News focus: Remote fee-sharing model comes under pressure

Eight years ago, virtual firm Keystone Law organised a publicity stunt at Liverpool Street station where a lawyer was imprisoned in a pop-up cell.

The idea was that passing commuters might look at the confines of their own firm and seek an escape route. The lure of a fee-sharing arrangement on lawyers’ terms was strong and appeared even stronger during the pandemic, when workers realised there was an alternative to the slog of train delays and missing kids’ bedtimes.

So it was a surprise this week to see Keystone – which has grown exponentially since that 2015 stunt – expressing caution in its latest financial results reported to the London Stock Exchange.

Amid an account of flat revenue and single-digit revenue percentage growth was an acknowledgement that it has not been as easy over the last year to entice lawyers from traditional firms to a remote working model.

While total fee-earners increased from 481 to 507, and 232 qualified applicants joined (compared with 228 the year before), the company admitted potential candidates were still ‘cautious of change’.

In addition, traditional firms who made outsized profits during lockdown were able to offer wage hikes to staff, while starting to adapt their own models to compete with what remote firms can offer.

Keystone chief executive James Knight (pictured above) said: ‘On the supply side, many of the push factors, which in normal times cause lawyers to seek change, have been absent. The significant demand has meant that lawyers have had less difficulty in hitting targets, wage inflation has meant that they are better rewarded for the work they do, and, with the balance of power in their favour rather than the employer’s, they have been able to avoid politics and resist pressures to return to offices which would otherwise, probably, have been brought to bear.

‘While it is very difficult to predict timing, we do not believe that these factors will continue indefinitely.’

Those involved in this new-breed sector insist there remains strong demand for the alternative model. Fee-sharing firm Spencer West, for example, hired more than 25 partners in the first quarter of this year, having increased its headcount by 45% annually.

'What happened during and immediately after the pandemic was that many senior, highly experienced lawyers found that they were already operating in a way that reflected a partner-led practice' 

Steven Cohen, Spencer West

Steven Cohen, a member of the Spencer West management team, said the ‘bounce’ from the change in working lives during lockdown is still being felt. He insisted the market has opened up more in the last two years than in the previous 10.

‘In the five or six years preceding the pandemic, while we had seen the fee-sharing model become more widely accepted, it was still at the stage where many lawyers felt unsure about operating within a revenue-sharing model,’ he said.

‘What happened during and immediately after the pandemic was that many senior, highly experienced lawyers found that they were already operating in a way that reflected a partner-led practice. Many began to question whether there was still a necessity to be operating in a traditional law firm where their ultimate “take” or “entitlement” amounted to roughly one-third of their billables.

‘During the pandemic, they realised that they weren’t so heavily reliant on the infrastructure of their firms. Many of them had experienced a reduction in their ability to access and work alongside associates and support staff, so they began to realise that they could operate in a way that would be well suited to a revenue-sharing firm.’

Louis Rosenthal, managing director of recruitment firm Interlink Talent Solutions, noted that this is a massively competitive market where all firms have struggled to attract and retain talent. He believes the growth in consultancy and fee-sharing firms has continued at the same pace in recent months despite firms throwing money at people to stay.

‘Traditional firms have had all-time-high PEP, which has meant they have the money and appetite to attract and retain the best partners,’ added Rosenthal. ‘I anticipate that this will tail [off] and find a level later in the year as increased salaries and fixed costs start to hit firms’ bottom line.’

One reason for Keystone’s current issues with persuading as many people to join may be the firm’s very success. Research by business advisory firm Hazlewoods reported recently there had been a 38% rise in the number of lawyers at ‘virtual’ firms in the previous year, up from 1,355 in 2020 to 1,875 in 2021, and then more than 1,900 in 2022.

Alongside the biggest firms in the market – such as Keystone, gunnercooke and Setfords – there has emerged a number of smaller firms following similar models. It is possible that Keystone saw a flat number of applicants because the market is becoming saturated. The choice for qualified lawyers is not just in leaving traditional practice, but in selecting which fee-sharing firm to join.

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