Law Firms as Businesses - What Type of Companies Are They?
"When billions are at stake, nobody is sacked for
hiring the best lawyers." - The Economist
The legal market is highly
fragmented.
- The top end of the market mainly serves corporate clients and is dominated by large firms which can offer a wide range of legal services.
- Small firms can compete successfully by providing specialized expertise or by operating locally.
London and New York house the greatest concentration of law firms.
- These cities house the world's largest capital markets and companies everywhere want to tap into them.
- International business is therefore often conducted under English or American law regardless of the client company's own jurisdiction.
Demand is dependent on the volume of economic transactions.
Profitability depends largely on the reputation and contacts of the
partners.
Happily for lawyers, salaries are the major operating expense.
Unlike most other industries, marketing is often aimed at other lawyers
since a large amount of work is done through referrals.
- Referrals are mainly inter-jurisdictional but some are inter-specialization.
Serving corporate clients is both the most profitable and the largest slice of
the market.
Consolidation Trends of Legal Services
Consolidation
is driven by the desire of some corporate customers, who require a host of
legal services, to have one firm handling all of their needs, a
"one-stop-shop".
Firms
typically add specialist lawyers and practice groups to do this. However, they
can achieve this more rapidly and on a grander scale by merging with other
firms.
Non-global
players traditionally share an international mandate with a local player, or
refer the client to a firm which they recommended. An example of this is the
Slaughter and May (UK) / Cravath (US) "best friends" relationship.
One
of the hottest current debates regards whether firms will consolidate globally
to offer cross-border one-stop-shopping or whether firms will be chosen on
their ability to provide the best service in a particular jurisdiction similar
to a specialist boutique.
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.
What Is A Training Contract?
A
training contract for solicitors is a practical training
period for law graduates in the UK who wish to qualify as solicitors.
A full-time
training contract typically lasts for two years, and is undertaken
by students who have completed the Legal Practice Course (LPC) , which is the
professional phase for becoming a solicitor in England and Wales.
The
training contract is mandatory for all law students graduating with a law
degree or with a non-law degree. If a person is qualifying without a degree, a
training contract is typically not required. In such cases, non-graduates
typically advance toward qualification by passing exams administered by the
Institute of Legal Executives (ILEX) - all the
while working under the supervision of a solicitor.
To
carry out a
law training contract, a graduate must apply for an opening for such
position at a law firm. The problem encountered is that the number of graduates
applying for
training contracts in the UK surpass the number of annual
contracts available.
Websites
such as
www.TopEmployers.co.uk strive to resolve this
problem by providing easier accessibility to the UK trainee recruitment
marketplace. Students can expose their details and resume online in order to
attract law firms which have yet to fill their
training contract vacancy. These
law firms invite suitable candidates to partake in
training contract
interviews.
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