Tag Archives: legal services

Breaking News: Humpty Dumpty falls off wall …

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News just in: “It will come as a shock to many to hear that Humpty Dumpty (also known as the traditional law firm business model) has taken a tumble. Worse still, all the king’s horses and all the king’s men couldn’t put Humpty together again. Yes, it’s true: however you look at it, Humpty is well and truly scrambled.

How could this happen? Well, sources close to the wall from which Humpty fell, say that although he was close enough to the wall to see the writing, he hadn’t actually read it.”

In many ways, the traditional law firm business model has been an accident waiting to happen. For me, a business model is a statement about how the firm coordinates four elements to structure the business and deliver its strategy. They are (a) creating value for clients; (b) resourcing the firm to create that value; (c) financing the firm to secure those resources; and (d) producing and distributing returns on the investment to make it all worthwhile. (For more, see Mayson (2010) Business models in legal services or visit the Downloads section.)

In terms of these four elements, the traditional law firm business model can be expressed in summary as: (a) using a cost-plus, time-based, lawyer-focused charging structure (which often bears no relation to value to the client; (b) a lawyer-driven human leverage model with as many resources as possible internalised within the firm; (c) finance provided by internal equity (partners) and external debt (banks and asset finance) – though much of the internal equity is often also the result of bank lending – and all managed within a partnership structure and culture characterised by confused roles, disdain for professional (that is, effective) management, and inefficient decision-making; and (d) returns created by growing turnover (rather than managing for profit) with rewards extracted entirely as income, usually within 12 months of earning them.

The message that Humpty missed was that, on all four elements, the traditional law firm business model is broken. So to those who say, “If it ain’t broke, don’t fix it”, I say: it is broke, so get on with fixing it as quickly as you can.

On the first element, creating value for clients can’t be done on a cost-plus model, time-based pricing, or where creating value is confused with adding value (most clients really don’t care about legal updates). But negotiate a better deal or outcome for them, or make their personal or business lives easier, and then you’re on track. Understand where the firm sits in the supply and value chain, and who else is claiming part of the value paid by way of fees for legal services, and then work out where the real value lies to the client and deliver it.

For the second element, neither employing lots of qualified lawyers to do things lawyers don’t have to do, nor using people to produce bespoke outcomes when technology or processes could give more consistent, reliable or cheaper results, represents a sensible route to 21st century resourcing for productivity and cost-efficiency. Nor does insisting on doing everything inside the firm when outsourcing or joint venturing are viable alternatives.

The third element relates to finding feasible sources of investment. When firms have been removing under-performing equity partners (who want their capital back) and postponing promotions (and so not admitting new sources of capital), internal equity capital is in shorter supply and debt capacity is constrained by the reduction of people to back the borrowing. Although banks have not stopped lending to law firms, debt is not so easily available and now tends to come with stricter terms and covenants than it used to. Alternative financing (including external public debt as well as public and private equity) should not be lightly dismissed with a wave of the hand and “we don’t need it and we don’t want it”. Maybe firms don’t want it; that doesn’t mean they won’t need it. And it doesn’t mean they’re fit for investment when they do decide they need and want it.

Law firm governance and structure also need reworking to provide better decision-making processes, more disciplined businesses with skilled and effective managers (I don’t much mind whether they are lawyers or not so long as they can do the job), and more attractive vehicles for investment, recruitment and retention. The professional partnership is an increasingly inappropriate vehicle for this. In business terms, professional partnerships are really not that special, and maybe it’s time we stopped exempting them from the requirement to incorporate when they have more than 20 partners (though in Humpty’s case, it will need more than a shell company to fix the problem!).

Finally, the returns need improving and re-thinking. Any business that takes its entire returns as current income is completely missing the point of being in business. Effective business models will differentiate income and capital returns, short-term and long-term rewards, and salaries, bonuses and dividends (whatever labels are applied to them).

And so the breaking news story concluded: “It is remarkable that Humpty Dumpty was able to stay on the wall for so long, and his downfall certainly represents the end of an era. We can’t say that he wasn’t warned. The writing is still on the wall, and it’s not too late to avoid falling off and creating a mess. But then you know what they say about needing to crack a few eggs to make an omelette. The future certainly needs a new recipe.”

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.