Partnership or public company?

The transition from partnership to plc can be a turbulent time, radically changing the business structure, management approach and culture of the firm. But the growth opportunities make it something for them to consider.

By Laurie Young

The spectre of the Clementi review and the draft Legal Services Bill lets law firms focus on an issue also causing growing debate and concern in other professions; namely whether there are advantages in giving up partnership structures to go public. They may also wonder whether the health of their practice will be threatened by plcs competing against them or buying them. In recent years, partnerships operating in a range of specialities have either been floated or sold to public companies (plcs), as the proposals might allow. These include: Accenture in consulting; Heidrick & Struggles in executive search; Michael Page in executive recruitment; IBM consulting (formally PwC); and Goldman Sachs in merchant banking.

This is an increasing trend that will affect much of the professional-services industry, including law firms, if current government thinking is ratified. Leadership teams will then have to understand the dynamics of these aggressive new entrants who are trying to serve their clients. Some will even have to chart a course for firms going through the difficult transition from partnership to public ownership. As the behaviours and decision-making processes of a plc are so very different, this is a major change to a partnership, which causes a fundamental change in approach. It takes years to assimilate because the people, particularly partners, need time to adjust.

Yet very few of those who have moved from partnership to plc seem to have been aware of the extent of the change, or the time needed for their firm to adjust, before they embarked on the journey. In fact, there is growing evidence to suggest that income, client-service standards, responsiveness, employee satisfaction and reputation can suffer during the initial years of the change. If managing partners are to avoid damaging their firms they should understand the extent of the difference, the implications for their practice and the pitfalls to try to avoid. The experience of partnerships in other specialities and countries provides a little insight into what UK firms might expect.

Pros of a partnership

Partnerships can be collegiate, flexible and professionally liberating environments. While they can also be haphazard, inefficient and desperately political, they are some of the most successful business models the world has ever seen. Firms like Mckinsey, Deloitte, Clifford Chance and Bane earn many millions of pounds in many parts of the globe from first-rate work. Many earn two to three times the net margins of the clients they serve; and have been doing so for nearly a century. Their success seems to lie in the individual practices, which, like cells in a living organism, evolve and respond to changes because they are run directly by an owner of the business. They can even adjust when the leadership of the firm makes fundamental errors of strategy or management. They are, perhaps, one of the business world’s few self-righting organisational structures.

Plc profits boost productivity

Yet despite the flexibility and reputation of leading partnerships, plcs do have competitive advantages to deploy against them. For example, partnerships are reluctant to use current profits to invest (because there is pressure to distribute it among partners). Plcs, on the other hand, routinely review capital investment, setting aside large funds for projects that will enhance productivity. They can therefore gain an edge over any professional partnership with which they compete by using their capital budgets to improve productivity through technology, process and systems improvements. It makes them much more efficient and streamlined than rival partnerships.

Plcs also have to report to the financial markets and account to, largely anonymous, shareholders for their use of funds. This introduces the relentless drive for process improvement, cost reduction and innovation natural to competitive organisations. Over the long term, they adopt an unarticulated drive for productivity improvement in response to pressure from shareholders, customers, competitors and public commentators. This, in turn, introduces various disciplines into any professional-services firm that becomes one or is bought by one. For example, client-service staff are required to forecast business accurately, giving tight income forecasts to the City on a quarterly basis.

Public companies’ prime competitive weapon in the professions, though, is their ability to employ top talent using share options. As shares are valued by the capital markets on different criteria than current performance, it means senior people can be employed at lower salary costs than in a partnership. So, in markets where plcs are in direct competition with partnerships, they are able to penetrate the market with high-quality work at lower cost and lower prices. For instance, in Australia, a plc owns an accountancy chain, WHK Greenwoods, which has been buying up private practices and creating a nationwide network. They now rival the ‘big four’ in terms of volume, able to offer comparable quality at a lower cost.

Different management styles

Another fundamental difference lies in the nature of leadership and governance. Partnerships work through mutual consent and consensus. Managing partners are, often reluctantly, elected by their peers and frequently continue to practice while managing the firm. As partners are owners of the firm, they rightly feel that they should contribute to direction and that their views should be heard. Leaders have to carry their peers with them, even when they comprise 2,000 partners working in many countries around the world. Aggressive or insensitive leadership is only tolerated for a short time, as partnerships can bring about change if it becomes abhorrent.

As a result, leaders solicit the views of their partners much more extensively than the CEO of a plc would. In fact, seeking consensus on most issues is second nature to leaders of partnerships. Therefore, there is often surprisingly little direct decision making. Initiatives are more often created by a wide consultation or ‘buy in’ process, which creates a momentum for the idea. Providing no one strongly disagrees with the initiative, it will become, more or less, common practice within the firm.

Corporate firms, however, are very different. Management responsibility is delegated down a hierarchy from the shareholders and there is both regulation and law to guide conduct. Individuals have clear accountability within a distinct area of responsibility, whether it is for a management function or for client service; and they are expected to focus on that. Client-service staff are not encouraged to contribute to strategy or management but ensure that their billable time is as high as possible. Nor are they allowed to create their own programmes and recruit their own ‘support’ people. As the CEO of one plc running a professional-services firm commented: “When we first buy a practice, professionals want to spend time telling me how the business ought to develop. They waste time in debate and presentations. I have to settle them down and make them comfortable with the knowledge that this is not their responsibility. Their job is to serve the clients, not run the business.” By this he meant that they simply do not have a voice on these issues and are not included in debate, planning or policy formulation.

With a plc, there is usually a clear management structure with delegated authority to run any functions within agreed budget and strategy parameters. Management is able to create and execute programmes to meet the firm’s goals. In short, they are not running after different partners rushing into tactical, sometimes whimsical, activities, or continually adjusting their decisions to suit the views of different people. Leaders in these firms can expect specialisation, investment and the ability to get on with the job. That this is a feature of different governance structures is shown by the experience of Littler Mendelson P.C., the largest labour and employment law firm in the US. It is known as a ‘professional corporation’ under Californian law, rather than as a partnership. Wendy Tice-Wallner, chairman of the board and managing director, says that this has enabled them to be responsive to opportunities and delegate clear actions to specialists in IT, marketing or HR. Each of these now sets their own implementation plan within the agreed strategic framework, while “lawyers serve clients”.

Summary

There are many reasons why a professional service offer might be considered by a plc. It may be that its leaders see a chance to grow their business by undercutting existing providers or buying vulnerable partnerships. By contrast, it may be that a generation of partners simply want the huge windfall that can come from selling out or floating. But partnerships wanting to change to this type of business structure must have a clear idea of exactly how different it is. They need to understand the different behavioural and governance issues, laying detailed plans to manage the transition. Just as importantly, practice leaders should consider laying plans to counter the incursion into their market by plcs if they are to preserve their partners’ earnings. 

Laurie Young has held senior positions with BT, Unisys and PricewaterhouseCoopers. His latest book ‘Marketing the Professional Services Firm was published in 2005. He can be contacted at lauriedyoung@aol.com.