Q&A: Damian Paul – "The company structure just resonates with our clients"

In our latest Q&A, M+K Lawyers national managing director Damian Paul comments on the advantages of a corporate model over a partnership and how the firm is targeting mid-market clients.

You joined M+K as a graduate articled clerk in 1988. What are the big law firm changes you have witnessed in the past 25 years?
“The first is the impact of technology on all businesses, not just law firms. And the second is the flow-on effects into law firms of the consequences of the global financial crisis.”

Tell us about the technology changes first.
“Let me make the point that when I first started at the firm, no one had a computer on their desk. With technology today, there are internal impacts and external ones. The internal ones are around the way a law firm now runs in terms of the speed of information flow – not only financial information flow, but access to precedents and documents and knowledge sharing among your people and also collaboration among your people. I have people collaborating on client work from Hobart to Brisbane and everywhere in between on a daily basis in a way that just couldn’t have happened 20 years ago. We are accessing the same files and working on the same documents. That’s driving the speed and accuracy with which work can be produced these days.

“With the external impacts, there’s no doubt that client expectations have risen quite dramatically. Clients won’t allow you to take two days to respond to something unless it requires a lot of research or drafting. Their access to knowledge has also increased, so the more sophisticated clients are asking for more and more services at the consulting end; not so much at the administrative and basic documentation end. The other thing I am seeing is the use of technology as a competitive advantage. We are now seeing not only law firms but non-lawyers in some jurisdictions, particularly in the United Kingdom, where non-lawyers can now own an interest in a law firm, starting with a blank sheet of paper and trying to design the law firm of the future. They are throwing a lot of money at the technology to enable them to bring services to market. It will be fascinating to see how that unfolds.”

Can that model work?
“Yes, I think it can. If you choose your place in the market appropriately and service it, there is definitely a place for it. Certain types of clients will always value relationships over technology, so that can’t be lost, and we are seeing technology starting to have a greater impact on what I call the retail space – that is, the domestic work, preparation of wills, family law, conveyancing and that sort of thing. In time, I’m sure that will creep into the commercial space as well.”

You mentioned the impact of the GFC. How big an effect has it had?
“The legal spend in Australia isn’t growing. If you go back to pre-GFC days, the spend on legal services was about $22 billion, probably growing at or above CPI – that is, about 3 percent to 3.5 percent a year. But legal spend has grown by about 1.5 percent over the past four years, so it trails significantly behind CPI. So when the market is not growing, competition becomes very fierce and more and more players are playing in the same pond. Organic growth has stalled and may never come back. The other thing we’re seeing is in-house lawyers in the big companies around the world, which basically command about two-thirds of the legal spend globally, are demanding more for less. While initially that impact was being felt by the global firms and the larger firms, we have seen that start to trickle down to the mid-tier firms as well. Back when I was coming through university and joined the profession, the story was that you became an in-house lawyer if you couldn’t cut it in private practice.

“These days general counsel are being plucked from the ranks of the top-tier firms and very successfully so. They know how big firms run and they are not going to tolerate paying for low-end services. So that’s having an impact on the profession generally. So I think with in-house lawyers their agenda is ‘okay, how can we get more out of law firms for less’. What that means for us all is that we’ve got to get better and better at differentiating what we do. We can’t just be one of the Joneses. We have to really stand out, both in the market for work from clients and in the market for talented people.”

As a law firm leader and manager, are you guided by any particular management philosophies?
“First, you’ve just got to get out and keep meeting new people. You can’t sit in your office. There’s not a day goes by that I don’t get out and meet someone in the profession or a client or a referrer – and you just don’t know where it’s going to take you. Sometimes the best meetings I have are those that I think, when I get up in the morning, it’s going to be a chore. But it could lead to an introduction to someone else who can help you, or access to a new way of doing things.

“Second, we’re a firm that will have a go and take calculated risks. We don’t just want to maintain the status quo. Third, when you make mistakes, fix them promptly and then get on with it. We all make mistakes – such as a hiring error, the way you’ve dealt with someone, or a client issue – but the longer you dwell on it the more it becomes a cancer around the place. Fourth, I’ve been really keen to gather low-maintenance people at the firm; people with a have-a-go attitude.

“And finally, we’ve remained really focused. In our case, we’ve concentrated on being a commercial firm that specialises on servicing mid-market organisations. They are typically organisations with turnover of between $5 million and $500 million, so it’s your small to mid-cap public companies and your subsidiaries of multinationals and your local closely-held or family-run businesses. To our way of thinking, there is no other national firm that is actually dedicated to that mid-market market as we are. There are a lot of firms playing in that market, but I don’t think as firms that they are truly dedicated to it. So stay focused.”

Your firm has been operating for more than 100 years and has its roots in Dandenong and the southeast corridor of Victoria. As you grow, is it difficult to stay true to those origins?
“We haven’t moved on from our traditional roots – if anything we’ve remained very strongly focused on those relationships, but used what we’ve learnt from those relationships to instil those lessons into our business nationally as we grow. The whole southeast corridor of Victoria was the growth corridor post-World War II, not just for dwellings, but more importantly for businesses. Coincidentally, when I joined the firm in 1988 as a graduate it was sitting smack bang in the middle of that corridor and we started to focus on the businesses in the region. As those clients have grown we’ve sought to grow with them, so we can support them nationally and, in many cases, internationally. Importantly, these clients have taught us what mid-market organisations require from service providers. So we’ve been taking those teachings and keeping them top of mind as we expand into new geographical areas.”

You mentioned that you try to hire low-maintenance employees. Is that the key to your culture?
“Most firms these days, particularly well-run firms, recognise that being really clear around your culture helps you attract the right people and screen out the wrong people. Our revenue today is five or six times what it was six years ago, but the growth has been built by retaining and attracting talented people who want to serve the mid-market and who share our approach or culture. Our approach is very much to talk straight both with clients and internally and to back people who want to have a go. People who engage in politics or put their own interests ahead of the interests of clients or the firm just don’t tend to fit in. The more you stay true to that, the more the message gets out into the market and it repels those who don’t fit and draws to you people who think they might fit.”

M+K has been operating under a corporate model since July 1, 2008. In your opinion, what advantages does this approach have over a partnership?
“This is something that we didn’t move towards lightly. Like most firms we were a partnership for our first 100-odd years and then we took up the company model in 2008. I think it’s a far more effective commercial model than the traditional partnership. For a firm that wants to grow and needs capital for growth – and not all firms do – whether that’s to invest in improved technology or to invest in acquiring firms, the company model is far more attractive. In a partnership, as you make your money you’ve got to pay that money out to the partners each year because they have to pay tax on it. So they need the cash in their hands to pay the tax and live their lives. In the company structure, you can do two things – you can retain some of the earnings in the company because the shareholders only pay tax on the money they actually receive. So if you retain some of money in the company for capital growth, the shareholders don’t have to pay tax on that, whereas in a partnership it comes straight out and they have to pay tax on it.

“You can also use the company structure to issue shares to people who want to contribute capital, whether that be to external investors or internal investors. In our case it’s predominantly internal investors, so it’s a model that helps fund for growth in a way that you couldn’t do in a partnership. It also affords protections to principals that partners and partnerships don’t have. If a partnership is sued and if for any reason that claim is not covered by insurance – and it does happen – or if you are sued by, for example, a landlord under a guarantee that the partners have given, then those partners are personally exposed and their assets are on the line. With our company structure no one who works in the business has any personal liability whatsoever, other than the few who take on the responsibility of being the directors of the company, and as directors of the company you are exposed to the normal (risks) that directors have under the Corporations Act and other relevant legislation.

“Furthermore, it gives you flexibility in the way you compensate principals. We’re not just talking about partnership drawings here. In our model, our principals have a four-tier remuneration structure. They receive an agreed salary, they then participate in a bonus arrangement tied to either how their office or their entire practice group performs. As shareholders they receive good dividends on their shares and, hopefully over time – and we’ve already seen this – they will receive an attractive capital return on their shareholding. In partnerships you’ve probably really got one tier of earning – a partnership draw.”

“The next issue is that it allows you to spread real ownership across the firm. Back when we were a partnership and before we started our growth track, we had four equity partners in a firm that had 130 people in it. It never really made sense to me and I tried lots of different ways to get a sense of real ownership into the hands of others beyond those four equity partners. We tried phantom share schemes and profit bonus schemes and all that sort of stuff. But today under the company model we have moved on from about 130 people to over 300 people, and almost 100 of them have shares. I like that spread of ownership. The final point that I would make is that the company structure just resonates with our clients. Sometimes we talk to them about the company model and its features – because to us it’s quite unique – and they just say ‘welcome to the business world – it’s about time’.”

M+K has experienced significant geographical expansion in the past decade. What hurdles has that presented?
“The first big challenge has been to get consistency across a number of geographic locations that we’ve brought together relatively rapidly over a six-year period. How do you get consistency around service delivery so that if a client uses you in one office and then uses you in another office, he thinks ‘gee, that’s the same firm’? Likewise, from a staff point of view, we have employees who go on secondments to different offices, and we are always looking at recruiting new staff. We’d like to think that no matter where an employee joins us – whether it’s Hobart, Melbourne, Brisbane or Sydney – that their experience is roughly similar. So consistency is a challenge.

“The way we are addressing this challenge is to try to go to the nth degree to make sure we are choosing the right people and firms to join us in the first place. The second challenge starts with a C as well – and it’s collaboration. Six years ago I had a group of 20 principal-partners, most of whom worked in Dandenong and a few of whom worked in Melbourne. I’ve now got about 60 principals nationally and, roughly speaking, there would be 10 in the Tasmanian office, 18 in Dandenong, 16 in Melbourne, 10 in Sydney and 8 in Brisbane. Notwithstanding our spread, our attitude is to approach the way we do things as the one firm. So collaboration is crucial.”

What are you expecting on the legal sector front in the years to come?
“I’m really looking forward over the next five to seven years to observe four key areas. The first is the continued consolidation in the legal profession. Yes, what the international players do will be interesting. But I’m speaking more about the players that are in my market, in the mid-market – the small to boutique firms through to the mid-sized firms. We are really seeing a lot of consolidation in that area and I’m keen to observe how that plays out, especially as we pass through an era where the baby boomers are looking to get out of their businesses. There are about 17,000 legal businesses in Australia and a lot of them are owned and run by sole practitioners and small partnerships. Second, I’m keen to see how the internationals position themselves in the Australian market. They’re going to have to stand for something pretty unique. The third thing is the impact of technology. And the fourth is the succession issues in mid-tier firms. The larger firms probably have more sophisticated and established models for dealing with this, but if you look at what I would consider to be the majority of small to mid-tier law firms, the successful ones over the past 10 to 25 years have probably been driven by an individual or a small group of individuals. And as they approach retirement over the next five to seven years, I’m fascinated to see what impact that has. On the one hand that provides a fantastic opportunity for senior lawyers coming up through the ranks, but on the other hand it creates an issue for the firm to replace someone with the vision, drive and leadership qualities of the person approaching retirement.”

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