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Consolidation Trends of Legal Services >>
Partners not Shareholders - Law Firms are Different
Margin
not Profit
- Unlike
limited companies which aim to maximize total profits for their shareholders,
almost all law firms operate as partnerships or LLPs.
- With
no shareholders to worry about, the profits are distributed across the
partners. Therefore they are
incentivised to maximize profits per equity partner (PEP).
- This
makes them potentially more concerned about maximizing profit margins (by
keeping headcount down, for example) rather than increasing revenues by adding
fee earning partners.
- The
same is not true about companies since the shareholders care only about margin
in as much as it affects profit.
- Most
companies would happily exchange a small decrease in profit margin for an
increase in profit. Quite the opposite can be true of partnership law firms.
Partners
not Board Members
- Law
firms usually take decisions by reaching a consensus amongst the partners. If
they don't, partners can defect to rival firms or set up their own, leaving the
firm to disintegrate.
- Therefore,
legal practices tend to behave more cautiously than their clients.
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