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The Oracle

The law firm as a business

updated on 27 September 2022

Dear Oracle

I know that I need to understand how a law firm operates as a business to be commercially aware. What exactly does that involve?

The Oracle replies

Reading time: four minutes

You're right that law firms are first and foremost businesses, which means that knowing how they make a profit is crucial – but that’s just the starting point.

To stand out to graduate recruitment, you must understand who a firm’s clients are and what services they use the firm for, which in turn means knowing what type of firm it is and how it’s structured.

What type of law firm is it?

Researching different firms is essential before applying for a vacation scheme or training contract. For example, do you want to work at a commercial firm in the City, a national/regional firm, or a smaller family law practice?

You can read this LCN Says ‘City versus regional: how do you decide?’ to help you reach a decision.

Each type of firm will serve different clients and operate in various practice areas.

Consider whether a firm has offices in other countries – this will tell you a lot about its business model and strategy. Clearly, a firm with offices abroad is regularly involved in cross-jurisdictional work, such as transactions between multinational companies. To serve such clients effectively, it’s essential to be able to work with lawyers in other countries and collaborate across borders.

Who are the firm’s clients?

A City firm’s clients may be:

  • large international businesses;
  • banks;
  • insurance companies;
  • governments; and
  • other public bodies.

While a national firm’s clients can range from big companies to small start-ups and private clients, to name just a few.

As legal advisers, lawyers provide expertise on how to achieve clients’ aims. Clients also need legal expertise to get things done. When a deal is agreed, the parties involved want to ensure that it’s legally valid and that the terms of the deal are enforceable by law.

Lawyers also play a crucial role in resolving disputes that may arise during the deal negotiations or after the deal has been struck – one method lawyers use is called alternative dispute resolution.

Commercial lawyers also provide clients with an ongoing legal perspective on achieving their commercial objectives.

How does the firm generate income?

Law firms provide legal services to their clients in return for payment, but that’s not all. Traditionally, lawyers charge for their time (this is called ‘billable hours’) by recording each unit of time they spend on a piece of work for a client (eg, one unit is six minutes). From this, the partner in charge puts together a final bill for the service that the client must pay.

You can read ‘Time recording: the ultimate guide’ to better understand billable hours.

However, clients are increasingly demanding fixed fees or an upper limit to what can be charged by firms for the work that they do, which puts pressure on firms’ profitability.

How’s the firm structured?

Law firms are generally partnerships, not companies, where partners make all-important decisions on the running of the firm. Many firms set up as a limited liability partnership (LLP), a partnership/company hybrid.

Some partnerships operate traditionally, where decisions are discussed and made collectively. Others operate more like companies, appointing a committee of partners to manage the firm.

Each equity partner owns a portion of the firm in return for making a significant financial investment in it when they are invited to join the partnership.

For more information, see LawCareers.Net’s guide to law firm partnerships.

Where do the firm’s profits go?

The firm’s profits, after all salaried employees are paid, are divided up among the equity partners. However, becoming a partner does not always mean gaining a stake in the ownership of the firm – it’s possible to be a partner while still on a fixed (but very handsome) salary.

Is the firm affected by wider economic conditions?

A time of prosperity and significant economic growth will of course mean lots of deals and business transactions requiring the services of lawyers, while an economic downturn could mean that there’s less (or different) work to go around in cyclical practice areas, such as real estate.

Read this Practice Area Profile for more information on working in commercial property/real estate or listen to it via the LawCareers.Net Podcast.

Meanwhile, conventional wisdom holds that there’ll be more work for insolvency and restructuring lawyers during a recession. Many thought covid-19 would have an overall negative impact on the labour jobs market, but research shows that the legal profession remained stable and even thrived during the pandemic.

Read these LCN articles for advice on boosting your commercial awareness: