With private equity firms circling the legal profession, law firms can use IT management systems to draw investors' attention, says Fraser Mayfield

With an estimated £26bn per annum up for grabs, it is no wonder new entrants, listed businesses, traditional law firms and private equity organisations are all eyeing the lucrative UK legal services market.

High-volume legal areas such as insurance, conveyancing, family law and personal injury are proving to be especially enticing and many law firms are exploring funding options from private equity to realise their business aspirations. 

Liverpool-based Forster Dean has announced plans to establish a national high street presence with the aid of external investment. Defendant insurance firm Keoghs has also struck a deal to accept external investment having received its Alternative Business Structure (ABS) licence. 

According to the Royal Bank of Scotland, more than £1bn of private equity money is currently available for investment in the legal market. Companies looking to tap into alternative funding options should strategically position themselves as attractive investment targets in order to secure a slice of the pie. 

Anthony Bellau, investment manager at private equity firm August Equity, said: "When evaluating potential investments in the legal sector, we look for scale, growth potential and quality of earnings." While undoubtedly each private equity company has its own key criteria, it is reasonable to assume that these areas would be of interest to most investors. 

Delivering scale 

Business management technology can enable law firms to meet these criteria. For example, scale and efficiency go hand in hand. In an industry that uses a huge number of business processes, automating and streamlining those procedures delivers efficiencies and facilitates a joined-up approach to business across the organisation. 

In turn, that provides the capability to easily scale operations in response to market demand. It also makes it possible to quickly replicate the business model to apply it to new regions and markets. 

Furthermore, technology enables law firms to simultaneously operate across multiple disciplines, borders, and legal and non-legal business environments. 

Business management systems are especially critical as they enable organisations to register financial transactions, manage relationships between subsidiaries and the parent organisation (including partial ownership structures), administer internal cost accounting, and enforce both accounting policies and rules seamlessly across the entire operation. 

With private equity investment on the horizon, the complexity of reporting will inevitably increase. A deployed business management system encompassing practice and financial management provides evidence that the law firm is equipped to track and deliver profitability, as well as regulatory compliance-related reporting encompassing national and international legal, financial and accounting legislations. 

A law firm's ability to scale can often be restrained by the availability of resources, both human and physical. Business management systems facilitate human resource and commercial management, supporting growth and allowing firms to create expansion plans based on accurate strategic analysis. 

For instance, by conducting skills and competency or client cross-sell analysis, law firms can easily identify gaps and take corrective action to capitalise on what would otherwise have been missed opportunities.

On a day-to-day level too, these systems can help identify low-hanging fruit that would potentially have been overlooked by automated management reports. 

This is easily achieved by combining time, billing, financial and human resource details into a single view to enable managers, partners and individual lawyers to understand where loss occurs and where opportunities exist. 

Growth potential 

Essentially, investors are looking for law firms that have the potential to grow organically, or can expand into new markets, geographies and lines of business, and raise their profile – all culminating in additional returns to them over a set period of time. 

Leveraging business intelligence – a key element of a business management system – to provide evidence of growth potential is important. Derived business intelligence enables law firms to report on all levels of their work – industry sectors, types of work, practice areas, or clients/matters – and understand what aspects of the business are driving the numbers. 

Law firms can then quickly identify areas such as which clients have the most lifetime value potential, what the cross-sell opportunities are, which lawyers are managing their clients well and where more attention is required. 

The business intelligence component takes transactional data and distils it into a framework that shows activity across all aspects of the company. With insightful information, firms can formulate more effective growth strategies based on both client segments and an individual client basis. 

They can evaluate every billable hour of the firm – be it at client, matter or lawyer level – to ascertain the effect that utilisation, realisation, leverage and cost allocations have on a firm's overall profitability and performance.

This capability must be fully utilised if firms want to compete in today's continually growing and competitive market. 

Quality of earnings 

Until now, financial management in law firms has been fairly short-term. This is perhaps because of the traditional partnership business model based on hourly fees and incentive schemes built on contribution. Despite the move towards lockstep (or modified lockstep), some firms still compensate their partners based on the 'eat what you kill' model. 

However, the ball game has changed, perhaps because clients have become more savvy and lawyers have realised that the legal sector is no longer recession-proof.

Law firms are sharpening their focus on the long-term potential of the business – many companies are exploring mergers with other organisations; others are promoting non-qualified staff to partners; the rare few are looking to turn themselves into Alternative Business Structure-style firms. 

The Legal Services Act 2007 has created a climate that is more favourable to private equity investors. Investors want to assess the future potential of firms' assets, the majority of which are intangible – things such as intellectual and human capital, brand, strength of client relationships and client satisfaction. 

This again can be drawn from the business intelligence functionality provided by management systems. Law firms can evaluate these intangible assets in a tangible manner by breaking down transactional information to understand their value. 

For example, finance managers, partners or lawyers can assess the billing rates clients are on, see which clients pay the highest rates, which of them are offered discounted rates most often, and for which activities and matters.

They can also track which clients have had to have their billing written off and for what reasons, see which are the most profitable, who are the outliers, who pose the most risk and much more. 

Keeping clients happy 

This kind of information analysis is essential – it helps ensure overall client satisfaction and provides visibility into areas where risk must be reduced, relationships strengthened, and where new opportunities lie.

Crucially, it also helps highlight non-performing sectors, unprofitable clients and underperforming lawyers. The need for such capability has greatly increased due to the more competitive nature of the industry in the past few years. 

Successfully wooing investors is all about demonstrating business management acumen. Fundamentally, private equity firms will be looking to invest capital and strategic expertise into law firms that have the potential to grow, and whose value in the market can be raised in order to earn a high return on investment.

Underpinning the firm with next generation technology provides compelling evidence of the organisation's ability to achieve its own and its investors' strategic business goals and long-term initiatives. 

Enterprise-class financial and business management systems are extensively used by mainstream corporations as platforms from which to execute strategy and conduct business operation. 

These systems are already commonly used in financial markets, they represent the pinnacle of current technology and hence are likely to draw in private equity investors as they become more interested in the legal industry.

Firms that invest in such technologies can exude confidence that they have the ability to operate as profitable commercial entities and grow the business, making them the kind of lucrative opportunity private equity investors are looking for. 

Fraser Mayfield (pictured, top) is product director for Nimbus at LexisNexis Enterprise Solutions.