You Thought Market Forces Were Formidable Now?

Say "Clementi Commission" on this side of the Atlantic and draw blank stares; say it on the other side and it is safe to say you will launch an immediate fray.

The Commission has proposed, and the government has pledged to support, legislation that will permit non-lawyers to own law firms, and even for law firms to go public.  Before you start bouncing off the walls and ceiling, consider the rationale in a nutshell: “I do not believe that many of the restrictive practices under which lawyers work can still be justified as being in the public interest.”  And who among us, once we've caught our breath, can truly argue with that?  (For the record, some "consumer-protection" style regulation will remain in place.)

But as I've warned you before, this is not a blog about ethics, it's a blog about economics, so what might one foresee on that front?

First off, to state the obvious, the Linklater's, Freshfields', and Lovells' of the world have zero need or desire to go public, and I'm sure a plethora of small- and mid-sized firms below the UK 100 radar feel precisely the same.  As with technological innovation, just because you can do something does not imply you should.

Second, going public is the extreme end of the bell curve, and will probably end up being at least two standard deviations beyond the mean.  But at the mean, I would predict firms will offer, or sell, equity to senior non-legal business managers including those who would here have titles like Executive Director, CFO, CIO, and CMO.  This could be the genuine beginning of the end of the caste system where only fee-earning partners really count.

Third, and of surpassing fascination to me, will be to watch how market forces begin to shape this brave new landscape, applying their disinterested Darwinian pressure over time.  Thus I predict:

• An emerging class of supermarket commodity services firms, providing relatively generic wills, tax and real estate services, matrimonial and garden-variety litigation practices, small business "corporate" work, etc.  Some of these could become reasonably large entities, and consolidation in pursuit of market share and economies of scale will be the governing principle.
• At the other extreme, a small group of highly sophisticated boutiques may offer equity to raise capital in order to reinvest in their premium practices.  If Goldman-Sachs and Christie's can be public, why not Boies-Schiller?
• In the vast middle, increasing focus on developing and publicizing distinctive, credible, and "ownable" marketing statements about why XYZ firm is different, and why you should invest in it.  Where does this notion come from?  From the competitive drive to lower a (public) law firm's cost of capital.  To take a step back, the only compelling reason to go public is to raise capital—otherwise who in their right mind needs to put up with the regulatory and disclosure obligations involved?  But if you're doing it to raise capital, you want to pay as little as possible for those funds:  That means you want as high a P/E as you can obtain, and surely one above the new Law Firm Equity Index median P/E.  How, in turn, do you achieve that?  Well, presumably you're already doing all you can to increase "E[arnings]," so you have to persuade the marketplace that one $ (or one £) of future earnings from your firm is more valuable than it would be from other firms.  In other words, you have to state a distinct value proposition.

Will the Clementi Commission achieve its goal and will this actually happen?  Beats me, but it is devoutly to be wished.

Bring it on!