#552: Should Your Law Firm Welcome Non-Lawyer Owners? Insights from UK Attorney Corinne Staves

Episode Notes

Transcript

Zack Glaser:

Hey, I’m Zack and this is episode 552 of the Lawyerist Podcast, part of the Legal Talk Network. Today, Stephanie talks with Corinne Staves about non-lawyer ownership of law firms, and today I’m on my own on this intro. Nobody, nobody in the studio with me, nobody keeping me from staying ridiculous things, I guess. So might have to be my own keeper today. But yeah, it’s just me looking forward to getting you guys into the interview between Stephanie and Corrine. But before we get to that, we are a couple of days away from the a tech show in Chicago. We’re also a couple of days past Stephanie’s 50th birthday, and this is a big occasion, a big milestone birthday. And at lawyers, we like to celebrate things. We like to celebrate our wins. We have a specific channel in our teams area.

We try to celebrate stuff, celebrate each other, celebrate what we do. So we in Lawyerist fashion, are going to celebrate Stephanie while we’re at the A tech show. So on April 3rd at 7:00 PM which is day one of the A tech show, we are going to have a party on the rooftop of Reggie’s in Chicago. As you can imagine, because we’re not going to leave the city in order to do this, we’re going to be in Chicago, which is at 2105 South State Street in Chicago. We’re just going to have a little get together with lawyers, friends, lawyers, acquaintances, people that have heard of Lawyerist. You’re all welcome. If you’re hearing my voice right now, you’re all welcome to come and join us for the party space is limited. So maybe holler at us a little bit before, but we’d love to see you there. You don’t have to wait for an invite or anything like that, but myself, Stephanie and Jennifer will be running around the A tech show next week, handing out invites, talking to people. So if you remember while you’re there that there’s some sort of party going on, but you don’t remember what it is, just ask us. But it is April 3rd, 7:00 PM Reggie’s in Chicago on the rooftop. We’re celebrating Stephanie’s 50th birthday. I think we’ve got some sort of reverse gift thing going on, so just bring yourself and we would love to see you all. But now here is Stephanie’s conversation with Corinnene Staves.

Corinne Staves:

Hi, I’m Corinne. I’m a partner at CM Murray, LLP. We’re a law firm in the UK and we advise law firms on everything from setting up to governance to compensation and to different forms of structure.

Stephanie Everett:

Welcome to the show. I’m super excited for this conversation. I’ve been waiting for it because I think as part of your job and your role there in the uk, you’ve actually looked at and studied how non-lawyer ownership of law firms has actually impacted the industry. Is that right?

Corinne Staves:

Absolutely, yes. Well, we’ve had non-lawyer ownership as a potential for law firms for over a decade, so we’ve really got the hang of what that looks like in the UK and found our stride really. Is it helpful for me just to talk about what that looks

Stephanie Everett:

Like? That was going to be my next question. So yeah, for the listeners who may not know about the UK structure, I would love for you to bring us up to speed onto what’s allowed there.

Corinne Staves:

Well, the short answer is that we have great flexibility. I mean, the regulator’s role is to look at what’s proposed and decide whether it’s comfortable with it or not. But you can effectively think about any forms of ownership or management that don’t have lawyers. Prior to that, you had to have some kind of legal qualification to either own or manage a law firm. And those are the two key features. Really it’s the ownership or the management, the influence and the control over the firm that are really relevant here in the uk. That’s played out in a number of different ways. The most common actually is where a firm wants to bring in a really important person that’s not part of the legal profession, say the FD head of it, head of hr, those really critical business people in the law firm, and they can be the same status as partners, whereas before they couldn’t, for example, take tech profits from the business.

So it’s enabled firms to bring those really significant people through to be equivalent to partners. That’s the most common example of external management, of external ownership by non-lawyers. Although we do see more interesting options, for example, we’ll see everything from, there’ll be an international law firm where you might have, for example, US lawyers who can come in because although US lawyers are lawyers, we don’t consider US lawyers to be UK qualified enough to be UK lawyers. So you wouldn’t necessarily have to get particular qualifications, you could just be approved by the SRA to own or manage a law firm. Again, that gives great deal of flexibility when you’re looking at a broader global businesses, for example. And then finally in the uk, one thing that we’re seeing more and more of is truly external investment. And PE is a big example of that where people are saying, here, we’ve got a big pot of money, we’d like to invest in your firm to help you grow. And that’s something we’re sort of seeing really take off a bit more at the moment.

Stephanie Everett:

Well, lovely. Right now in the US it’s very limited. There’s a couple of states who have opened up some sandboxes and have allowed some experimentation to happen, but I think there’s generally a sense of fear is probably, I mean there’s a lot of reasons people are saying that they’re against this, but I think they all boil down to fear. And I’m curious what you’ve seen, what has your research played out and how this actually impacts the legal profession?

Corinne Staves:

To be honest with you, I think we were probably a bit afraid to, the driving force behind introducing this flexibility in the first place was to enhance competition and to provide better outcomes the consumers of legal services in the uk, and I mean it’s a completely different podcast to work out whether that’s happened or not, but that was what was driving it. And I think we probably all were a little bit afraid, but actually I think most practitioners in the profession would say that not a vast amount has changed. I mean, it has changed the competitive environment, but everything is constantly changing anyway. I mean, look at the way that technology is shaping the way that we’re doing business from day to day this year in particular. So I think we’re all perhaps naive to think that things aren’t constantly changing. And this is just another element.

The biggest factor really is that it enables some firms to have different forms of investment of different forms of working capital, which could give them competitive advantage, for example. And I think the US experience to date does seem to be, I know it’s very limited, has been around the accountancy firms expressing an interest in not being able to offer more services. And again, that was perceived as a huge threat to the UK market. I’m not going to pretend it hasn’t changed the UK market. Obviously it’s relevant that the accountancy firms can offer everything including legal services, but as I say, it hasn’t been a huge volcano of change. It’s more been adapting to different competitive pressures in the same way that firms always do.

Stephanie Everett:

Yeah. One of the concerns, and you addressed this too, is we tend to say, well, as a legal profession, we have an obligation to our clients. We have the rules of professional responsibility and ethical obligations, and there’s a fear that outside investors wouldn’t be beholden to those same rules or they might be influenced differently. And how have you seen that play out if you have, in terms of how it’s impacted the client experience?

Corinne Staves:

And I think you’ve hit the nail on the head there, but if anybody’s thinking about changing their structure, about having non-lawyers come into their business for the first time, that’s got to be the priority, hasn’t it? What’s this doing for our clients? Because if our clients are happy, we’ll be successful, we’ll thrive as firms and as lawyers ourselves. So that’s got to be the starting point. And to be honest with you, I think that lots of firms, when they’re thinking about next steps, whether it’s external investment, whether it’s non-lawyer owners, whether it’s things like m and a activity, mergers, those sorts of things, often people overlook the why are we doing this? What are we trying to achieve with this? What’s our strategy here? And this is just another example of that. What is the strategy here? What are we trying to achieve? How does this serve our clients?

And if you’ve got good answers to those questions and the answers to those questions involve non-lawyer ownership, then I think you do have to think about some of those ethical considerations. But again, I think they are more things to think about than necessarily barriers in the large majority of cases. For example, you might think about your independence if the extent of the non-lawyer ownership is so significant that your governance is completely controlled by a non-lawyer owner or by some kind of external investor, you want to be absolutely confident that you can be independent, that you could, for example, do all the things that you would need to do to serve your clients appropriately and legitimately throughout. There would be some issues there. For example, if you are owned by a particular stakeholder from an own interest perspective, you’ll find yourself unable to litigate against them, for example.

But those sorts of circumstances don’t come up terribly often. I suppose there could be bigger issues if there was a particular sector. I mean you look at things like the banking sector or the insurance services, you’ll find that their clients are driving client take on decisions, so you can’t ever ask act against insurers if you act for insurers, for example. There are lots of examples of business like that, but we haven’t found that that’s been such a big issue in the UK because those businesses are not investing in other law firms. I guess the other thing I would mention when we’re thinking about accountancy firms and in the UK we have obviously all the big four for example, and they’re operating with lots of lawyers operating out of their UK operations, they’re going to have even more constraints because you think about the big four accountants firms, the audit regime is a really difficult one to deal with, and there’s lots of constraints with the accountancy and the audit rules. And so that’s another set of rules that these firms are going to have to contend with. Having said all that, there is a way through. Firms find a way through and you’ve just got to add it into the pot of things you think about all the time.

Stephanie Everett:

Yeah, no, that makes sense. And in your role, are you helping firms or have you seen firms put in certain guardrails or protections in their governance structure to sort of navigate some of these issues that are coming up? I mean, that seems the obvious way, but

Corinne Staves:

We do see some guardrails in governance and constitutions, and that’s a really sound suggestion to be honest with you. Lawyers in the uk, and I make no comment about US lawyers or a very specific group of people, we are proud to be law firm partners. We take a certain social significance from it. It’s a profession, it’s not just a job. And so one of the key things there when you’re talking about non-law ownership is thinking about how it infringes on that sense of identity that law firm partners have and the relationships that law firm partners have with their clients and those kind of bonds they’ve built as trusted advisors. So quite often it all gets built in with that, those aspects and the autonomy that partners and the groups of partners want to retain. And most often in those circumstances in alignment there, you wouldn’t be thinking about partnering with a non-lawyer if they didn’t share that vision, if they didn’t share the values. And then it’s just a question of complying with the regulatory framework, which is already baked in because you can’t operate as a law firm clearly without that sort of regulatory compliance. And of course that’s true across the US as well.

Stephanie Everett:

Yeah, no, that makes sense. I’m curious if you’ve noticed any benefits that surprised you, things that maybe you didn’t think of and anticipate but now have played out and are good things?

Corinne Staves:

It’s a great question and probably ask because again, in another 10 years time, we’ve seen some examples of really extreme examples of non-lawyer ownership where we’ve seen law firms listed on the different stock markets in the uk and that hasn’t been a success in lots of cases. There’s one or two exceptions to that principle. So I guess that’s sort of the opposite of the answer to your question in the sense that we’ve seen a couple of things don’t really work in that context, and I wonder whether it was just because of the businesses that went for it, if there’ll be better contenders for it or whether that’s because it’s just not a good model. By contrast, I do think that this ability to bring through non-lawyer owners and managers like your fd, your HR manager, your IT manager is fantastic because often these people, especially in the larger firms, in the smaller firms, perhaps less, but in the larger firms are often incredibly significant people within the business more so than normal partners like me.

So you need to think about how you reward and incentivize those people so that they’re driving the success of the firm. So I think that is one of the success stories, and I think we’re probably seeing the other potential success story play out as we speak with the increased interest in technology and particularly in AI in the UK market, but I know across the legal services market across the globe and in the US, firms are suddenly seeing that there is a much greater need for investments, but perhaps they’ve felt ever before they’ve been able to meet their working capital needs quite effectively, but now there is scope for huge investment in technology and really deriving benefits from that. And therefore I think people looking for external sources of finance. And therefore I think what we’re seeing now is that firms are thinking more carefully about those external sources of finance, for example, from pe, and that’s just one example, but it’s a really good one. We’re also seeing it from litigation funders, for example. They’re a good source of external finance in our market, and I guess we just have to wait and see how that plays out, particularly if people do take that funding, what the capital event looks like in five to eight years time and how that impacts on things like the recruitment and retention of good people, good partners and what that does, the client relationships.

Stephanie Everett:

Yeah, I mean you hit on two huge topics that I think the technology piece has talked about a lot here that if we were to allow this investment money to come in, it would allow law firms to innovate faster and to keep up. But the other point you made is so important too, which is around retention and I guess even the recruitment of really qualified people who could have stock options and have ownership interest in other companies, but we want to recruit them and we don’t have that same ability and now we could and give them a piece of the pie, which would incentivize them in a different way and in a way that would be in alignment with the law firm’s objectives. I think that’s a point that isn’t talked about enough here. I completely agree.

Corinne Staves:

I think there’s great scope for innovation and imagination. I think that, and again, I say this from a place of love, I don’t think we are necessarily the most innovative businesses that are out there. And I say that as a law firm partner myself, and so I think we sort of trail behind commerce in the true sense in that way. But I do think there are great opportunities there and I think that we should be seizing them. I think we need to think a little bit about what that looks like for the next generation of lawyers because we need to make sure that we have a really strong pipeline of the next generation of partners, of associates, of people in training so that we get that kind of pure quality. Because I think the one thing that we’ve seen in the UK is that quality speaks. That’s the most important thing, isn’t it? For any model. It’s got to be that you’ve got a quality offering that really meets your client’s needs. And so if you can’t assure that because of the changes of the innovation, then you’ve done something wrong.

Stephanie Everett:

It’s such a great reminder because I think sometimes we can get caught up in the, I’m going to say hysteria, hysteria of from everything from this non-lawyer owners to technology and ai. And it’s a good reminder that at the end of the day it comes down to are you serving your clients? Are you delivering a quality product? Because that’s ultimately what’s going to drive business forward. So I really appreciate that because I do think we lose sight of it sometimes. I’m curious to shift gears just slightly. The audience of our podcast, as we mentioned, is often smaller firms and I feel like there’s also a fear that this might allow larger firms. We’re already seeing it with the big four accounting firms really take a stronghold in the market and become these behemoths that really hurts small firms and small business. And I’m kind of curious if you’ve seen any of that play out or how you’ve seen maybe small firms react in the UK to stay competitive?

Corinne Staves:

It’s a great question and I think that that is true of the UK market as well in terms of those perspectives. I think it is true, and let’s go back to the accountancy giants, that it is the mid-market that is probably most threatened. So the magic circle firms and the US firms operating in the UK in London are not facing those same competitive pressures because they’re seen as the top-end advisors with the high rates clients that can stomach that. But if you look at the UK market and the mid-market and the smaller side of things in terms of the number of partners in the matter of turnover and profits and so on, there is a squeeze going on at the moment and those firms are facing increased costs of everything from inflation to salaries increasing and so on and so forth. And clients, whilst they will accept some increases to rates, that isn’t a blank check.

For those of you that remember checks apologies. And so we face this pressure and these firms are, they might be innovative, but they’re not necessarily got the same war chest to be able to make changes. And so they’ll continue to do what they know and so they’re seeing profits starting to dampen or flatten some years be less profitable. So that sort of growth trajectory that firms are expecting isn’t following. So there is that pressure there and we’re seeing a lot of consolidation now. Markets of say mid-size firms, smaller firms merging. There are a number of consolidators in our business in our markets where these large consolidated businesses are going around and sort of gobbling up little firms here, there and everywhere. Sometimes it’s to bring them all under the same brand. Sometimes it’s so that people can keep their own brand and then they can operate, but with the back office and the support supplied centrally.

So yeah, and I think that external ownership permits those, one of the key consolidators is listed for example, and that wouldn’t be possible if we couldn’t have external ownership. So I think we are seeing that, but it’s not just the external ownership which is driving that, it’s commercial pressures, which is driving that. And external ownership does provide several other options, I suppose for firms that are facing those pressures. But what I would say it isn’t panacea, the consolidators, for example, they want to buy a good business and a good business is not one where the partners have failed to plan for succession properly or the partners have allowed the clients to sort of dwindle away and to be not competitive and to not know strategically what it is that they’re trying to achieve. If they’re trying to do all things for all people, chances are they’re not doing anything well for anyone. So it has to still, the same principles apply. You have to have a well run business, you have to know what you’re trying to achieve. And that’s the same whether you’re going to be gobbled up by a consolidator, whether you’re going to merge with another law firm or whether you’re going to continue to go it alone.

Stephanie Everett:

Music to my ears, I agree. If you get to put on your advice hat and say, okay, us, we’re ahead of you. You’re coming along. Here’s our chance to tell you some best practices or maybe even potential pitfalls, what would you tell us law firm owners today that they should be thinking about? I

Corinne Staves:

Think we’ve probably covered most of those messages frankly, because it is about understanding what are you trying to achieve, what are you good at, what do your clients need you to do, and not being all things to all people. And I think that clear understanding of what you are trying to achieve strategically drives everything for firms, whether it is, as I say, looking for a merger or expanding or shrinking, whatever it is laterally hiring good partners in your own marketplace, in your location, expanding domestically, whatever it is you need to know what it is you’re trying to achieve. And then you can go, okay, so if we can have someone external come in and be an owner or a manager, what are they bringing to that mission? What are they going to contribute that will help us achieve it quicker or more effectively than we would’ve done without that external investment? I think

Zack Glaser:

One

Corinne Staves:

Of the risks in the UK market, and we do see it play out occasionally, is that this extra money that external investment can sometimes represent could be an opportunity for the current generation of the most senior partners to cash in basically as that sort of selling the family silver. And there’s only one chance to do that really. We don’t value goodwill generally in law firms in the uk. And I understand the same is true of the us we do in other sectors accountancy, you see it much more regularly, for example, but we don’t in the UK and in legal services, and therefore there is this opportunity for people to say, oh, I could have taken income out every single year on a full distribution model and get a nice lump sum at a point at which I’m near a retire. And that sounds really attractive to me, and I think it is a very enlightened and mature law firm partner who says, actually, no, this isn’t actually my business to sell.

It’s a bit different for founders maybe of first generation firms, but generally speaking, this is not my business to sell. This is not my money to earn. I’m not entitled to this lump sum anymore than the people who came before me or the people that come after me. My job is as a custodian here to make this firm stronger for the next generation of lawyers and to serve the clients. And I think that little carrot of some kind of capital sum can distort things. So I guess I would warn law firm leaders to think carefully about what’s driving that sort of capital transaction. If indeed that’s what’s on the cards, is it a legitimate opportunity to grow the business and to serve clients and to make the business strong for the next generation? Or is there actually a little bit of, actually this is a nice little pot for retirement and is that driving it? Is that voice loudest and should it be loudest?

Stephanie Everett:

Any thoughts on where the UK’s headed like this just exists now? Will it continue to evolve and if so, maybe any thoughts on what you guys might see next?

Corinne Staves:

We had a great period of flexibility, and that’s been great in many ways. They’ve also been one or two high profile examples of consolidation activity where it hasn’t been successful. And I think that’s always going to be the case. Whatever models you have, you see firms thrive and fail regardless of the external model. But our regulator in the uk, in England and Wales has space faced some criticism for the way in which it’s allowed firms to expand and to grow. And I fear that there’s going to be a bit of a knee jerk over the next couple of years in terms of there being a bit of a dampener on that sort of growth activity and consolidation activity. If you think about it, there is not much stopping a law firm from failing. It’s continuing to serve your clients. We are not selling something that we manufacture with years worth of advanced orders or many, many years worth of advanced orders.

It is really, we are serving people with the knowledge and the ability of our lawyers and therefore things can change quite quickly if clients leave, if partners leave, you can quickly see a very successful firm become an unsuccessful firm, and it will still help those overheads. So I guess the point there is that law firms need to continue to do what they’re doing, but there is scope to fail quite quickly for all law firms. I don’t mean to catastrophize, but as is true, it depends on clients continuing to instruct us. And so I think those distressed situations will still lead to those consolidations, whether it’s people coming in and gobbling up little firms or succession not really working through correctly. So I think we’re always going to face these distressed situations and these, they’re just going to be a feature of the legal services sector and there’s always going to be a place to deal with that, and different ownership models might provide a bit more flexibility in those circumstances or something.

Stephanie Everett:

Okay. Well, we’ll certainly keep an eye out and obviously the discussion will continue here in the US For anyone who’s listened to the show for any amount of time, you’ll know that we think it’s going to happen and we think it can be a positive thing on the entire industry. And so I love the advice that you gave today because actually what we say too, build a great business, right? Focus on your firm, focus on your strategy, build it well, and then no matter what happens, you’re going to be well positioned for the future.

Corinne Staves:

I completely agree. I completely agree. That’s got to be in the heart of everything we’re doing, right?

Stephanie Everett:

Absolutely. Thank you so much for being on with me today. I have enjoyed our conversation and I’m glad to hear that things are not going crazy over there after all this. Because if you read social media here, then that’s what people are led to believe. As soon as we flip the switch, we’re all going to hell in a hand basket. And that isn’t actually the.