The conversion factor
Assessment of Sir David Clementi's public meeting in Edinburgh, and the pressures for change in Scotland similar to his report for England and Wales
It was interesting to attend the talk by Sir David Clementi in April co-hosted by the Society of Legal Scholars and the WS Society. For me, it was particularly interesting to hear the questions from the practitioners in the audience, which almost exclusively concentrated on Sir David’s proposal for a new trading structure called legal disciplinary practices (LDPs). Attendees were keen to hear his views on the effect of its introduction in England and Wales in terms of Scottish firms’ competitiveness in the UK market.
The Clementi Report has already generated a number of articles in the Journal. Douglas Mill in “The Pull of the South” (February 2005, at page 18) points out that “The whole question of professional regulation and business models is not something which is just left to the Executive or the Office Bearers. It is a matter for Council and indeed the whole profession to become involved in.”
For that reason and given the current level of interest in trading structures, this article looks at the findings of my recent research into the change of structure to limited liability partnership in the context of Clementi. Hopefully this will help to inform the debate on any proposed reforms in a practical way.
Research into LLP conversion
At the time of writing, 23 firms in Scotland have converted to LLP status. All were asked to contribute to the research by completing a short questionnaire. This looked at a number of factors, including the drivers behind their conversion, advantages, disadvantages, timescales and overall effect. Eleven (48%) replies were received, ranging from large commercial practices to small out-of-town firms.
All had found the conversion easy to achieve. Timescales varied from six to 18 months, with most achieving it within one year.
The main reason for changing to LLP status was to limit liability. Other reasons included to achieve:
- tax advantages,
- a corporate structure,
- a more flexible structure,
- improved recruitment, and
- more modern methods of securing debt.
All reported that clients’ response to the conversion was positive. Law Society of Scotland support was prompt and practical. Some lenders were unreceptive and would not continue panel appointments. Additional paperwork included new client engagement letters, obtaining release of personal guarantees from lenders and banks, and meeting the external accounting reporting requirements. External professional advice was usually sought on accountancy and tax matters and was not always found to be well informed.
Final comments included: “It has been a worthwhile move for us. Culturally little has changed. The business is judged on the strength of our balance sheet and not the personal solvency of the partners! We found no client hostility at all.”
Roger Mackenzie in his Journal article “Take a Deep Breath” (October 2004, page 20) had also found few problems with the conversion, commenting that “there are continuing signs that in time LLP will become the conventional model for legal firms”.
Change is possible – and necessary
To me, this research highlights that change is possible. Alteration of trading structure is relatively easy and quick to achieve, provided firms are clear about what they want to achieve and why.
Anyone familiar with my writing will recognise my interest in the links between trading structure, managing change and business success. My original research into professional firms in 1997-98 highlighted the importance of matching structure to strategy. To be successful, professional organisations must ensure that their operating structure facilitates the making and implementation of decisions, makes efficient use of resources, assists the delivery of high quality client services and provides the skill base necessary to operate effectively.
Important as it is to get the right structure, achieving a change of structure offers the opportunity to do more than that. It offers the chance to tackle underlying problems and access new skills, energy and resources, both of which are needed to operate in today’s marketplace.
Many firms have pushed out the boundaries of the currently allowable trading structures by introducing management boards, rewarding non-lawyer managers and converting to LLPs. Some now feel these limitations are too restrictive to allow them to source third party funding, recruit and retain young professionals and fully compensate people other than practising solicitors.
Clementi echoes these sentiments, arguing that “Access to justice requires not only that the legal advice given is sound, but also the presence of the business skills necessary to provide a cost-effective service in a consumer-friendly way” (Review of the Regulatory Framework for Legal Services in England and Wales 2004, page 5).
What did the meeting ask?
As mentioned above, the questions put to Sir David concentrated on his proposed new structure. In particular, he was asked directly whether the introduction of LDPs would put the profession in Scotland at a competitive disadvantage if it did not have that choice. His answer, albeit measured and cautious, was “yes”. He was also asked why he had not gone further and suggested MDPs. His response indicated that he had not ruled out that option in the long term, but felt a less radical proposal would be easier to introduce in the first instance.
It is worth noting that these questions came from good professionals seeking to improve the range and quality of their services to their clients. They were not seeking “commercialisation” over and above their professional responsibilities.
The original drivers for a new trading structure were outlined in the July 2003 Report by the Department of Constitutional Affairs. These included to:
- provide an opportunity for new investment sources and innovation,
- achieve improved efficiency, and
- lower costs.
For Clementi, the main aim of the introduction of LDPs is to improve the overall quality of business services. As a result, he is seeking to give the opportunity of ownership (and long term recognition of their contribution) to other professional people, such as finance, marketing and HR directors.
He recognises the arguments against people other than lawyers owning legal service firms as they may put external pressures on professionalism and confidentiality. There exists the remote risk that third party ownership might result in law firms being controlled by money launderers and/or criminals. As result, he proposes safeguards to ensure that non-lawyer owners are brought within the remit of the new Legal Services Board – for example, a “fit to own” test, signing a code of professional practice, and rules to preserve client confidentiality.
The importance of change
All of my reading of the situation down south tells me that his proposal will happen, in one form or another. The introduction of LDPs will indeed put Scottish firms at a competitive disadvantage vis-à-vis the UK market. Attracting and more particularly retaining good financial, marketing and HR people is an essential part of business success for professional firms.
“The challenge for existing management will be to move away from the temptation to bemoan their fate and protest their moral superiority; and move towards the position where they will have access to the resources, skills and attitudes needed to compete openly” (Simon Young, “Clementi and Alternative”, Managing for Success, January 2005, page 15).
The profession in Scotland needs to respond to the challenge Clementi is setting the UK legal profession. I would argue that change is needed if we are to thrive commercially and professionally.
“If certain lawyers continue to reject the notion that they are in business, such complaints will continue until they are indeed out of business” (Review of the Regulatory Framework for Legal Services in England and Wales 2004, page 5).
Fiona Westwood runs her own management and training consultancy, specialising in working with the professional sector. Her second book, Accelerated Best Practice – Implementing Success in Professional Firms, has just been published by Palgrave Macmillan. For more information see her website, www.westwood-associates.com. She is also a senior lecturer in legal practice at Glasgow Graduate School of Law.