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The New Owners

As Stephens Scown announces its new ‘John Lewis-style’ shared ownership scheme and more law firms opt for limited company status, Lucy Trevelyan asks if the traditional partnership model has had its day.

In March this year, South West firm Stephens Scown formally agreed a new shared ownership model with regulators and HMRC, under which all profits over a certain minimum threshold go into a pool – half being retained by the firm and half being shared equally among all eligible staff members.

Similar to the shared ownership and profit model operated by John Lewis, from 1 May 2016 the scheme will see receptionists receiving the same bonus amount as fee-earning lawyers. The firm, which has a £17m turnover and 300 staff, has structured the scheme by creating a new company, Stephens Scown Ltd, which is a member of the main limited liability partnership and is entitled to a share of profits equal to the bonus pot. The new company is owned by the staff through an employee benefit trust.

Managing partner Robert Camp says the move is part of the evolution of the business. “Working as a team has always been integral to our culture and our business ethic. Introducing this model takes it a step further, and shows we really mean it. It’s not just words – it’s backed up by how we operate.”

Camp insists the equal distribution idea didn’t come from just him – it emerged after a consultation with people at all levels of the firm. “It came back very strongly that people wanted it to be equal, so that everyone has the same share. We’re all in it together.”

The idea, he says, came to him three years ago. “It’s something one or two smaller firms have done. We wanted to remain a partnership – becoming a limited company wasn’t an option. We feel this scheme is the most viable way of giving everyone a stake.”

It “took a while”, he says, to get the new model approved by the Solicitors Regulation Authority. “Of course, there are a number of hoops you have to go through to get SRA approval – and rightly so. They were always very supportive and this was something very new to them, so it took perhaps a bit longer than I had hoped. We also had to ensure the new structure would not fall foul of the HMRC requirements, which again took time.”

The new structure, he says, has huge benefits. “It’s a virtuous circle. It gives us even more motivated and engaged employees, and it gives employees a more direct sense of involvement, and benefits them financially. Last year, our average staff bonus was around £1,300. Under the new scheme, it should be around £2,000 – a significant uplift. It should also make client service even better, as everyone is more motivated to excel.”

Camp says he hopes that, as the new structure has been analysed for many months, the obvious pitfalls have been covered. “I am sure that as we implement the new structure we’ll come across issues we have not thought about and will have to deal with. Of course, we’ll be monitoring the impact on the business as the scheme beds in. But I’m expecting that it will help us to give even better client service, which should mean that our revenues grow as we win and retain more work.”

Staff retention has never been a problem, he says, but the new set up should attract more talent. “The word is out there in the market and the response has been huge. I’ve had lots of people from other firms asking me about it. There’s no doubt that it could be a factor in attracting people to work for us. The response from employees has [also] been superb.”

UNLIMITED FUTURES

Julie Browne, senior lecturer and BVC deputy course director at City Law School (part of City University), says the advantages of employee ownership are well documented in a 2012 research paper, the Employee Ownership Advantage: Benefits and Consequences, produced by the Department for Business, Innovation and Skills with Cass Business School.

“This study demonstrated that employee owned businesses have a stronger longterm focus, improved performance and productivity, invest more in human capital, and have a more positive media image.

“They tend to perform better during recessions. Share ownership models are also likely to result in higher levels of job satisfaction among employees and higher rates of staff retention.”

The government has introduced tax advantages to encourage businesses to operate share ownership schemes, she says, but a partnership is not the ideal model to bind to employee ownership.

“It is relatively straightforward for limited companies to adopt models that enable employees to share in the profitability of the company by acquiring shares through employee share ownership schemes, or with the company’s shares being held in trust for the employees as beneficiaries. However, employee ownership is much more difficult to achieve when a business is trading through a partnership model.”

Stephens Scown’s innovative scheme, she says, will provide a model for other law firms to set up similar schemes. “With market changes driven by increased consumer demand for more accessible and cost-effective legal services, and the recent regulatory changes, there is now the flexibility for legal service providers to use a business structure that best meets the ethos of the organisation, its aspirations and business plan, and the needs of its customer base and those of its staff.”

Mishcon de Reya is another firm reportedly considering a John Lewis-style ownership model, which could see even cleaning and reception staff own a stake in the business. The results of a year-long “deep consultation” is to be announced imminently, as part of its new “10-year vision”.

The firm was granted an ABS licence by the SRA in February 2015, after which chief operating officer, Bambos Georgiou, became the partnership’s first non-lawyer.

Managing partner, Kevin Gold, is no stranger to radically changing working practices – he introduced agile working and ‘unlimited holidays’ (or paid time off, see Edward O’Rourke’s column this month on p11) for partners in 2014 and, following its conversion to LLP status, the firm’s salaried partner band was eliminated.

Shortly after the LLP conversion, Gold told the Lawyer: “I come from an old school where I would be much more comfortable with a John Lewis way of life. I think if everyone has shares we’re better than if fewer people have shares, but the Mishcon way is [that] we will come up with a solution and if it doesn’t work we will fix it.”

ALTERNATIVE ROUTES

Excello Law, which has offices in London, Liverpool and Leeds, launched as a limited company in 2009 – one of the first firms at that time – and obtained an ABS license in 2014. Founder and managing director George Bisnought opted for a different approach after practising law in private practice and industry and finding the traditional partnership model wanting.

“I saw the profession from both sides – as a lawyer and a client. As a lawyer, I noticed a great deal of despondency among my colleagues due to office politics, inflexibility, macho office culture, glass ceilings, and feeling as though you’re not in control of your destiny or that you’re being inadequately rewarded.

“As a client, I was concerned about accessibility, quality and cost. It was clear that the partnership structure was extremely inflexible and for that reason no longer fit for purpose. We chose to be a limited company because we wanted to adopt the business model used by clients and the wider business community. We also wanted the best platform from which to grow and the ability to develop incentive schemes.”

Excello doesn’t share profits in the same way as a traditional partnership – lawyers are remunerated on a fee share model which gives them an immediate and more generous share of the fees they generate.

“It’s more attractive than a profit share model, where they receive a fixed share of a communal pot. Our focus is on what is in the best interests of the business. This means we are able to reinvest profits for growth as opposed to being obligated to distribute profits among partners.”

It took six months to secure ABS approval but, says Bisnought, the SRA has since improved the process. The firm is run by a management board – supported by an advisory team – including Dame Janet Gaymer, the first female managing party of a City law firm.

Keystone is another example of the limited company model, and it’s a ‘virtual’ firm. Its shares are owned by a combination of senior management and a private equity boutique called Root Capital. The firm’s 185 lawyers act as consultants to the firm, but do not hold any equity.

Says managing partner and founder, James Knight: “The traditional partnership model, which has worked well for years, is too rigid and no longer suited to the modern business environment. The Keystone model delivers a high degree of flexibility and this enables our solicitors to meet client requirements in a more efficient manner.”

Most of the firm’s lawyers, he says, are motivated to join Keystone so they can focus on client work rather than law firm management. “While we are very consultative and seek to act in the best interests of the firm’s lawyers and its clients, decisions are made by a management board which is comprised of eight senior individuals, none of whom are fee earners of the firm. Fee earners themselves are all subject to the same performance-based remuneration structure, which gives them a high percentage of fees earned on relevant projects.

“Being a limited company was the best option for this model when we incorporated the firm in 2003. While we did not know about the impending Legal Services Act at the time, or the potential for private equity funding, the chosen structure has stood the test of time.

“By 2002, innovations in technology had made a new type of law firm logistically possible. We set about creating a business which retained all the essential ingredients of a conventional law firm but jettisoned any unnecessary and expensive aspects.”

CLEAR DISTINCTIONS

London litigation boutique Signature Litigation has another way forward. Structured as a normal LLP, the firm claims to have developed and implemented the first truly transparent, non-discretionary and universally applicable profit-sharing structure in the legal market. It has effectively transferred economic ownership of the firm away from the traditional model of equity partners to every member of the practice.

CEO Kevin Munslow explains: “Our constitution sets out a formula for the creation of a profit pool based on 10% of all profits generated up to a certain budget, with higher percentage allocations once the budget is exceeded.

“The key metrics that drive the budget itself are also defined by constitution to ensure the process is entirely transparent and cannot be manipulated by anyone within the business. Once established, the constitution sets out a formula by which profits will be allocated, which is driven primarily by basic salary earned by each participating member during the relevant year.

“The final profit-sharing pool, expressed as a percentage of basic pay, is formally announced in June each year.”

Signature discounted the limited company route because of tax complications surrounding flexibility of equity among other things, says Munslow.

“We also discounted the idea of full partnership for all, partly due to the regulatory complications of doing so at the time but also because of the concerns some members of staff might have around the liabilities and risks they may be exposed to as a result.”

The structure developed out of a desire from the founding partners to create an environment where everyone can share in the successes of the firm, he says.

“The firm benefits from an engaged workforce who all have a keen interest in the long-term success of Signature and a clear line of sight as to how the contribution they make effects the firm as whole. In addition to a financial benefit, employees benefit from working with a team of capable colleagues all of whom work towards a common goal. Clients benefit from a workforce prepared to go the extra mile because they know that they, and others, will benefit from doing so – unlike most traditional firms where the link between working hard and reward is far more opaque.”

To ensure the system at Signature is entirely transparent, says Munslow, the process for allocating the pool does not take into account any performance criteria – which means, he says, that “in theory, at least, a committed and hard-working team member will receive the same allocation as a colleague who has not displayed these attributes during the year. This has the potential to be demotivating, although it is an inevitable consequence of this approach.”

But growth of the business depends on Signature’s ability to compete in the market for talent, says Munslow – exactly the same position many SME law firms are in. “The ability to share in the successes of the firm and have some influence over its direction sets us apart from the bulk of our competitors.

“Talented people – fee earners and support – thrive in this environment and enjoy the opportunity to perform to the best of their ability, as opposed to being managed within their level of PQE, as is often the case in traditional firms.”

This article was originally published in Legal Practice Management and can be found here.