Operational practicalities of LLP conversion

Deciding to convert to a limited-liability partnership makes a lot of sense for firms that wish to limit the personal liability of existing partners, and can also help in attracting top recruits to the firm. It can be easy, however, to underestimate the work and partner involvement required to get it right.

As a result of the introduction of The Limited Liability Partnership Act 2000, professional-services partnerships can now incorporate as a limited liability partnership (LLP) and by so doing they can remove the unlimited liability of individual partners.

Specifically, in the event of a business failure (as a result of a catastrophic claim), the partners’ personal assets should not be exposed unless they themselves were shown to be negligent. Increasingly, the partners of the future, when faced with a choice between pursuing their career in a general partnership or in a LLP, will opt for the latter – why wouldn’t they?

Consequently, to be competitive in the lateral recruitment market (and even, to some extent, in graduate recruitment) those firms that have not already done so will need to convert.

All of the major accounting firms have converted and more law firms are now following suit or are at least actively considering it. In a number of cases, firms have decided that they want to convert but have not yet done so. Often this is because they are either unclear of all of the practical steps required, or lack some confidence in their ability to manage the conversion process successfully and in a relatively tight time frame given the scale of the project.

Having led the operational implementation of a recent conversion programme at one of the top-ten firms in the UK (which has a number of overseas offices), I can fully understand their hesitancy. There is a huge amount to do and typically only a few months in which to achieve it. But with proper timely planning and a methodical approach it can be achieved, and relatively painlessly.

The process of conversion is not inherently complicated, it is just the sheer number of things that need to be done for a conversion to be successful that can make it seem daunting. The work falls into two broad categories:

Legal and constitutional work – creating the right legal structure that works for tax and regulatory purposes (while recognising the different local regulatory requirements in all of the jurisdictions where the firm is operating);
Operational implementation – ensuring all of the practical things happen at the right time in all locations – and this includes a comprehensive client communications programme.

Underestimating the amount or work and time involved in either of these areas is the main reason why some conversions have been completed late or put off for a year. For obvious reasons, the conversion date tends to coincide with the financial year end, which is the busiest time in the support team’s calendar, and they are likely to be the staff to whom the most significant amount of work will fall.

For most law firms the legal and constitutional stream is the easy bit and there is plenty of in-house expertise to drive this stream of work and a clear starting point (for instance, the members agreement will typically be based heavily upon the existing partners agreement). That is not to say there isn’t a lot to do and it is vital not to underestimate the amount of time that is required to consult fully with the partners to ensure that they are comfortable with the planned change. Any change of this magnitude will be met with some resistance and concerns about the impact on the firm’s culture – and it is important that plenty of time is given to listening to the concerns and getting real buy-in from the partners.

Most firms also have a fairly clear idea of how they want to operate (for example, as separate LLPs in each jurisdiction – or as ‘one firm’) and this will typically dictate the structure (as far as the local regulatory requirements will allow).

It’s the operational stream of work that typically presents the biggest challenge, as this is a complex multi-location project bringing together all the different support functions in the firm.

The success of the operational stream of work is primarily about project management at a detailed level, which includes excellent communication right across the whole team involved in the conversion. Typically a significant number of the key players in the project may well not be accustomed to the rigorous approach to professional project management that is required for such a complex project, and, in particular, to detailed plans, dependencies, milestone reporting, risk and issues logging etc. Consequently, it is important that the project leader is an experienced project manager.

In addition, it is vital that there is a single focal point for all of the operational tasks to ensure that there is consistency and continuity of approach; to ensure the wheel is not continually reinvented; and that nothing is missed. As a trivial example, when I was leading a recent large conversion project, we had to make an eleventh-hour change to the way we were describing partners (as a result of the new Law Society guidance, which was issued just two weeks before the conversion date). This change:

Impacted a huge number of documents (letterheads, marketing documents, billing templates, standard forms);
Required changes to working practices that had to be communicated to all staff;
Required physical changes to the list of partners in buildings, standard office stamps etc. Every single operational group was affected, as was every division, in each of the countries and offices in which the firm operated.

Without a single focal point for managing the project – something would have slipped between the cracks and we would not have been ready for conversion day.

My own recent experience confirmed that while the LLP conversion does not need to involve a significant cultural change, some change is required. In particular, there is a very significant client-communication exercise – both to meet the Law Society’s requirements to notify all of the firm’s clients about the change and, more importantly, to put in place the all important new terms and conditions for every client. These terms and conditions should ensure that the contractual limitations, which protect the partner’s personal assets, are in place for all of the firm’s clients.

It is very easy to underestimate the amount of work, and partner involvement and education needed to complete this one-off novation exercise successfully. Of even more importance, and hence needing even more effort, is the need to embed the right behaviours relating to having the correct contractual terms in place as soon as you start working with any client. Some change management is required here if you are going to be successful in changing this underlying on-going behaviour. This is easily said, but not so easily done.

So against this background, what are the key factors to ensuring a successful implementation? As indicated above it is about leadership and management, specifically in the following areas:

Planning

As with any project, proper planning should ensure that obvious pitfalls are avoided. When projects of this complexity do not deliver on time it is often because:

The project’s critical path was not understood at the outset. One major accounting firm’s conversion was delayed because it was realised too late that to produce the new billing templates and allow time to test them, the LLP’s new VAT number would be needed – a month-long process that could not be started until the new LLP company number was available, which required a registration process that also took several weeks;
Key steps did not happen because one team thought another was covering it and vice versa;
Key staff were not able to devote sufficient time to the project because of the demands of their day jobs.

Clearly, therefore, for a successful LLP conversion, you have to get basic planning concepts right:

Understand the dependencies (for example, those tasks that need to be completed so that another task can be commenced) as these will determine your project critical path. Failing to understand these dependencies at the outset may mean that your project becomes seriously unstuck. For example, there are a number of important tasks that cannot be undertaken without the LLP registration number from Companies House and Law Society approvals. We allowed ourselves three months from incorporating the LLP to conversion and, with the benefit of hindsight, could usefully have had at least another month as we were on a critical path with no room for delays throughout the last three months of the project;
Each support area and office should have their own implementation plan. It is critical that each plan is owned by a suitably senior person – the support heads for their plans and a senior partner in each international office;
Ensure that the plans cover all of the areas where there will be an impact. That will span from the obvious significant items like getting Law Society approval down to the minutiae like changing the header text on fax machines and replacing all office stamps that have the partnership’s name. Responsibility has to be allocated for every single item and realistic but aggressive deadlines need to be set;
Ensure there is a matrix of responsibilities. For example, an HR person in Milan has reporting responsibility to (and is supported by) both their local plan owner in Milan and the head of HR at the centre (where the resource and expertise lies);
Factor in other projects with deadlines during the conversion process and the normal work peaks and troughs of the key staff involved in the project. Most conversions are planned to occur at the financial year end, when finance staff are frantic and HR staff are probably right in the middle of the appraisal and salary-review process;
And, of course, expect the unexpected – and make sure you build in plenty of contingency time.

Timescales and key resources

For a complex organisation with international offices, detailed planning should start at least six months before conversion and there needs to be a dedicated implementation leader working full-time on the operational aspects throughout this period and preferably for at least a month after conversion. That means you need dedicated senior lawyers working on the legal, constitutional and regulatory matters, and an additional dedicated full-time resource for at least seven months to lead the operational implementation. This may sound a long time but given the scale of the project, this is likely to be the minimum requirement.

To lead on the operational side requires a full-time experienced manager who can make decisions, deal with partners, manage the support heads, create an effective team and communicate well with senior management, all levels of staff and project team members.

This could be:

A partner – as long as they have real project-management training and experience;
A senior support-staff manager with enough time, seniority and credibility;
A short-term project manager or consultant, but to be successful they need to be able to ‘hit the ground running’. That means having plenty of complex project-management experience – they must also be able to fit into the culture by combining their project-management experience with a deep understanding, and extensive experience, of operating in a partnership environment.

The choice is yours.

Derek Godfrey is an LLP conversion expert and project manager. He can be reached by contacting simon.slater@first-counsel.co.uk