Law firms have reported higher than expected revenues in the face of the Covid-19 pandemic, but that doesn’t mean they’ve escaped the need to be light on their feet and adapt to change. Adam McCulloch asked Fox & Partners employment partner Ivor Adair about how the legal sector will rethink remuneration, diversity and remote working.
1. What level of turbulence should we expect as law firms readjust and reappraise themselves during the pandemic and its aftermath?
It is likely that law firms will reorganise in a number of ways, in the immediate and, more fundamentally, over the longer term. In the immediate term, many firms have responded to the crisis by implementing cost-saving measures, such as reducing monthly partner drawings, suspending partner year-end profit distributions and furloughing support staff and lawyers.
A lengthy period of remote working has also exposed inefficiencies for many law firms that are also appreciating they are, in fact, overstaffed in some areas. This is likely to result in a further phase of cutbacks and redundancies.
There are significant diversity and inclusion issues, which are still not taken seriously
More forward-looking firms have combined cost-saving measures with a focus on promoting a strong culture, retaining talent and with that, potentially important clients. Rather than shrinking, these firms are more likely to sustain and grow profitability.
Many are poised to recruit disaffected partners and teams who have not felt properly supported during Covid-19 crisis and have lost confidence in their firm’s leadership. These firms are taking the opportunity of the crisis to redefine themselves and expand the practice with hires.
Teams within firms that have close relationships with clients and colleagues, but who now feel isolated from the firm as a whole, will continue to present attractive opportunities to competitors. Law firms ought to be mindful that identifying and investigating a potential team move is far more difficult when the entire team is working remotely.
There is also likely to be an uptick in the compulsory retirement of partners over the next 12 months, particularly for those who have underperformed or been unable to rise to the challenges posed by the consequences of Covid-19.
Some firms may use the impact of the pandemic to prune out unwanted partners and reinvigorate their partnership with lateral hires and injections of capital. This will inevitably generate disputes.
Some firms may use the impact of the pandemic to prune out unwanted partners and reinvigorate their partnership with lateral hires and injections of capital”
Longer term, many firms will be looking to reduce expensive office space as soon as they are able to, invest significantly in technology and reorganise offices to cater for more flexible working environments and practices.
2. Do you foresee more mergers and acquisitions taking place?
Yes, the market looks set to consolidate in 2021 with firms looking to take advantage of new synergies. Smaller firms and boutiques, particularly those that have performed well this year, will be seen as attractive options to strengthen the business and compete with silver circle firms. Some firms will want to diversify their capabilities and reach into new markets. Others may need to address a succession problem that might have been brought to a head as a result of the crisis, or be facing financial difficulties.
3. Such a long period of remote working is bound to have a lasting impact. What have law firms learned during this period?
Remote working has brought with it a fresh perspective on flexible working and new opportunities but also a great many challenges. On the cultural side maintaining a sense of common purpose and identity across the whole firm, but particularly across the partnership, will have been a challenge for many firms.
Some junior lawyers, who ordinarily would be closely working with and learning from more experienced colleagues, will have had a sub-optimal experience working remotely.
Supervision and development programmes ought to have been modified to deal with the challenges of remote working. The supervision of teams and junior lawyers virtually requires a fresh approach and those partners who have not adapted well and feel unsupported by the firm in supervising others, have struggled. This is likely to result in performance issues being raised.
Some firms will not have reviewed and adapted their policies and procedures to take account of remote working, for example data protection and whistleblowing polices. For other firms, new working practices, or a change in the type of data being collected, may require a data protection review.
There are complex challenges with conducting internal investigations, grievance and disciplinary processes in the context of remote working and social distancing measures and these policies and procedures will also require review and amendment.
4. It has been said that major law firms are in a remuneration war as top US firms try to lure newly qualified lawyers with vast sums. Is this sustainable?
This is not sustainable over the longer term. Some law firms will be reconsidering their approach to newly qualified lawyers and instead focus on fairly remunerating those top performing partners and lawyers with connections to key clients. Others will take an unprecedented opportunity to focus on lateral hires.
5. Is the partnership system of management outmoded?
Yes, but firms are rising to the challenge with the appointment of non-lawyers to management positions and lawyers moving away from fee-earning to concentrate solely on administration.
The management system a partnership takes will depend on the terms of the partnership agreement, its culture, size and resources. Management decisions will be taken by a leadership team. Many important management decisions do not and are not required to be taken by the full partnership body (although there can be mechanisms for that to occur in some circumstances, for example the expulsion of a partner).
More often than not it is the management culture rather than the partnership system itself which is outmoded. The culture can be hierarchical and out of step with modern values and behaviours. This is particularly exposed where the firm takes an outmoded approach to investigating misconduct.
Those partners who have not adapted well and feel unsupported by the firm in supervising others, have struggled”
A culture of speaking up has continued to flourish since the advent of the #MeToo movement and this has placed new demands on management within partnerships. The modern law firm has a number of internal and external stakeholders as well as a regulator to answer to with regard to investigating allegations.
Failures to communicate effectively to stakeholders, properly frame terms of reference, appoint a third-party investigator and approach the issues neutrally, can, aside from exposing the firm to legal and regulatory risks, seriously damage the reputation of the partnership as a management body.
6. Will there be an increasing onus on employing younger talent to meet the challenges of technology and the post-Covid world and will that lead to ageism tensions?
There may be an implicit bias within some firms that younger talent is best placed to meet the challenges of technology and a post Covid-19 world, (which has equality law implications).
However, those more experienced lawyers with established client bases and solid performance metrics, are likely to be favoured in the post-Covid world.
Where a resistance to properly engage with new technology or adapt to a changing work environment is identified, this is more likely to be picked up on as a more serious issue than will have been the case in the past.
7. Does everybody accept the diversity and inclusion agenda in law firms (they appear to have made great strides but a recent case involving could suggest otherwise)?
The days of the misdemeanours of the rogue rainmaker being swept under the carpet may be gone, but there are significant diversity and inclusion issues, which are still not taken seriously. These include: in relation to pay, in relation to the mentoring and support provided to younger female and lawyers from ethnic minorities and their progression into partnership, appointment to senior partner or leadership positions and in relation to bullying.
8. Are law firms still wedded to a public school ethos or are they now far more professionalised?
It will depend on the law firm. Many of the silver circle and magic circle firms, will have their own particular educational ethos. Most successful law firms have a very professional culture that respects intelligence, hard work and good collaboration skills.
9. Are law firms increasingly branching out into consulting services in response to any trend or are those particular companies just trying to expand?
Law firms have not followed the lead of accountants and have tended to concentrate on what they are good at, that is providing legal and strategic advice to their clients. There are likely to be more companies branching out into consulting services, such as data protection services, cyber or compliance than law firms doing so.
Law firms ought to be mindful that identifying and investigating a potential team move is far more difficult when the entire team is working remotely”
10. What are the benefits of the limited liability partnership (LLP) model, which has overtaken the traditional partnership model?
Fewer and fewer professional practices now operate as traditional partnerships. The LLP is overwhelmingly the model of choice for a law firm and that is very likely to continue. Members of an LLP have an interest in the firm in the sense of having financial and governance rights and obligations, but also forge strong bonds with each other for the benefit of the firm. A member is still taxed personally but only the capital the member puts in is at risk rather than all of his or assets. It is the LLP that is liable to third parties.
A well drafted LLP agreement will help protect and stabilise the business by being drafted in a way that delays partner exits, by providing for an adequate notice period. A garden leave provision can also help conserve and consolidate the LLP’s relationship with a client. The agreement could also prevent a number of partners leaving at the same time, by restricting the number of partner resignations within a certain period.
Most LLP agreements will contain restrictive covenants aimed to protect the business after a partner departs. For a restrictive covenant to be justifiable, it has to be shown that the provision is no more than is reasonably necessary to protect the legitimate interests of the employer. An onerous restrictive covenant in a LLP agreement is more likely to be upheld against a partner than a similar covenant would be in an employee’s service agreement, which is another benefit of the partnership model.
A potential downside to the model is the lack of non-partners in the decision-making process. However, at the current time many law firms are in the process of re-evaluating how and from where business is done. This will encourage firms to take more independent professional advice and incorporate that into the decision making processes within the partnership.