Andrew Hosking (l) and Sean Bucknall of Quantuma

The last few major U.K. law firm administrations have several things in common. Insurmountable debts; a depletion of confidence in the management; an irretrievable breakdown of the partnership; and Andrew Hosking and Sean Bucknall of Quantuma—a small firm of insolvency practitioners who have over the past decade managed to corner this gloomy niche in the U.K. legal market. 

Following calamitous demises, King & Wood Mallesons (KWM), Ince & Co, Davenport Lyons and Cubism Law are just some of the names to have fallen under the microscope at Quantuma.

And along the way, the firm has acquired a nuanced perspective of the U.K. legal market, benefitting from relationships with banks, insurers and lawyers well-known in the field – such as Samantha Palmer of Pinsent Masons and Rita Lowe of CMS.

Why do firms collapse?

When KWM's European arm went insolvent in 2016, the main question was: how could such a major institution fall apart in such spectacular fashion?

For Hosking and Bucknall, there are generally a few key elements at play for most law firm failures, much besides macroeconomic reasons: a failing firm culture, an unpopular managing partner, the firm going in an unpopular direction, are but a few reasons.

"You have a group of individuals that wants to go somewhere else. That's part of your turnover walking out the door. And then you have to return capital to partners and to the banks. So you've got a double-whammy hit," says Bucknall. 

KWM faced that exact hit when four of its most profitable partners quit, causing the firm to halt its recapitalisation plan.

"Where a firm sees a reduction in profit, they look to remove overhead, rather than non-performing senior people around the table"

"And when it gets to that point, it can become unimaginable. With 10% of partners gone, and with no heavy restrictive covenants in place, it's like pulling out a bath plug. Momentum starts to build, and then all of a sudden you're contracted down to a smaller pot, no longer able to take on big billing work." He adds: "That's what happened with KWM and Ince."

But increased competition serves not only to flatten some firms, but increase choice for unhappy partners. The influx of U.S. firms into the U.K. and the proliferation of boutiques in particular have served to offer these partners another route out of go-nowhere partnerships.

"The pound is cheap", Bucknall says, "so U.S. firms are interested, they can offer bigger salaries, so many [partners] will think, why wouldn't I leave."

A failure of culture

"You can't underestimate the importance of culture", Bucknall stresses, especially given how hard it is to recruit staff. He adds: "You need to be profitable to attract new partners. Also, though years ago there was more of a drive to get to equity, nowadays people are less inclined. What's important now are things like work/life balance. A lot of firms still don't get that." 

For Hosking, the point around restrictive covenants is especially corrosive. Traditionally, these had been used to limit a partner's ability to leave a firm, taking a share of the partnership profits within a specified period. But they are at times of limited use, and can only go so far in tying a partner to a firm they've grown to dislike.

Unbridled by onerous restrictive covenants, lawyers at Cubism marched out last year, which precipitated the firm's collapse.

"It's a question of choice," Hosking says. "But [restrictive covenants] are not particularly enforceable. You want's lock-ins, but it depends on the firm, and how willing someone is to leave."

A failure to modernise

For larger firms, you can generally attribute failures to two things: partner departures and loss of turnover. But for smaller, more sector-focused corporate outfits, failures tend to take root in issues around succession planning, a lack of investment in long term efficiencies, leading to poor IT and technology infrastructure. 

Bucknall suggests that "in difficult times, firms need to modernise faster, and learn how to identify challenges faster". Remote working is one such area of innovation that firms are only recently noticing.

"Gone are the days where everyone is sitting in the office," Bucknall says. "People are working remotely, at home, at client sites. Do you need an office to accomodate all staff, or just 75% of staff? More forward-thinking firms are asking how much space can we get away with."

Cash mismanagement 

For both Hosking and Bucknall, one of the most fundamental – and obvious – causes of law firm failures is cash mismanagement. And they believe that alternative business structures (ABS) – that enable external law firm ownership – can offer a means to shore up expertise and security around a firm's resources. They even make the radical suggestion that a firm's managing partner need not always be a lawyer.

"The ABS was a good idea," says Hosking. "The ability to bring in proper professionals is something that's still not fully accepted by lawyers. Accountants and business growth leaders have their own skill sets which can work in concert with those of solicitors. 

"But still, solicitors elect solicitors as managing partners. A solicitor who is fantastic at dealing with client needs, being commercial, is not necessarily able to transfer it to running a 2,000 employee law firm with and all sorts HR and data issues." 

…and how to avoid it

So how can firms avoid suffering the fate of a KWM or an Ince?

Hosking sums it up: "If you're on a decline curve, stop and take heed of the issues presented to you, and consolidate. Don't be ashamed if you have to sublet part of your premises. Don't be embarrassed if you have to remove one or two partners.

"Drop your drawings, because you want the law firm to succeed. Every law firm has peaks and troughs. The key issue is to identify when you are experiencing it, and adjust the course of the ship. That's all it is. It's managing your risks and being able to move as quickly as you can."

He adds: "That, and good communication."