Retirement Benefits – Does your Firm Provide a Nest Egg?

For many years, a generation of law firm partners has become accustomed to funding their own retirements through personal savings and schemes. They know that their naked-in-naked-out style of partnership means they will never be able to extract value from their years of effort. However, partners in highly profitable first-generation law firms – those they have founded in the last thirty years or so – are waking up to the realization that the legacy they have built up has some value that does not necessarily need to be given away. They are therefore becoming increasingly reluctant to envisage free entry (other than fixed-capital contribution) to the firm by new partners with no benefit to those who built the firm. After all, new partners come into a firm which enjoys the benefits of an established brand, a sustainable client base, and a successful business recipe – all painstakingly developed by the hard work and skill of the founding partners.

Historically, goodwill started to be excluded from accounts of law firm partnerships in the 1960s and 1970s. Existing partners were often at that time compensated for goodwill write-out by being given an annuity – sometimes for life – to reflect the fact that they had not had an opportunity to build up a pension. According to one report for example, after 15 years of partnership> at Clifford Chance, retiring partners were allowed to receive an annuity of 17% of their final profit share for five years, rising to 23% for partners with more than twenty years of service. The annuity solution has remained in place for a few law firms and accountancy firms, with different arrangements in place for valuing the annuity by reference to the average of the last five years compensation or on an agreed multiple of the firm’s underlying profitability, and payable over a five- or ten-year period.

As a possible alternative, some firms are considering asking new partners to buy their partnership share on an agreed valuation methodology. Valuations of any law firm as a going concern is notoriously difficult, particularly in jurisdictions such as the USA and Canada where law firms are not freely marketable outside the established legal profession. Some firms – especially those burdened with debt – are worth little or nothing, but at the other extreme we often see firms that are so profitable and valuable that any market valuation of an incoming partner’s share becomes an unaffordable proposition.

The annuity option is therefore possibly more viable. However, to take this forward, founding partners who want to reserve retirement benefits for themselves need to answer three questions:

1. Is their firm worth anything now or likely to be worth anything when they leave?
2. More specifically, is their firm sufficiently attractive to new partners if the entry deal was to include retirement provisions for the founding partners?
3. If satisfied about their answers to the first two questions, what provisions are likely to provide fair protection for the retiring founder partners whilst remaining affordable for the continuing partnership?

Whilst the founding partners will presumably continue to derive income benefits from their shares of an increasingly profitable business, a balance needs to be struck between – on the one hand –encouraging and rewarding talented new lawyers, and – on the other hand – compensating the founding partners for their heavy investments over time.

Driving Growth and Sustenance in Competitive Economies

Higher Brand Loyalty, Stronger Client Relationships and Brand Positioning for Better Sustenance and Growth

The Indian legal Industry is going through a phase of re-organization. With growth rates dropping to single digits across the globe (Including India), most firms have recognized that a larger market share, consolidation, deepening client relationships and enhancing loyalties are the way forward for a better growth.

The legal departments at the same time are expanding their teams (handpicked from law firms) to reduce dependency on external lawyers and are being very selective in using assistance from law firms.

All of the above, along with growing competition, is pushing law firms to be competitive, proactive, efficient and value-driven. Hence, sustenance is becoming a major challenge for most law firms in India. The firms with higher loyalties and stronger client relationships are drawing better purchase.

Higher loyalties and stronger client relationships are the result of steady investment in building relationships, understanding what the client wants, correct brand positioning, and ensuring quality delivery consistently and efficiently. Therefore, it is important to learn more about the client, its business and competition, and the market in which it operates.

Regrettably, not many firms undertake the effort to understand more about their clients; the ones that do couple it up with innovation and promptness to create a differentiation. Knowing one’s client is also important to understanding whether their loyalties are transaction-based or relationship-based.

A transactional client is looking for best value and best deal. Their decision-making is based on services, convenience and price. They contribute to the bottom line but cannot be relied upon for sustenance and, most importantly, building one’s brand. Most clients will happily to go competitive firms for better deals. However, this is not to say that they can never be converted into a relationship-driven client. Once they start finding value beyond price consistently, it can pretty much become a relationship-driven client – which is exactly what any firm would want, as they value the trust, loyalty, and commitment to a specific brand more so than finding a great deal.

These types of consumers are more likely to stick with a specific brand that they have been using and have built trust in and are exactly the kind of clientele every business wants to have.

As routine legal work becomes more commoditized, what law firms offer is becoming less important to legal buyers. The clients are looking for law firms whose partnership helps them shape strategy and assists in achieving business objectives. This is where a strong, differentiated brand comes into play.

A brand with stronger brand positioning can build and sustain goodwill, providing the extra edge over the competition during evaluation and keeping the relationship strong during rough patches. When you have the right brand position, it becomes the driving force behind the firm. Conversely, the firm struggles with a weak brand positioning.

The India Story

The Indian legal marketplace has been more volatile over the past few years with senior partners leaving for independent chamber practice, partner movements, and more firms mushrooming – all of these, thereby, adding to the competition and reducing revenues for firms.

Therefore, it is all the more important to remain differentiated in a competitive market like India to ensure consistent growth as “me-too” firms may have a seat at the table but only the distinguished ones get the winning hand.