Law firm partners are paying themselves too much and their businesses will struggle to attract external investment because they are not worth as much as the partners believe, a leading commentator has warned.

Professor Stephen Mayson, director of the Legal Services Policy Institute, said partners have to rethink how they reward themselves and what they are being rewarded for. ‘What is the return they’re getting on their investment, not just their financial capital but their human capital too, their time and their expertise?’ he asked.

Giving the keynote address to a seminar organised by the Solicitors Regulation Authority in Warwick, Mayson said third parties will force them to differentiate between the elements that make up their net profit: ‘[There are the] returns on financial capital invested, returns on the labour they give to these businesses, and the bit the third parties are really interested in is whatever’s left.

‘And the sad news for many firms is that there isn’t anything left. If you actually worked out a return to financial capital and a return to labour, they are overpaid. Nobody’s going to invest in them. Nobody’s going to give them a cheque and say, "Waltz off, retire, play golf, go yachting, do whatever you like", because that business isn’t actually worth what it is paying its current owners. So some firms will be in for a shock if they don’t start thinking about the investment and return issue, and indeed their own exit.’

Other elements of a new business model fit for the Legal Services Act 2007 future include how to create value for clients, especially in non-reserved activities which non-lawyers can provide for less. Mayson said it is a ‘flaw’ in the regime that non-authorised persons delivering non-reserved activities ‘are not, cannot and will not be regulated’.

Firms will also need to generate returns for owners, investors and staff. ‘The essence of this is managing for profit,' he said. 'Most law firms manage for turnover... Even if they can understand profit, there are too many profit-takers.’

The final element is the right resourcing, such as whether as many qualified lawyers are required as are now employed, and valuing management.

‘The old normal is not coming back,’ Mayson asserted, and while there would be a place for traditional providers, ‘there won’t be enough room for all those that want to remain traditional’.