Gray, John; McAllister, Gillian; Adams, Michael A --- "Qui bono - law firms governance" [2008] ALRS 6

Last Updated: 17 May 2010

John Gray, Gillian McAllister and Michael Adams “Qui bono? How will changes in business models for law firms affect organization, governance, and regulation of legal services? Report of a pilot study.” for the Challenging Institutions Workshop, UNSW, 19-20 June 2008

About the authors

Associate Professor John Gray is the Research Leader of Professional Services Research node (PSRn) j.gray@uws.edu.au and Engagement Director for the School of Management of UWS[1].

Doctor Gillian McAllister is a Senior Researcher of PSRn of the College of Business of UWS.

Professor Michael Adams is Professor of Law and Head of the School of Law michael.adams@uws.edu.au

at UWS and a member of PSRn

Abstract

Law is a fundamental, hegemonic institution. Its effects on civic society come about through a reflexive interplay between its constitution and its constituents (Giddens 1976). A chief agency in this structuration is the lawyers’ practice or organization. Until relatively recently all common law nations constrained lawyers to practise within sole proprietorships, or partnerships. Firms were composed of natural persons with unlimited liability and only lawyers could be owners of such practices. This arose historically based from the notions that:

• a deal could be struck between the state and the profession, whereby the profession regulated itself and the state provided it professional closure through very high barriers to entry, to a market defined by a broad range of services labeled legal (Larson 1979);
• individual professionals were the agents to be regulated.
  
  

However, as Gray, Clegg and Carter (2008) note, the first of these notions tumbled during the 1980s and its following decades, as neo-liberal tenets increasingly applied; the second notion was always misguided but definitely of very little value in modern organizations. Australia has decided to permit incorporation and public ownership of law firms in a national policy move that was intended to permit multi-disciplinary practice (with accountants and the like), improve efficiency of trade across the states and territories of this large federation, provide national competitive advantage and harmonize the regulation of lawyers. This paper focuses upon changes to management practices of law firms and their sustainability. It reports a regional study that has been conducted prior to a forthcoming national study. It is based around neo-institutional precepts found in Greenwood and Hinings (1996) and Gray and Hinings (2008).

Introduction

Australia’s constitution makes the regulation of legal services a state matter. For most of our Federation’s history, this has meant that law firms have had to be organized as state-based firms, subject to state laws and the rules and codes of state law societies. Market inefficiencies resulting from parochial models of organization could be borne whilst legal trade was more or less discrete to state boundaries. However, during the 1980s, the Australian economy commenced major (internationalization-driven) transformation and large corporations demanded seamless national service; very large (so called federated) law firms with partnerships in most states developed to provide such a service. Despite federalism’s institutional constraints, the ways of managing around these that the most successful firms developed not only served corporate clients but also earned the practices super profits as they created some of the world’s largest partnerships, with transaction costs that excluded smaller firms from competing. Thus, an unintended consequence of inefficiency in federal arrangements was the growth of the Top Tier firm in Australia and internationally (Pinnington and Gray 2007). Significantly these firms organized as if they were corporations or, as the international literature refers to these archetypes, as Managed Professional Businesses (Greenwood, Hinings and Brown 1990, Greenwood, Suddaby and Hinings 2002)

The 1980s also saw the adoption of deregulation and the principles of national competition policy. While the transformations wrought by deregulation were central to several industries, such as financial services, they had a broader, but lagged, impact. These changes did not flow legislatively to legal services until the end of the decade. Since that time, and at varying rates, state governments have abolished many of the trading restrictions on law firms. In NSW, which led these reforms, lawyers have been permitted to incorporate, conduct business and share income with non-lawyers since 2001. As part of this policy shift, legislative control over the business structures that can be used by lawyers has changed significantly. In 2003 the States and Commonwealth Attorneys General or SCAG (see AG 2006, LCA 2008, SCAG 2008) agreed to a National Professions Project whereby it was agreed that each state and territory Parliament would be invited to enact legislation to enable incorporation and listing using NSW law as a model. Today all states and territories apart from South Australia and Tasmania have enacted these laws. This is the most significant change in legal services in any Common Law country for several decades.

Additionally, over the past 15 years, there has been decreasing self-regulation of the Australian legal profession and increasing regulation by government. The establishment of the Office of the Legal Services Commissioner in NSW in 1994 was the first step in this process. The Commissioner’s early responsibilities were to receive and investigate complaints against legal practitioners. However, the Commissioner’s role has evolved and he now has power to audit the management practices of law firms to ensure that they are appropriately managed. The Commissioner’s office has been actively exploring new approaches to regulation and for this reason is an important influence in the field. It is examining the effect on professional complaints, improved management systems uptake, and the hybrid forms of firms that include non legal entities. Questions have been raised as to the adequacy of existing legislation to regulate changing governance structures within the field of law firms (Mark and Hutcherson 2005). So you can see that legal services in Australia have experienced two major jolts:

• coercive institutional constraints to business models have been removed, but
• coercive institutional constraints over professional behaviour have been increased.
  
  

These policies are intended to balance the needs for professional behaviour with the need for sustainability. Incorporation permits improved management practices that should improve professional behaviour as well as improve business efficiency, and thus sustainability. Thus the policymakers answer our question, “Qui bono?” with the espousal that law firms will be more efficient and sustainable and they will be regulated so that their management practices avoid conflicts of interest and ensure professional behaviour. But the answer lays in enactment, not espousal. We know that major jolts to any settled system create opportunities for new ways of organizing which, in turn, become settled or institutionalised (Cooper, Hinings, Greenwood and Brown 1996, Miller and Friesen 1980, Nadler and Tushman 1990, Scott and Meyer 1994). Malhotra, Hinings, Gray and McAllister (2003) showed that there were several clusters of archetypes in their 2001-2002 national studies of Australian law firms. These included the Global Professional Network; the Managed Professional Business; the Professional Partnership and variations of them (as defined in Brock, Powell and Hinings 1999). For purposes of this argument we can consider these clusters as if they were upon a continuum, with practices more systematised near GPN and MPB and less so at P2. The configurational changes that occur at field level will reflexively interact with management practices at firm level. As Gray, Clegg and Carter (2008) note, the notions that professions would assure professional behaviour in return for monopoly tumbled during the 1980s and following decades, as neo-liberal tenets increasingly applied. They also assert that the notion of the individual as the unit for assurance was always misguided but definitely of very little value in modern organizations.

Research into major civic institutions, such as law, corporation governance, professional behaviour and constraints to strategy have been published under the broad rubric of institutionalism. The dominating stream of this research tradition is neo-institutionalism (see Greenwood, Oliver, Suddaby and Sehlin-Andersson, 2008). These works emphasise that the interplay between external constraints and agency of those ‘within’ firms enacts the real institutions. This is a structuration argument (Giddens 1976, Ranson, Hinings, Greenwood and Walsh 1980; Lawrence and Suddaby, 2006) that gives prime attention to what is enacted rather than espoused. This is consistent with the notions that professional behaviour is changed ‘within’ the firms where professionals practise by the practices that professionals practise ‘within’ their field. Gray, Clegg and Carter (2008) argue that the enacted structure, governance, strategy, and systems regulating professional behaviour structurate norms, which are transmitted in fields. Greenwood and Suddaby (Greenwood and Suddaby 2006) showed this to be accurate with American state accountants. Gray and Hinings (2008) and Lazega (Lazega 2001) have been able to show the impact of lead firms and migratory partners but we know of no study that has systematically studied formation of professional behaviour, and governance of firms within most of one national profession. We hope the pilot study that we report to this conference will eventuate in a national study of change as it is enacted.

In this paper we particularly focus on incorporation’s impacts upon: how organising affects professional behaviour; and the sustainability of legal services. Professionally, one of the key areas of contention in relation to the incorporation of law firms has been the potential for conflicts of interest to work against the public interest in the proper administration of justice and against the interests of clients. It is argued that incorporation will systematise professional behaviour more effectively than partnerships through improved management systems. Opponents of this view argue that the conflicts of interest cannot be reconciled and that the duties owed by firms to foster the commercial interests of their firms will come to dominate.

Profitability and sustainability are key issues for firms in Western Sydney because of their size. Australia’s legal services are extremely concentrated with 1.2% of law firms (those with 10 partners or more) generating 48% of total revenue from legal services (ABS 2003). The vast majority of firms in Western Sydney (96%) are small, with just one or two partners.[2] Incorporation permits smaller firms to consolidate and potentially improve their profitability without the large transaction costs that have previously prevented this under the partnership model. Ultimately, incorporation and consolidation might increase the sustainability and capability of legal services.

This paper considers these questions by:

• How has incorporation impacted on the management practices of pilot study firms?
• Can incorporation contribute to the sustainability of legal practice in smaller firms?

Pilot Study: Incorporation of Western Sydney firms[3]

We conducted a pilot study of three incorporated law firms that were located in Western Sydney, which we had recruited by elite referral. For the purposes of this project, Western Sydney is defined by reference to the regional structure of the Law Society of NSW. The following Law Society districts are regarded as included in Western Sydney:

• Parramatta;
• Bankstown;
• Liverpool-Fairfield;
• Macarthur; and
• Hawkesbury Nepean (Penrith).
  
  

The vast majority of firms in Western Sydney have only one partner. As at the end of 2007, there were 630 firms in Western Sydney and 551 of these (87%) had one partner. A further 59 firms (9%) had two partners while the remaining 16 firms (4%) had three partners or more. This distribution is represented in the figure below.

Figure 1: Western Sydney firms by number of partners

As at December 2007, there were 122 incorporated firms in Western Sydney, (representing 19% of all firms). The vast majority of these firms (77%) were one partner firms. The remaining incorporated firms had between two and 10 partners.

All of our firms were in this last category. The study took a qualitative research approach, with information being collected through a series of face-to-face semi-structured interviews with practitioners. Each interview was divided into three parts. As an introductory question, the interviewee was asked about the factors that led the firm to incorporate. They were then asked to describe the incorporation process at the firm and the changes that had been introduced at the firm as a result of incorporation. The final part of the interview was a discussion of the advantages and disadvantages of incorporation for the firm. Within each firm, the researchers asked to interview people who had been closely involved in the incorporation process or who were currently senior managers of the firm. In two of the firms four people were interviewed while in the third firm one person was interviewed. That is to say, nine interviews were conducted in total.

Interviews were conducted face-to-face and typically lasted between 30 minutes and one hour. In each interview, the researcher took detailed notes. Five of the interviews were also taped. Four interviews were not taped because:

• Two interviewees did not wish to be taped; and
• Two interviews took place in circumstances where taping was not feasible (for example, in a location with a great deal of background noise).
  
  

The tapes were not transcribed. Instead, they were used as a back-up to the interviewer’s notes and retained as a record. Analysis of the interview data took place in several stages. The first step in this process was to conduct a preliminary analysis of the interview data; the researcher read each set of notes carefully and noted down the chief ideas contained in each chunk of data. The researcher then reviewed these ideas across all the interviews and developed categories and sub-categories for grouping the topics together. Inevitably, some of these categories followed from the interview schedule. However, new issues and ideas also emerged from the data, and these were noted down under their own category names. The themes identified in the data are reported in the following table, which also offers some theoretical cues for analysis.

What changes did the firm have to implement following incorporation?

In the assessment of those interviewed, the firms in the study did not have to make a large number of changes to management practices or systems following incorporation. In two of the firms, this was probably because they had already implemented a series of management changes that were taking them towards a more corporate model, even while operating as a partnership. In the third firm, the partners had simply chosen to make very few changes to their governance structure.

There were four major changes reported by the case study firms. The first was the introduction of an executive structure, so that fewer partners were involved in making management decisions about the firm. A management team was established which no longer involved all of the former partners. In some cases the management team involved a mixture of lawyers and non-lawyer managers.

As a consequence of reducing the number of partners actively involved in management, firms found that they needed to develop good strategies for communicating with all the owners. As one interviewee described it, there is still a “thirst for knowledge” amongst the principals who are not in management.[5] Thus, the firms have had to develop effective systems for providing information to the ownership group.

The third major change concerned the firms’ policies and procedures. Firms have had to focus on documenting their policies and procedures and then ensuring compliance across the firm. This change flowed from the duties imposed on directors’ under the Corporations Law. These obligations are stricter than those that apply in partnerships.

Finally, some of the interviewees mentioned the fact that there had been a change in the funding structure of the firm, with the firm now being able to borrow funds instead of the partners.

Management of change

The transformation from partnership to company involves a significant organizational change for law firms. Interviewees were therefore asked about the skills and resources they needed to make the transition to the corporate model.

The firms in this study drew mostly on internal resources to achieve incorporation. However, in some cases, the firms had considerable internal resources at their disposal. These included:

• A partner with post-graduate qualifications in management;
• A partner who had had a career in management before training as a lawyer;
• A strategic management consultant who had been advising the firm prior to incorporation;
• Senior in-house managers.
  
  

In terms of external resources, the firms reported:

• Bringing in specialist accounting advice;
• Using continuing legal education resources;
• Talking to other firms that had already incorporated.
  
  

The overall picture, though, is that firms had to look very broadly to obtain advice on incorporation and that there is little in the way of recognised sources of information.

It is interesting to note that some of the firms in this study had recognised the need to build their own management capacity and were using different measures to do this. One of these was a rotation system to give younger partners experience on the management team. So as these firms move ahead, they are likely to have more skilled lawyer managers on their team.

The impacts of incorporation

All three firms included in this research felt that incorporation had been achieved without major disruption to the firm’s business. At the same time, though, incorporation had had significant impact on the firms. The four main areas of impact were:

• Cost
• Unbundling the roles of partners
• Succession planning; and
• Decision-making and management systems.
  
  

Cost

Most of those interviewed for this study felt that their firms were still in the transition phase in terms of the cost implications of incorporation. As a result, they were unable to provide a final assessment of the cost (or savings) involved in moving to the corporate model. However, participants were able to identify both costs and savings following from incorporation.

The costs identified related mostly to taxes and similar charges. Those interviewed noted costs in terms of:

• Capital gains tax;
• Stamp duty;
• The costs involved once partners have to be treated as employees (payroll tax, workers compensation premiums, compulsory superannuation charges).
  
  

However, two important areas of savings were also identified. Firstly, the fact that the firm only has to run one entity rather than two (the partnership plus a service entity) provided significant savings for two of the firms in the study. At one of these firms the savings were much more significant than anticipated. In fact, in this firm it was rated as the second most important benefit from incorporation due to the time (and therefore) costs saved.

Saving in partner time was also identified as a significant financial benefit from incorporation in two of the firms. Time was saved because fewer partners were involved in management. Monthly partners meetings no longer took place and and a smaller management team met in their place. As a result, there was a group of partners who no longer had to take time out for management meetings but could spend more time building their practices, which was an obvious benefit to the firm.

Unbundling the roles of partners

Under the partnership model, law firm partners perform three different functions within the one role of partner. They are owners of the firm, they manage the firm and they also work within the firm and generate revenue. Under the corporate model, these three functions become distinct roles: shareholder, director and employee. Unbundling the three roles was seen as a potential advantage of incorporation by some commentators.

Such unbundling of roles means enhanced accountability for workers and a subsequent tightening of control over different practice areas, but less autonomy for the former partners of a firm. A separation of roles also means that those contributing to the success of the [incorporated legal practice] as solicitor directors, managing directors and employees are more accurately remunerated according to their performance (Mark and Cowdroy 2004).

A number of interviewees focused on this particular issue and talked about what it was coming to mean in practice.

Obviously, when governance structures are changed so that the firm is managed by a smaller management team or executive committee, management is no longer a universal partnership activity – only those partners who are elected to or selected for the management team make management decisions about the firm. In the case study firms, while some partners were initially concerned about the loss of control involved in this new structure, in practice many have found it liberating to leave their management role and be allowed to focus on their legal practice. Lawyers are not all equally skilled or interested in management, so moving out of a management role has been a positive impact for some.

However, this unbundling of roles has meant that new attention has had to be paid to communicating with those partners who are owners but not managers. One interviewee commented that “... partnership is an excellent communication model, but a difficult management model”[6]. Under the partnership model, all partners (and therefore all owners) attend management meetings. However, under the corporate model, these roles are unbundled and only those owners who are part of the management team attend management meetings. Thus, in an incorporated legal practice the firm’s managers have to develop strategies for dealing with its owners as a distinct group. Two of the case study firms reported that they had had to try a number of different approaches to communicating with owners, but that communication had improved over time. The measures they had used included circulating the minutes of management meetings and holding regular briefings for all partners so that they are informed as owners.

Effective communication with all owners was seen as an important issue by several of those interviewed because of the potential risks involved if communication fails. One interviewee commented that, prior to incorporation, the firm had tried operating with a more streamlined management team, but found that the partners who did not attend were not “tuned in”[7] to what was happening. As a result, the firm had reverted to full meetings of the partners.

Another interviewee talked about how the firm had worked, for some years prior to incorporation, at building trust across the partnership group. He believed that if the firm hadn’t done this and built commitment to the firm’s strategy with all partners, then incorporation would have been much more difficult. There would have been a risk of partners “going off in their own direction”.[8] Thus, effective communication with the ownership group is important to avoid alienating them.

The third partnership role is that of employee. As employees, partners become subject to the same systems that apply to all employees, including systems around performance management. Under a corporate model, if there are performance management systems within the firm, then they should apply to those who were formerly partners in the same way as they apply to all employees. In this way, all lawyers in the practice are equally accountable for their performance.

Applying performance management systems across the board to all staff was seen as a very important advantage of the corporate model by several of those interviewed for this study. However, it was also seen as a system that needed to be introduced gradually because it represented such a significant departure from past practice.

Even without introducing performance management systems as such, one firm reported that the unbundling of roles simply provided greater accountability between the partners. Once the firm became a company, partners (as employees) were paid a salary rather than relying on weekly drawings against estimated profit. So the relationship between the partners was clearer and expectations as to their work and role were also clear.

At a more abstract level, one interviewee commented that, when a partner’s role as manager is split out from their role as owner, it introduces a new mindset. The role of director is seen as a more commercial role than that of partner. Directors are obliged to make decisions in the long term interests of the firm as a whole rather than in the interests of the partners. This interviewee thought that the former partners who were now directors of the firm were bringing a different approach and way of thinking to the role, thinking that was more strategic and more commercial.

Succession planning

Succession planning was an enormously important issue to many of those interviewed for this study. One interviewee described it as “the standout success”[9] from incorporation because of the flexibility the corporate model provided in terms of entry and exit of partners. Incorporation was seen generally as having had a positive impact on firms’ capacities to recruit and retain staff and to provide an effective retirement system.

Firstly, some of the firms involved in this study were setting up systems so that younger lawyers could be brought into ownership gradually, according to their performance or their capacity to purchase shares in the firm. The financial capacity of young lawyers to buy into the firm has become an increasingly important issue over the last few years, according to a number of the interviewees in the study. In their experience, younger lawyers are now likely to be heavily burdened by HECS debts[10] and home mortgages, and therefore in no position to buy out a full partnership share. However, they can take up shares gradually over time. This has given firms greater capacity to retain talented lawyers. It has also meant that firms have been able to set up performance-based systems for bringing young lawyers into equity. Under this type of system, young lawyers can buy a certain amount of shares per year, but can pause in any year if they have not achieved their goals or targets and need time to build their own capacity and skills.

The ability to bring new partners into equity gradually was described by one participant as the outstanding benefit of incorporation for his firm. It had enabled the firm to build new systems that they believed were providing a sound structure for developing the firm into the future.

As well as providing a means for bringing young lawyers into the ownership of the firm, incorporation was also seen as important by some interviewees because it provided the opportunity to broaden the ownership base. In particular, an ownership stake can be offered to non-lawyers who play a significant role in the firm. This provides a means of retaining talented managers as well as retaining talented lawyers.

Finally, interviewees reported that incorporation was providing them with better retirement options for working owners. Smaller law firms operating as partnerships face a significant challenge in providing an appropriate return on capital investment to retiring partners. However, in the experience of several interviewees, the corporate model provided a better range of options. For example, in the same way as new partners can buy into the firm gradually, retiring partners can sell their shares gradually over time. This means that their expertise remains available to the firm, albeit on a different basis. Alternatively, owners can retire as working lawyers but retain their shares in the firm. As one interviewee commented, the firm can solve the issue of how to provide a financial return to retiring owners by making the firm’s shares so attractive that the retiring owners will prefer to hold their shares rather than look for avenues to sell them.

Incorporation can therefore have a significant and positive impact on succession planning within law firms. As one interviewee noted, if their firm had stayed as a partnership, then they would have been “inventive” about different ways to bring employees into ownership. However, incorporation gave them much greater flexibility:

... having a large volume of shares and then drip-feeding out small quantities of shares on a stream basis ... it opens up as many opportunities as your imagination can expand to think about.[11]

Nonetheless, the firm had to work hard to develop a system for promotion to ownership that met the firm’s needs. Two senior members of the firm spent a great deal of time “philosophising on what it was we were trying to achieve, to try and get the philosophy and the people part of it right and then making the model fit those human issues”.[12] The firm worked with two separate accountants as well as their internal accountant to develop the model. But having developed a model to fit their own culture and goals, it was then relatively easy to gain the support of the rest of the firm in implementing the model.

Decision-making and management systems

The final area of impact that emerged from the interviews concerned decision-making and management systems within the case study firms. Management systems are particularly important for incorporated firms because, once a firm incorporates, it is required by the Legal Profession Act 2004 (NSW) to adopt “appropriate management systems”, so that legal services are provided in accordance with the professional obligations of solicitors. The NSW Legal Services Commissioner takes a very positive view of the impact of this part of the legislation.

My skepticism about how the incorporation of legal practices would play out in New South Wales has been overborne by the benefits which sound management principles can bring to legal practice ... I say this because, with the introduction of “appropriate management systems” we have a codification of certain ethical and business principles. There will always be ethical and unethical people. What is now explicit is that “appropriate management systems” provide the framework for ethical behaviour, and they can also be enforced (Mark 2007).

The Commissioner’s office has developed a set of 10 objectives or guidelines which they consider form the basis of sound legal practice, and they use them to assess whether or not management systems are “appropriate” within firms. Incorporated firms are allowed to self-assess against these 10 guidelines and, where they do not comply, are given some time to improve their management systems. The Commissioner sees this “education towards compliance strategy” (Mark 2007) as contributing to an improvement in management practices in law firms. Research conducted by the Commissioner’s office (in conjunction with the Centre for Applied Philosophy and Public Ethics) revealed that 63% of incorporated legal practices were prompted to make substantive systems changes as a result of engaging in the self-assessment process (Mark 2007). This research also showed a link between very high levels of compliance with the 10 guidelines, and low levels of complaint for incorporated practices.

The Legal Services Commissioner is therefore very optimistic about the improvement in management practices that is occurring through incorporation. Data collected for this study supports his view that management practices are improving, with many of the interviewees commenting that the introduction of an executive team to manage the firm in place of the entire partnership had led to improved decision making. There were several reasons for this:

Firstly, unlike in a partnership, in an incorporated law firm lawyers who are also owners of the firm, but who have no real interest in management, no longer have to be involved in management. This means that the executive team comprises only those owners with a management focus. Some interviewees felt that, under the firm’s previous operating model, not all partners had been contributing to the management of the firm even though they were required to be involved in management decisions. As a result, some interviewees believed that their firm was now benefiting from better quality decisions because decisions were being taken by people with a real focus on the management of the firm.

Following from this, some interviewees also talked about the fact that there was now a proper recognition of the need for management expertise within their firm. The firm now had non-lawyers on their management team and they thought that this gave the firm a better weighting of decision-makers between the law and business sides of the firm. This was also contributing to better informed decisions.

Interviewees also reported that a smaller management team was bringing about more streamlined and faster decision making. Partnership means consensus decision making, which, according to some interviewees, can result in ‘lowest common denominator’ decision making. With an executive structure, it is no longer necessary to reach consensus amongst all partners: the executive team can take decisions based on the interests of the firm.

Finally, apart from improved decision making, most of the interviewees also reported that incorporation had meant that they had gone through a much more rigorous process of documenting their management systems and processes. As a result, there was greater consistency in operation across the firm. In the view of one lawyer, it also meant that the firm no longer had to “reinvent the wheel”[13] each time there was a change of managing partner, which had been their previous experience.

Thus, decision making and management systems were considered to have improved following incorporation, partly through the introduction of more streamlined executive teams but also through a greater focus on documenting the firm’s systems.

Conclusions

This is a pilot study and is accordingly delimited. The sample was small and geographically bounded. None of the firms were listed and though one traded interstate all had offices in one state only. However it has confirmed that the neo-institutionalist framework robustly supports the data, not only from the cases but also from the contextual reading we had to do. It has shown that variables interact reflexively, thus any method must accommodate this. This suggests a longitudinal mixed method study as described in Gray and Hinings (2003;2008) which can counterpoint individual cases against national configurational surveys and contextual databases. Gray, Adams, Hinings, Mayson and McAllister (LP??????) have proposed such a major national project with their partner organizations, Slater and Gordon Law Firm and NSW Office of Legal Services Commission.

The study will document and analyse the impact of the adoption of the corporate model on the field of Australian law firms, using the neo-institutional model as developed in the writings of Hinings and Greenwood (Hinings and Greenwood 1988, Greenwood and Hinings 1988, Greenwood and Hinings 1996) and is located, theoretically, within institutional theory. It provides a framework for carrying out the type of research around organisational change regarded as necessary by Pettigrew (Pettigrew 1985) and Pettigrew, Woodman and Cameron (Pettigrew, Woodman and Cameron 2001) : that is, research that pays attention to the interplay between the context, process and content of organisational change. Neo-institutional theory argues that organisations exist within fields, and that each organisational field is set in a particular market and

institutional context. Competitive forces and changing economic conditions will create pressures for organisational change. At the same time, the institutional environment that relates to a particular organisational field will carry ideas, norms and values about the way that organisations within that field should be structured and how they should operate. As these prescriptions change, organisations will experience pressure to adopt those changes in order to maintain legitimacy and ensure success. Analysis of change within organisations therefore needs to take account of the field-wide pressures for change that emanate from the organisation’s market and institutional environment, and the way those pressures operate across time (Wooten and Hoffman, 2008).

At the same time, neo-institutional theory takes into account the way that internal organisational processes influence the change process. While all organisations existing within a field will be subject to the same environmental pressures for change, the micro-processes that occur within organisations will determine how the institutional environment is interpreted by the members of an organisation and how that organisation responds to field-level changes. The operation of these micro-processes means that organisations in a sector can, in fact, be structured differently at any given point of time, even though the argument is that they will tend to converge around institutionally acceptable forms (Lawrence and Suddaby, 2006).

England, Wales (Clementi 2004) and Canada (CBA 2008) have identified that barriers to entry into professional markets such as legal services along with trading restrictions are effectively a brake upon development and international competitiveness. England and Wales have chosen a path of deregulation of business form similar to Australia’s, but delayed. Canada has not attended nationally to business forms, leaving that to individual provinces, but it has noted the regulatory arrangements in Quebec and Ontario, which permit limited forms of equity sharing, as most promising (CBA 2008). So, we find three major Commonwealth jurisdictions attending to issues of business form for lawyers. One of these, Australia, has moved to policy and implementation. England and Wales have announced their policy decision to act similarly. Canada expresses interest but is still within early policy discussion stage. We can learn from each other for we may be seeing transformation of an international field in the medium term. But these are for the future. We return now to the recent past, our pilot study and our conclusions about that.

The first question that this research set out to answer was: how has incorporation impacted on the management practices of the firms? On this issue, all three firms involved in this study were very positive about the impacts of incorporation. The benefits have included better decision-making structures, more flexible succession planning and greater accountability due to the unbundling of the different roles encompassed within the role of partner. At the same time, though, several of our interviewees commented that many of these benefits could have been achieved with a partnership, it’s just that it would have been more cumbersome to do. It is possible, then, that the true benefit of incorporation has been to prompt firms to focus in more detail on their governance systems and to think more creatively about the problems facing them in the management of their firms. One of our interviewees made the following comment when talking about succession planning:

What [incorporation] did, it just got us thinking – it was a whole new ball game – how can we invent something that is going to work for the existing people and is going to be highly attractive to our young stars coming through.[14]

In terms of management systems, incorporation appears to be opening firms’ eyes to new ways of structuring and organising: it has provided an alternative business model which some firms are ready to build on.

However, there is a caveat to this conclusion. In two of the study firms, major change programs were already taking place and incorporation was part of this overall program. It is possible that the early adopters of the corporate model are already well-organised firms and for this reason are reporting success from incorporation. So as adoption spreads more widely, quite different impacts might be seen. Firms that are not well prepared for a more corporate style of practice might find the transition much more difficult. This is an issue that could be investigated in a larger study.

It’s notable that none of the firms in the study reported any negative feedback from clients. A small number of interviewees commented that the changeover with bills and invoicing had not proceeded as smoothly as it could have, but apart from this there had been no major concerns expressed by clients.

The second question that the project sought to answer was: can incorporation contribute to the sustainability of legal practice in smaller firms? The answer from the firms in this study would seem to be that it can. Several interviewees felt that the corporate model positioned them much better for future growth. To quote one interviewee, “... incorporation is a bigger picture issue than just tax”.[15] This participant saw incorporation as part of a long term strategy that would allow their firm to grow and improve its market share and profitability. According to this view, a partnership structure is inadequate to manage a large firm whereas a corporate structure provides a vehicle for the firm to grow.

Related to this, of course, is funding, and several interviewees commented that banks understand and are much more open to working with a company than with a partnership. As a result, financing growth may become much easier for incorporated firms than for those that remain as partnerships.

One other conclusion arises from this study. The findings suggest that there is a gap in terms of the information available to law firms that are considering incorporation. The firms in this study drew mostly on internal resources to achieve incorporation but also reported consulting a range of other sources, from bringing in specialist accounting advice to talking to other firms that had already incorporated. The overall picture, though, is that firms have to look very broadly to obtain advice on incorporation. With almost 20% of firms in Western Sydney alone having incorporated, more practical courses around incorporation could be offered, possibly as a collaborative initiative between research centres such as PSRn and regulatory agencies.

Given the size of this study, this research can only provide tentative answers to the two research questions that drove the study. Further investigation of the issue of incorporation is required, involving more firms, before a full assessment can be made of the impact of incorporation. A larger study would be able to investigate not only how incorporation is impacting on the management and sustainability of firms, but also some of the other questions suggested by this research:

• Are there positive aspects of the partnership model that risk being lost in incorporation? One or two of the interviewees in this study made the point that, as time went on and a new generation of lawyers came into the firm who had only ever known the corporate model of practice, it would be easier to completely separate the ownership role, the management role and the employee role, functions previously combined in the single role of partner. These interviewees were looking forward to an easier and better future in terms of management of the firm. However, it is also interesting to ask whether anything might be lost in this process of generational change. Does the partnership model support routines or behaviours that enable law firms to operate more efficiently than companies?
• This was a study of firms operating in NSW only, under a single regulatory scheme. However, incorporated firms operating across state or territory borders are faced with differing regulatory mechanisms. Does this create inefficiencies for these firms? If so, are there still benefits from incorporation?
• As firms explore the possibilities offered by incorporation, it is likely that new organisational forms will emerge in the field of law. Research is required to track the emergence of new forms of organising and to evaluate their impact on the provision of legal services.

References

Australian Bureau of Statistics (2003). 8667.0 Legal Practices, Australia 2001-02. Melbourne, Australian Bureau of Statistics.



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http://www.business.nsw.gov.au/region/profiles/westernsydney.htm (accessed 8 October 2007)

Gooding, Alex (2007). Western Sydney: a statistical snapshot. Sydney: Western Sydney Regional Organisation of Councils.

http://www.wsroc.com.au/page.aspx?pid=58&vid=1&fid=329&ftype=True

Giddens , Anthony (1976) New rules of sociological method: a positive critique of interpretive sociologies London: Hutchinson.

Gray, John, Stewart Clegg, Chris Carter (2008) “How do professions form, organize and change?” Critical Perspectives on Accounting London: Elsevier, January Edition.

Gray John and C. R. (Bob) Hinings (2008 under review) Operationalizing neo-institutional theory with a decade of data (This paper was originally delivered as a conference paper to RGOS in 2003. Since then we have refined it and added data from a ten year research project on law firms.)

Gray, John, Danielle Logue, Tim Rankine, Richard Woolley (2006) Can clustering of law firms improve efficiency and community service in Western Sydney? UWS: Office of Research Services.

Greenwood, Royston and C. R. (Bob) Hinings (1996). “Understanding Radical Organizational Change: Bringing Together the Old and the New Institutionalism.” Academy of Management Review 21: 1022-1055.

Larson, Magali (1979) The rise of professionalism: a sociological analysis Berkeley: University of California Press.

Mark, S. (2007). A short paper and notes on the issue of listing of law firms in New South Wales. Paper prepared for the NOBC, APRL and ABA Center for Professional Responsibility Program entitled “Brave New World: The Changing Face of Law Firms and the Practice of Law form a Professional Responsibility Perspective”, San Francisco, 10 August 2007.

http://www.lawlink.nsw.gov.au/lawlink/olsc/ll_olsc.nsf/pages/OLSC_speeches: (accessed 28 September 2007).

Australian law firms can now incorporate and publicly list on stock exchanges. This internationally unique national policy is predicted to bring benefits of efficiency, international competitive advantage, improved management systems, and market rigour to national legal services. These benefits are predicated on the basis that the removal of law firms’ institutional constraints, puts them on the same footing as other economic entities. This is the most significant change enacted to legal services in any common law nation for many decades.

[1] He is also Visiting Professor to the Centre for Management and Organisation Studies at UTS, and Visiting Professor to the College of Law of England and Wales whilst on sabbatical from UWS.

[2] Statistics provided to the researchers by the NSW Office of the Legal Services Commissioner.

[3] Statistics in this section were provided to the researchers by the NSW Office of the Legal Services Commissioner.

[4] These triggers applied to several of the reasons firms incorporated but were dominant in the case mentioned.

[5] P7.

[6] P7

[7] P2

[8] P7

[9] P8

[10] The Australian Higher Education Contribution Scheme, which provides loans to students in higher education to cover the contribution they are required to make to the cost of their course. These loans become repayable once the student graduates and earns income above a defined level.

[11] P8

[12] P8

[13] P9

[14] P8

[15] P2