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Incorporation: the affair continues

Incorporation: the affair continues

The affair with incorporation that's busting up law firm partnerships is as prevalent in the current economic climate as it has been in the past, writes Angela Priestley It wasn't so long ago…

The affair with incorporation that's busting up law firm partnerships is as prevalent in the current economic climate as it has been in the past, writes Angela Priestley

It wasn't so long ago that debate around incorporation as an emerging model of law presented the chance for a huge revolution around the way law is practised in Australia. Once legislation was passed allowing incorporated legal practices to operate in NSW in 2001, a steady flow of law firms shifted to the incorporated model, challenging what's expected behind the operations of a traditional law firm. Soon after, similar legislation was passed in Victoria, Queensland and Western Australia, and thousands of incorporated legal practices were operating across the country.

By 2007 Slater & Gordon had made history, and international headlines, by becoming the first law firm to float on the stock exchange, and some of Australia's largest law firms - including Freehills and Mallesons - said incorporation was a strong possibility in the not-too-distant future.

Across the globe, Australia was seen as a test case for what the incorporation model for a law firm could engender. The future of law was questioned and legal commentators wondered just how far up the legal food chain - from sole practitioners to international law firms - the idea of an incorporated legal practice could go. The foundations of the partnership model were seriously threatened, as a love affair with incorporation begun.

The reality in the romance

That was 2007. In 2009, with a global financial crisis acting as a big distraction, the debate over incorporation has gone a little quiet. The priority of change has taken a backseat as firms move on to protecting what they have now and finding any means possible to see through to the other side of the economic downturn.

But law firms are still incorporating, and those that did so well before the current crisis - particularly new ventures, start-ups, and firms interested in operating a little differently from what we know of a traditional legal practice - are reeling in the benefits of the corporate structure.

"The majority of law firms still have crusty old partners sitting around a boardroom table arguing about whether or not they are going to buy a new photocopier," says Steve Roche, who heads up Queensland-based Shine Lawyers.

Roche can make such a statement. Having implemented a quasi-corporate management structure a number of years ago, Shine Lawyers incorporated in February 2009. Roche says that while operationally the move makes little difference, formally being incorporated offers a more consistent approach that has allowed the personal injury specialist firm to clean up its everyday operations.

Shine Lawyers was undeterred by the stamp duty tax required of Queensland law firms that incorporate that has stopped other Queensland law firms making the move. While those stamp duty issues are expected to be removed in the future, Roche says there was little benefit in his firm waiting.

"We wanted to get some runs on the board in running as a company," he says. "We didn't want to delay it."

Is now really the time?

Leaving tax issues aside, why incorporate now, at a time when many private practices are redefining their operations in a bid to cope with the limited work that's coming through the door?

For Shine Lawyers, it helps that the firm is not in a business likely to feel the full brunt of the downturn. "I wouldn't say we're recession-proof, but people are probably more inclined to take legal action in our area of work when they are looking for that extra bit of money than what they ordinarily would," says Roche.

From downturn to upturn, Roche also notes the benefits incorporation can have on staff retention. "This is a good opportunity for growth," he says. "We want the best people - and we want to keep the best people. By incorporating, it gives us the flexibility to enable us to sell down some shareholdings to staff in return for them committing to the firm for a period of time."

A long-term advocate of incorporation, Dr Peter Ellender, says that while his Queensland-based firm, Carter Newell, is yet to incorporate - mainly due to tax issues - there are still strong benefits to incorporation, even in the current market. The attractions include limited liability, a broader ownership base, clearer objectives for operations, and an easier process for decision-making, by filtering required decisions through an executive team.

Ellender points to start-ups and new ventures as those firms that will particularly appreciate such benefits. He says that if you're building from the ground up anyway, it's easier to implement the necessary requirements of incorporation by immediately establishing the operations structure.

"You have to have a legal practice director, somebody needs to be nominated as accountable for the firm, you need the appropriate management systems in place and you have to follow the Corporations Act," he says. "Incorporation will provide that structure, as well as some clear directions around governance."

Optim Legal is one start-up to have built its firm as an incorporated practice from the get-go. Co-founder Nick James says that running a law firm the way he and his fellow co-founder envisioned, particularly in looking to offer fees 40 per cent lower than top-tier firms, would have been extremely difficult under the partnership model.

"There is something about a partnership management model which seems to lead to certain kinds of structures and managerial dynamics," says James. "But in pioneering our services, there were things that would have appeared out of left field and would have been very difficult to have achieved agreement on with a large group of partners involved."

Such "left field" ideas to have materialised include the ability to offer their version of "partners" the opportunity to build their own practice the way they individually see fit, and work with their own target billable hours accordingly. The firm can also offer top-tier lawyers to clients at significantly lower rates by cutting down on the operations spend of the firm, as well as the ability for clients to rate their lawyers on performance, and lower or increase their fees accordingly.

"It is difficult to see how our model and that vision could have emerged, and achieved the support that would have been required from a partnership structure in order to have been effective," James says.

And James firmly believes that the model he and his co-founder have created is in line with the spirit of the Government's original intentions when creating the Incorporated Legal Practices Act: namely, for greater competition and innovation around legal services.

A perfect attraction

Both Optim Legal and Shine Lawyers claim that their structures can attract a certain type of lawyer who is fundamental to the success of each firm and who will stick with the firm long-term.

Roche says by incorporating, Shine Lawyers can reward staff appropriately while also attracting certain kinds of individuals who realise the benefits of the corporate structure for their own incentives and careers. "We find individuals who are interested in adding value to an organisation," he says. "They say, 'If I'm going to commit my time and career to an organisation, then why shouldn't I be given that opportunity?'"

At Optim Legal, James says that top-tier lawyers who might be put off by the partnership model are the people typically attracted to the firm. By removing the politics of partnerships, James says, lawyers are given the ability to harness more freedom in they way they undertake their work. "Because we don't have a profit-share system and we don't have billing targets, we can allow our partner-level lawyers to choose their own working hours and construct their practice within our practice," he says.

These arguments made a lot of sense before the current economic crisis, given the limited talent pool that was available, and the difficulties in keeping lawyers long enough in the profession - and the one firm - for them to confidently enter the partnership later on.

These days, the profession is increasingly appearing over-lawyered, but whether or not that means lawyers will be more willing to stick with the comfortable and continue to work towards the prospects of joining a partnership remain to be seen.

Rekindling the romance

Law firms are still incorporating despite the economic downturn, but a large-scale revolutionary push to the corporate structure across Australia's legal sector appears unlikely in the medium-term future.

Mallesons and Freehills once said that incorporation was a likely possibility in the future, but both firms agree that the same impediments to incorporation exist in 2009 as did in 2007, meaning for them, incorporation is unlikely in the next couple of years.

But Mallesons managing partner Robert Milliner says the firm is keeping an open mind: "The current market environment is possibly going to require a wider review of what are appropriate law firm models and therefore incorporation will be recast in light of that," he says.

Innovation could be the key to prosperity in the current climate and could offer law firms the competitive edge needed to position themselves as a leader once the economy picks up. Could incorporation be the only means forward? Probably not, but it will certainly continue to stir things up a little, and challenge the familiar practice of law.

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