Analysis

Pressure to generate returns forces listed law firms to think outside the box

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Investors aren’t interested in how many offices firms have got or other traditional prestige metrics

While aspiring lawyers train their sights on securing training contracts with global mega firms, investors in the legal sector are rather more interested the low overhead model of new flexible lawyering firms.

It’s these outfits — that offer no training contracts, have minimal office space and employ more experienced lawyers on a freelance basis — that many reckon will enjoy the strongest growth over the next decade or so. So Irwin Mitchell and Mishcon de Reya, the latest law firms to be considering going public, should expect tough scrutiny of their more traditional approaches.

The flexible lawyering firm that anybody can buy into, thanks to its public listing on the stock exchange, is Keystone Law. Since the Legal Cheek fund bought shares in Keystone in January they have risen in value from 510p to 665p per share. Not a bad return for a few months, but small in comparison to the 250% rise Keystone shareholders have enjoyed since 2017 when the firm went public at 190p per share.

Other non-listed flexible lawyering services, such as Lawyers On Demand, Peerpoint and Re:link (all spun out of big law firms), are also thriving at the moment as the pandemic-induced WFH trend encourages lawyers to re think traditional ways of working.

Is the model really the only way to run a modern law firm, though? Investors get nervous about traditional ‘Big law’ firms, which they associate with bloated networks of international offices (some of which are barely profitable), excessive lawyer headcount and costly graduate training programmes. It’s one of the reasons they have been rather frosty towards DWF, the only firm among the handful of UK listed firms that fits into this category. Accordingly, DWF has seen its share price fall from 125p upon its initial public offering in 2019 to 83p today.

But ‘Big law’ also has its advantages — a pipeline of young talent constantly entering the firm, the associated loyalty this generates as trainees progress into senior positions within the firm or outside as in-house lawyers at client companies, as well as the strength of a brand that comes from being more than a collection of self-employed individuals.

And there is no doubt it can be done with high profit margins and low overheads — see elite US law firms, with their lower staff numbers, and top UK firms like Travers Smith and Macfarlanes that have foregone international offices in favour of ‘best friend’ referral relationships with overseas law firms.

The 2021 Legal Cheek Firms Most List

To thrive as a plc DWF knows that it needs to emulate aspects of these approaches. It’s no coincidence that it has been cutting back on support staff while pioneering a new Solicitors Qualifying Exam (SQE) graduate apprenticeship that allows new recruits to earn while they learn. What’s more, this month DWF confirmed that it’s going to be emulating the Travers Smith/Macfarlanes model of ‘best friend’ relationships with international firms — as it announced tie-ups with firms in countries where it had recently shuttered offices.

It will be fascinating to watch DWF over the next few years shift itself from the expansionary model it followed under previous chief Andrew Leaitherland to becoming something that appeals more to investor sensibilities under new boss Sir Nigel Knowles.

If the markets sense Knowles is starting to crack a new formula for success with DWF the firm’s fortunes could shift very quickly. No doubt those at DWF will have noted the recent performance of fellow listed law firm Rosenblatt Holdings whose share price is up over 100% this year alone after a bounceback in profits and recent acquisition of mid sized law firm Memery Crystal.

The Legal Cheek listed law firm fund

DWF Group: £90.91 fund value (83.4p per share)
Knights Group Holdings: £101.20 fund value (440p per share)
The Ince Group: £145.65 fund value (76p per share)
Keystone Law Group: £113.05 (665p per share)
Gateley Holdings: £113.40 (180p per share)
Rosenblatt Group Holdings: £218.96 (136p per share)
Total fund value: £783.17 (up from an original total of £600 invested in January this year)

This series is in no way intended to amount to financial and/or investment advice. And remember, shares can go up as well down and professional advice should always be sought before investing.

10 Comments

Netherlands 3PQE

I’m mainly curious if law firms being listed will lead to a change in culture, i.e. having external, relatively anonymous and detached shareholders over having equity partners doling out the work. Would hours change, would targets change? Law firms are the way they are because the shareholders are so close to the action, would they become more relaxed and less focussed on profit if they are listed?

FT

Do external shareholders like money? Is that what you’re asking?

Netherlands 3PQE

Do they have the same visibility over how profitable a law firm can be, as partners who are literally there giving you workloads? Seems a fair question.

Barry

How long until share holders demand that firms spend less time on wokery and more time on growing their business?

Good Game

Do law firms really spend a lot of time on ‘wokery’? The occasional legal walk for charity is about as far as most firms get.

Barry

Of firms that are large enough to have an IPO.. yes they do, for example I know of:
One UK based firm and one US firm with London offices who have senior EDI staff that rake in £80k and £120k respectively.
A firm that spent £40,000 updating its HR software so that it could have a wider range of choices for the gender box in applications.
A firm that spent upwards of £20,000 to have EDI consultants come in to give their view on a new office plan in 2018.

I hate to think how much CC has spent on its woke programmes alone.

Now these numbers are nothing to major firms, but it is not just the money, its the hours spent by fee earners, the time spent filling in pointless surveys, the money to PR people and consultants to ensure enough woke points are being earned. Especially if the above is all being done by firms who were furloughing useful administrative staff over the summer to cut down on costs.

lol okay Alex

investors also care about not buying shares whose values are going to plummet right after the IPO

oh wait that happened to several of the listed law firms

culture shark

Law firms are not banks, nor do they generate revenue like the big banks. The list of C-D class firms seems to be desperate for income that they would go public. However, if they are unable to do as the article says then it will go downhill from there.

This is actually bad cause their culture will be focused on the profit maximisation, result in pressure to increase revenue, then it opens up possibilities of fraud and crimes to generate income, such as exaggerating fees and overcharging or even being the lawyers for sketchy billionaires and facilitating dirty money.

Pay attention to the Wells Fargo fraud, HSBC mexico, BNP Parribas and etc . Focus on profit maximisation will force these firms to do desperate things in order to show stable level of growth.

However, this does not apply to everyone. The firms are pretty vanilla and if they just accept that and aim to do their best rather than thinking how to increase their double stock value then this could work, i.e just making sure they stay afloat + a little more.

Going public would work well for the big boys like Kirkland, Latham , Cleary . These firms are able to settle into the same position as the Goldman’s and JP morgan

Trainee

If you work at a listed firm you may as well move off-shore because both are career killers.

Miss Understood

I work at a listed firm and its refreshing now there are not equity partners there bleeding every last penny out of a firm and the ones that do the hard work are left with a minimal wage increase for their thanks. Its most definitely the way forward.

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