Keystone CEO, James Knight (courtesy photo)
I wrote in my most recent column that the COVID-19 crisis was forcing long-gestating changes to our industry to come into being. I focused mostly on the damage these changes would wreak on firms that have failed to prepare for the future. But it won’t be all gloom and doom once this crisis lifts. Many firms have been working hard at future-proofing their operations over the past few years and stand to be validated as the legal industry moves into a post-COVID world.
I spoke a few weeks back to the leader of a firm that’s been ahead of the curve, James Knight, CEO of Keystone Law. With 350 attorneys in the UK, and a presence in Australia, Northern Ireland, and the Isle of Man, Keystone is part of the growing ranks of the mid- and large-scale cloud-based or “distributed” firms. But it’s not just Keystone’s virtual platform that makes it unique. The firm also happens to be one of the world’s only publicly traded law firms.
Day And Knight
Keystone maintains far less of a real estate and staffing footprint than a traditional law firm, with only four formal offices and 40 support staff. It makes up the difference with a focus on infrastructure and technology. Given that real estate and personnel are typically the biggest expense items on any firm’s income statement, virtual outfits like Keystone are generally set up to weather the coming downturn in the economy better than firms with higher built-in expenses.
Although Keystone may have most of its attorneys and team members working from home, Knight told me that the firm makes deliberate efforts to maintain connections among its people. “We do a lot of events. We do a lot of parties, a lot of lunches, a lot of training sessions, that sort of thing, so people know each other very well.” Knight also said many lawyers plan vacations and activities together to solidify bonds. Keeping distributed networks of people engaged with one another can be like threading a needle, but it’s crucial to developing and maintaining a firm’s sense of culture. In today’s world, where remote working is the norm, firms that have been working for years on how to keep home workers connected have a leg up on most brick-and-mortar firms now trying to figure it out for the first time.
On The Exchange
Keystone’s structure made it uniquely suited to go public under the UK’s loosened laws regarding law firms sharing fees with nonattorneys. There was substantial fear and uncertainty in the UK in advance of those changes, similar to the fear and uncertainty bubbling through the American legal community as our bar associations and courts consider similar changes. Knight reports that the fears have, for the most part, not come to fruition.
Only six law firms, Keystone included, have gone public in the UK since the ownership rules changed nearly a decade ago. Per Knight, that’s because the traditional economics of a law firm align against outside ownership. “If equity is sold off to investors then there’s less money to be shared amongst the partners. It does suit organizations like Keystone because it’s very, very different.” Since Keystone’s partners make most of their money directly off their billings, rather than out of their share of the firm’s overall fortunes, they’re not losing out if the firm sells off some equity to build out infrastructure or reward its stakeholders. They make functionally the same amount.
By being on the vanguard of law firm capital structures, firms like Keystone are able to fund growth in ways not possible in most law firms where partners cling tightly to capital and generally want to maximize short-term returns. But the model also opens up new ways of surviving in the coming downturn. Traditional firms that find themselves in a cash crunch typically either have to make painful cuts or, in some cases, take out long-term loans. Keystone has all those options, plus the ability to sell off equity. Firms like Keystone, therefore, have more arrows in their quiver when major challenges arrive. These benefits, Knight says, are a fair trade-off for the increased administrative burden of reporting requirements.
Different Structures, Different Opportunities
But don’t let that virtual footprint fool you. Knight made it clear that Keystone doesn’t try to compete on cost, something Knight called “a very dangerous game to play.” Firms that gorge themselves on low-cost, low-margin work, like the now-shuttered Sedgwick, find themselves susceptible to shocks if that work ever dries up. Instead, Keystone competes for rainmakers, with the understanding the clients will follow where their attorneys move. Because of Keystone’s lower overhead, its attorneys keep a bigger-than-average percentage of the revenue they generate, which entices the work-generators to lateral over. Rainmakers at traditional firms who are confident in their books and not interested in contributing to a larger pot that might be drained by attorneys whose books have gone away are a key target for firms like Keystone in the coming years.
Looking Outside Of Ourselves
Forced evolution isn’t just happening in the legal world. As the nation’s schools close down for the academic year, learning has moved online at an unprecedented pace. I recently had the opportunity to take a live course via Zoom from MIT professor Hal Gregersen. Called The Innovator’s DNA, the course is based on Gregersen’s book of the same name, which I’ve written about before in this space. It was one of the first live courses MIT offered remotely, and would have been unthinkable at most universities just a few years ago. Yet, going forward, I have to imagine it will be a standard option.
One of Gregersen’s key points is that innovators spend time observing the world around them, seeking out fresh data and figuring out new ways to incorporate their findings into their own lives. As we spend the coming weeks, months, or years sitting in our homes, waiting out the worst of the virus, we have more opportunity and reason than ever to see the new and exciting things being done both in our industry and in the larger world. We would be remiss not to take advantage of this time.
Those who don’t look outside of themselves in the coming months will likely remain unprepared for whatever else the world throws at us next. Those who do may find their next great opportunity to thrive.
James Goodnow
James Goodnow is an attorney, commentator, and Above the Law columnist. He is a graduate of Harvard Law School and is the managing partner of NLJ 250 firm Fennemore Craig. He is the co-author of Motivating Millennials, which hit number one on Amazon in the business management new release category. As a practitioner, he and his colleagues created a tech-based plaintiffs’ practice and business model. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at James@JamesGoodnow.com.