IT HAS always been regarded as akin to selling off the family silver. But now that flotation is close to becoming an option for law firms, will they find it an attractive prospect.

Research conducted by the accountancy firm Deloitte shows that there are a number of firms, including mid-sized London and process-driven regional firms, considering flotation should the consultation be enacted into law.

The proposals that would allow firms to float are set out in a consultation paper from the Department of Constitutional Affairs, In The Public Interest. Although it would not be appropriate for all firms — with the “magic circle”, for instance, not seeing the need for further financing options — mid-tier firms could have a source of finance with considerable potential. Historically, law practices have not been capital-intensive. Global expansion, the formation of national and international brands and the increasing use of information and communication technology mean that law firms have increasing and significant capital requirements, making listing worth serious consideration.

For the magic circle there may also be particular reasons why flotation would not be attractive. Partners in the larger, long-established firms are often regarded as tenants rather than freeholders, holding their shares in the partnership in trust for future generations.

Flotation is unlikely to allow partners to realise their equity stakes and walk away from the business. Although partnerships have been floated, with significant payoffs going to equity partners (Goldman Sachs is a prime example), there is a paradox here since partners are most likely to succeed in realising value from their business where they are not central to its continued value. It is likely that clients, and fees, would be lost if a partner who was key to the business’s future success were to leave. Potential investors might want assurances that such people would be staying.

Ownership of assets is likely to be the main barrier to flotation. Whereas some assets, such as financial capital, tangible capital (property, computer equipment) and intangibles such as the firm’s strategies, organisational structures and processes, can be “owned”, others such as the human capital — the people — cannot. This barrier is not insurmountable, as demonstrated by the numerous “people” businesses — surveyors, stockbrokers and recruitment agencies — that have successfully floated over the past few years. However, those legal service providers that are heavily dependent on high-volume, process-driven work will be best positioned to float.

Where culture is an important part of a firm’s competitive advantage, it may be that flotation, by changing the culture, could undermine the success of the firm. Many partnerships rely on what has been termed the partner tournament to motivate employees. In effect, fee-earners are encouraged to perform by means of the partnership “carrot” and the associated rewards that partnership brings. From the perspective of the firm’s financial performance this can be a relatively cheap motivational tool, as many fee-earners can be motivated, without immediate cost, by rewards that they might never see. The removal of the partnership structure would require an overhaul in remuneration policies.

Finally, firms might be deterred by the changes that a flotation would bring to the organisation. They would need to justify their strategy and actions to shareholders, and there would be greater disclosure requirements, pressure to take a shorter-term view and a greater focus on the firm and its employees as a result of its being in the public domain.

Although some firms of lawyers will still see flotation as a step too far, similar views were no doubt held by many firms of chartered surveyors and stockbrokers that subsequently went through with it.

What is clear is that some law firms are coming round to the idea that flotation is a realistic option. Watch this space.

The author is professional practices senior manager at Deloitte

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