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Incorporation is the future: experts predict

Incorporation is the future: experts predict

THE NAVEL gazing prompted by incorporation has done law firms a world of good, prompting better management practices, improved transparency and greater returns, according to leading academics.…

THE NAVEL gazing prompted by incorporation has done law firms a world of good, prompting better management practices, improved transparency and greater returns, according to leading academics.

The University of Western Sydney released the findings of the first study into the incorporation of law firms to ALPMA NSW and QL members last Thursday at Macquarie Bank’s Sydney offices.

Academics Dr Gillian McAllister and Professor John Gray investigated the reasons why Western Sydney law firms incorporate. At the end of 2007, there were 122 incorporated law firms in Western Sydney.

The three firms interviewed for the case study reported overwhelmingly positive outcomes from incorporation. Dr McAllister found a key advantage for firms was the ability to think and work more creatively in relation to management of the firm; “management is no longer a universal partnership activity — only those partners who are elected to or selected from the management team make management decisions about the firm. This was seen as “liberating for those partners,” she said.

Dr Peter Ellender, CEO of Carter Newell lawyers, was also on hand to offer some insights into the shape of the law firm of the future. Future firms are set to become ‘real corporations’ that will provide legal services right across the nation, Dr Ellender predicted, taking advantage of economies of scale and other latent efficiencies to drive the consolidation process.

Wearing his CEO hat, Dr Ellender highlighted the possibilities for valuation and greater returns for incorporated firms, pointing to the benefits for capital raising, shareholder investment, the restructuring of company tax and increased governance.

The disadvantages listed were presented as short-term barriers, rather than longer-term impediments. “Some of the disadvantages are there to look at as well — the cultural changes that do occur as partners move to employees, the extra responsibilities of the legal practice directors, and the cost of setting up incorporation.”

Carter Newell has given serious thought to incorporation, but found cost a prohibitive factor, Dr Ellender said. In Queensland there is no stamp duty relief on the initial transaction.

In the Q&A session following the presentation, Professor John Gray tipped national firm Sparke Helmore as next to head down the incorporation path. When asked about the rumour, John Davis, Sparke Helmore national managing partner neither denied nor confirmed the possibility.

“Incorporation and the possibility of a partial IPO is a very new phenomenon in our industry. Our board considers that it is something which we do need to better understand from both the perspective of what opportunities and advantages it may offer, as much as what we may have to compete with as other firms also consider the issues.

“Like many other firms I am sure, we have begun an investigation of the quite complex issues involved however we have no pre-determined view of the outcome, are not bound by any particular timeframe and are no where near a concluded position. Recently we adopted some governance changes within our partnership which do take us much closer to a corporate model."

Overall, the experts agreed that the industry will become more efficient as a result of incorporation.

“The ones who do [incorporation] well, and the ones who see this advantage will improve their returns quite significantly, and gain from that, but as an industry right across the board there will be winners and losers,” Dr Ellender said.

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