one-size-fits-all requirement.  So the ‘sufficiency’ proposition appears to be on shaky foundations if framed in terms of an input (hours) rather than an outcome (competence).  But at least a minimum number of hours makes compliance easy to assess (for the regulator and the regulated) … even if it actually fails to assure continuing competence.  That might explain part of my unease.

There is clear evidence from CPD providers – and it has changed little during this country’s 25-year experience of professional CPD – that, as the CPD year-end approaches, lawyers will attend (in body, though rarely in mind or spirit) any CPD event that will get them over the hours threshold.  The content can be entirely irrelevant (to competence); and the behaviour (in making the choice and in not being truly ‘present’) is not what one might expect from a professional.

Some maintain, against this background, that CPD is fit for purpose.  That begs a fundamental question about what the purpose is.  The reality in the circumstances I’m describing is that the CPD obligation has achieved compliance, but not competence or development.  Compliance without competence or development strikes me as a rather sterile objective. (It might be true that education is never wasted – if, in the circumstances I assume here, there has been any; but that is still not necessarily the same as competence or development.)  The relevance requirement therefore also lies on some shaky foundations.  My unease mounts.

I confess to admiration for the New Zealand approach (thanks to panellist and BSB board member Matthew Nicklin for this): a requirement in the code of practice that a practitioner “must undertake the continuing education and professional development necessary to ensure an adequate level of knowledge and competence in his or her fields of practice”.  What a refreshing approach: treating practitioners as responsible professionals, able to make their own judgement about sufficiency and relevance – and being willing to be judged and held accountable after the event (on the basis of competence demonstrated, or not) rather than being told before it to satisfy some arbitrary input proxy (hours spent).

So, does this sometimes insufficient and irrelevant process nevertheless produce ‘better’ lawyers?  Of course it might.  But I’m not sure that this should be the objective for a regulator (as opposed to a representative body).  Surely, regulators, through regulation, should confine themselves to securing minimum levels of competence (which might nevertheless be set at high levels) rather than pursuing aspirations based on relative competence beyond that minimum level?  After all, regulation is an intervention in otherwise private activity, and such intervention should in my view be justified in the public interest.  What, then, is the public interest here?  My conclusion would have to be that it is to protect clients from incompetent practitioners, and to achieve a broader confidence of the public in the competence of those authorised to provide legal services through maintaining standards for authorisation and removing those practitioners who fall below them.

My contention, therefore, is that the regulator should assure competence.  This is in part an issue of the qualification and entry requirements sufficient for becoming an authorised person under the Legal Services Act.  CPD has nothing to do with this.  The regulators must then over time be satisfied that a practitioner is suitable to remain an authorised person.  Is CPD relevant to this?  Yes of course; but only, I think, in a sense more limited than current CPD requirements assume.

If a practitioner is the subject of a serious complaint about competence or service, or is found to have been professionally negligent, there must be questions to be asked about their competence and the public interest in them remaining able to practise.  I would regard it as an entirely relevant question then to ask whether or not they had undertaken any CPD to maintain the currency and relevance of their competence, and to explore in detail exactly what CPD they had done and when.  That should legitimately inform a regulator’s judgement about the extent of culpability in relation to the professional lapses complained of and the assessment of continuing fitness to practise.  But that judgement will be exercised in the specific circumstances of a particular complaint, at a certain point in time, and in the context of the practitioner’s performance at that time and in the period leading up to it.

I’m led to the conclusion that the true value and utility of CPD as a regulatory obligation can only be judged in retrospect, and that to seek to prescribe in advance (especially by something so crude as an input measure of time spent) misses the point.  The public interest requires an assurance of competence at the point of authorisation, and action to remove from practice those who subsequently fall short.  It is not well served by universal and broad-brush requirements that ensure compliance rather than competence.

In the end, therefore, I’m drawn to the New Zealand approach.  Every lawyer should be under a regulatory obligation to maintain their competence and fitness to practise.  The New Zealand approach requires that.  Of course, CPD should be encouraged: development beyond the minimum required to practise should be a lifelong quest for any self-respecting professional.  Personal aspiration and motivation will drive this, supported by the professional representative bodies.  I question, however, whether the regulator should be focusing on professional development beyond the minimum competence required for practice.

The regulator should certainly remove from practice those who have been demonstrated not to be up to the required standard of competence.  That is a specific judgement required after the event in light of a range of circumstances, including whether ‘sufficient’ and ‘relevant’ CPD had taken place.  Disciplinary proceedings against those who have not undertaken enough CPD hours (failure to comply) does not actually assure their continuing knowledge and ability (failure of competence) – and probably costs the professions something in practising certificate fees to no great avail.

My unease therefore relates to:

  • the confusion of compliance with competence and development; and
  • regulators’ focus on achieving some abstract and relative notion of ‘better’ when their attention should be directed to removing the incompetent and unethical from practice.

Consequently, CPD should relate to competence; it is not secured by compliance with an hours threshold, and development beyond the required minimum level of competence is a personal and relative matter.  Whether someone has fallen below that minimum level cannot be assured by CPD, and can only be judged confidently in retrospect.

My conclusion is that the scope for prescription of CPD requirements is therefore more limited than current approaches appear to acknowledge, with the result that regulatory intervention relating to CPD goes further than the public interest requires.

PEP talk: beyond the low-hanging fruit

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Most of us realise that profit per equity partner (PEP) is a distorted and distorting measure of law firm success. But its use persists.

It is distorted because its underlying metric (net profit) is perversely stated relative to any ‘normal’ business. The accounting treatment of professional partnerships, combined with the taxation of them, encourages a full income extraction approach – that is, all profits are usually taken out as income within as short a period as possible after the financial year to which they relate.   There is usually no allocation of any element of ‘wage’ or employment cost to an equity partner, and no recognition that some element of the distribution of net profit is a return to invested capital and to entrepreneurial risk.  To some extent, therefore, allocations of net profit represent a short-term income distribution of what in other businesses would be longer-term capital growth.  The ‘net profit’ of a professional partnership is accordingly not comparable to that of most other businesses – and so is relatively (and significantly) over-stated.

PEP is distorting because it drives behaviour that seeks to maximise the numerator (net profit) and minimise the denominator (equity partners).  For example, in many firms, the ‘strategy’ recently has been to appoint new partners not as equity partners but as salaried or fixed share partners (or similar variations on that theme).  In the six years to 2010, figures from the annual Legal Business surveys of the top 100 firms show virtually no net growth (just 2%) in the number of equity partners in those firms.  Over the same period, the number of non-equity partners increased by 40%.

As the financial crisis took hold, and law firm revenues began to fall, managing profit by increasing human leverage and fee income was no longer the name of the game.   Attention turned to cost-cutting programmes to reduce expenses in the (often vain) hope of maintaining profit levels.  Unfortunately, law firm profitability is much more sensitive to fluctuations in revenues than it is to variation in expenses.

With costs reduced (usually by trimming back-office and related overheads, and squeezing suppliers), the profit management project turned from maintaining PEP through cost-cutting to PEP engineering through denominator-cutting.  Having stemmed the influx of new equity partners (as described above), attention turned to removing underperforming equity partners.

All well and good, and often long overdue.  But if a firm chooses the wrong partners to cull – that is, those who have a client following (or book of business) – reducing denominators will also result in a loss of revenues, and the net effect might be neutral (or worse) for PEP.  On the other hand, if the removal of partners does not significantly affect fee income, that rather suggests that net profit has been shared with people who were being allowed to take more than their fair share of this mixed return to productivity, investment, entrepreneurialism and capital.  To put it another way, the PEP was distorted by being available to those who were not worth it.  Removing them is not achieving any true saving to the business but is simply restating the firm’s profitability on a fair and proper basis.

So, by this stage in the economic playing out of the financial crisis, the low-hanging fruit has been taken.  Removing surplus costs from the business, along with equity partners who were not making a net contribution to it, simply puts the firm on to its true footing.  These have been tactics that perhaps bought some time – probably in the hope that by now ‘normal’ practice and PEP would have been restored.  To some extent, it might even have worked: the American Lawyer figures for US law firms’ profitability for the calendar year 2010 show some restoration of PEP.  It will be very interesting to see if English law firms’ results for 2010-11 mirror this.

Unfortunately, it’s not looking as though this creates a sound platform for future profitability in the face of continuing flat revenues for law firms, and a cost base that many think has been pared back as far as it can be.  The old ‘normal’ is still not expected to make an appearance any time soon.  If the right costs have been cut, and the right partners removed (or retained), there is no further scope for maintaining or improving PEP by using the same tactics.  Indeed, to do so would run the risk of jeopardising the business since such an approach would imply removing valuable partners and reducing the firm’s resources and support to (or below) a critical level.

So, where next?  Although the tactics have so far addressed both the numerator and denominator of PEP, arguably, they have not really addressed the fundamentals.  The next temptation is usually to redesign the profit-sharing arrangements, normally with some performance-related or bonus element.  In English law firms, the tendency is to pull up short of ‘eat-what-you-kill’ systems.  What is too often missed, however, is that once the firm’s and partners’ performance is properly managed and underperformers removed, the firm’s problem is not its profit-sharing structure but not enough profit to share.  Changing the way in which profits are shared at a time when there is not enough money to go round is inherently dangerous; a lot of babies are thrown out with the bath water.

My conclusion, therefore, is that with no scope for more of the same, and little point in moving the profit-sharing deckchairs, now has to be the time to look at the fundamentals – and that means returning to the numerator.

Future approaches to PEP management must, in my view, be the result of reinventing the firm’s business model.  The elements of that model are: creating meaningful value for clients in the performance of the firm’s services; resourcing the firm to create that value; financing the firm to secure those resources; and generating sufficient returns to the firm’s stakeholders (and I’m assuming here that the ‘right’ equity partners are now in place).  The first two of these are the fundamental issues that need immediate attention, and both are elements that crucially drive net profit.  It is true that these two elements also contribute significantly to the fourth – returns. By challenging management’s thinking about having the ‘right’ resources (including how many equity partners the business really needs), they will have some effect on the denominator, too.  But value creation and resourcing fundamentally drive the generation of net profit rather than the sharing of it.

First, then, the firm’s revenue needs to be grown by concentrating on creating value for clients.  This requires the firm to be close to its clients, to understand what value looks like to them, what represents success in the transaction or resolution, and to demonstrate how the firm can deliver real benefit.  It isnot the same as ‘value added’, which is usually found in the periphery of the relationship rather than at the heart of the professional service itself.  This exploration is also a necessary part of achieving competitive advantage.

Second, the cost base needs to be revisited – or, rather, redesigned.  This is more far-ranging that stripping out surplus overhead, squeezing suppliers and looking at outsourcing.  What’s required is not so much outsourcing as alternative resourcing.  Thinking about the entire configuration and use of the firm’s resources is necessary, including: lawyers and non-lawyers, professionals and support staff, human beings and technology, craft and process, physical and virtual, internal and external.  Using new approaches to case and project management, and integrating the firm’s business process and support functions into a seamless and more cost-efficient infrastructure, are an inevitable part of the redesign.  This might result in legal or business process outsourcing (LPO or BPO); it might mean using cloud technology, paralegals or professional project managers; it might mean off-shoring; it might mean collaboration with suppliers or even competitors to secure otherwise elusive economies of scale.  In short, the result will be a new way of structuring the delivery of legal services which does not merely adjust the firm’s cost base but designs a very different approach to making profit.

Understanding and delivering value creation and new resourcing approaches are still in their infancy in law firms.  But these must be core to the next wave of managing the PEP numerator.  At the same time, the denominator must not be allowed to drift out of kilter again.  Profit is the outcome of the firm’s business activities, but it is an outcome that needs to be managed actively.  If it is, perhaps then PEP can begin to move beyond distortion and then approach some semblance of a meaningful measure of return – at least in a professional partnership.