23 July 2012 at 09:35 BST

Firm foundations

Private equity companies were eyeing up English law practices even before the legislation allowing them to buy-in hit the statute books. Jonathan Ames talks to a prominent business angel boss who's struck early

James Caan: 'an exciting investment'

James Caan is not the type of character generally associated with the still ultra-conservative provincial English legal profession. Sure, he’s partial to a stripy suit, but of the sort of width and brightness of chalk – along with flamboyant open-necked shirt – that would normally have the Rotary and golf club regulars muttering about ‘not being one of us’.
And it’s not just the clothes. Mr Caan made his considerable fortune – estimated to be worth some £70 million – in the personnel business (what is now referred to as human resources and capital, by those who prefer to replace one word with three). In the mid-1980s he launched London recruitment company Alexander Mann, and by 1993 he’d added executive head-hunting business Humana International to the portfolio.
Six years on, he first sold Humana and in 2002 he flogged Alexander Mann to take a break for studies; in 2003 he completed Harvard Business School’s advanced management programme and then set up London-based private equity house Hamilton Bradshaw.
As an outspoken, entertaining entrepreneurial firebrand, Mr Caan has few equals, a point recognised by the BBC when it recruited him to sit on the panel of its Dragons’ Den, a television series designed to scout young, innovative talent.
If that all sounds like a story out of the script-writing department at an old Hollywood studio, it will come as no surprise to learn that even his name has an element of fantasy about it. Born in Pakistan 51 years ago, he was originally Nazim Khan before officially changing his name in his twenties, having admired the work of the Rollerball and A Bridge Too Far star.
So not a typical member of the legal profession, but that is what he has become. Several weeks ago, Hamilton Bradshaw announced it would take advantage of recently implemented UK legislation that allows the creation of alternative business structures in the legal profession and, pending regulatory approval, invest in solicitors’ firm Knights, a 23-partner, three office practice based in Staffordshire.
Partnership meetings at Knights will never be quite the same again.

At first glance, the legal profession might appear to be outside your comfort zone of standard business investment. What attracted you to the sector and to Knights specifically?
From my perspective, this is one of the most exciting investments I’ve made this year – I feel I can bring a lot of value to the business.
Law is interesting to me because I’ve primarily been investing in people-based businesses for the past 25 years. So it is a sector I understand very well.
When you invest in people-based businesses you have to be very aware of the challenges those businesses face – and it can be challenging getting over the culture of a company, which can be heavily dominated by personalities. Unlike with a product, where you can change colour or design, it can be much harder to implement change in people-based businesses.
But this is something I understand. When I launched Alexander Mann we started it from scratch and grew it to revenues of about £400 million a year, operating out of 50 countries.
Knights has been established for nearly 250 years; it’s got a very strong following and brand – some of the customers have been with the firm for generations. When doing the due diligence, one of the things we found that was quite remarkable was that there were secretaries who had been with the firm for 35 years, partners who have been there for 40 years. It seems to be one of those firms that is very talented at keeping its people. And the people seem to be very loyal.
The business is also of a decent size for us – about 130 staff, with 23 partners. We also did quite a lot of due diligence on some of the customer base and were pleasantly surprised at how some of the clients had been with the firm for many years. Reputation, quality, integrity, professionalism – the firm has all that. As an investor, what you need is a business that has a foundation that you can build on.

You’ve already spent time at Knights. What have you told the partners and wider staff about the future?
The core message I delivered was the strategy is to introduce a way of working closer with clients. Rather than a client using us as a transaction house, I want the firm to move to a situation where we have several of our lawyers based on the clients’ premises, becoming an almost in-house counsel and using the platform of Knights to deliver the service.
Currently, a lot of clients use the firm for specific matters. We are now saying, ‘Let’s get closer.’ Rather than having one-night stands, let’s develop a more deep and meaningful relationship with the clients. If that means allocating a lawyer to each of our clients to get to know them – actually spending some time based at their premises – then let’s do it.
Once you understand the nature of a business, what it is trying to do and what its strategy is, the quality of the advice you give is greatly enhanced. By knowing the dynamics of a client’s business, lawyers will be able to provide better advice.

Can you be more specific about a business plan for the firm?
In the first year, as we get to know the business and the customer base, one of the things that we’ve got to be very careful about is that we don’t change the culture, values and principles of the firm. You need to contain the fabric of the business to ensure that what has kept the firm going for nearly 250 years is retained.
But, ultimately, you want to develop and introduce strategies looking at new markets and opportunities and talent. The idea of identifying potential opportunities for us was quite exciting. The idea of scaling the business and identifying other niche areas where we can attract other firms of five to 10 partners that will benefit from a bigger scale. If we acquire those firms, we can leverage off the customer base of Knights.

Along with another provincial English law firm – Cripps Harries Hall – Knights has been involved in a unique outsourcing deal with global law firm Lovells, a deal that has survived that firm’s 2010 merger with US practice Hogan & Hartson. Did that innovative scheme – known as the ‘Mexican wave’ – factor into your thinking when looking at the firm?
One of the key components around the firm that appealed to us was that they had done a fantastic deal with Lovells, which essentially outsourced the processing of property legal work for Prudential.
When you win a contract of that type, if you can execute and deliver it successfully, what you want to do is replicate it.
When I was with Alexander Mann we essentially did the same thing – we were a transaction business, in other words, a head-hunting business that evolved into an outsourcing business, where rather than taking individual assignments from clients, we were proposing to clients that they outsource the whole of that area to us. That approach revolutionised the business from being a straight-forward headhunting firm to what is now one of the largest outsourcing businesses in Europe.
When we looked at Knights we thought it had done that successfully and maintained that contract for nearly 10 years. So why not go out and look at other law firms? We’ve got a facility outside London, which means having a much lower cost base, our partners are charging £250 per hour, when a typical London firm will be charging £450 per hour.
We feel strongly that the market is under a lot of pressure in relation to margins and pricing, so if the large commercial law firms want to retain some of those bigger clients, they can keep the core London work, but outsource some of the easier work to a firm such as Knights.

Britain’s Legal Services Act 2007 – which reformed regulation of the profession and created the concept of alternative business structures – has been highly controversial, both in England and abroad. Will the reforms ultimately be accepted by the profession?
When you look at the changes that took place when Margaret Thatcher deregulated financial services and allowed foreign banks to operate out of the UK, a lot of people questioned whether that would work. But ultimately, as a consequence, those reforms built one of the biggest industries in this country and created thousands of jobs.
You can scale law businesses quite well – they can be developed and grown. There must be about 11,000 law firms in the UK, but around 8,500 have four partners or fewer. So it really is one of the most fragmented sectors of the economy.

Nonetheless, there remain harsh critics of external investment in law firms. Many would argue that bringing businesspeople and outside capital into the equation will move the practice of law away from its fundamental, independent rule-of-law and justice core to a purely profit-generating motive. Have you any sympathy with that view?
When you’ve got external investment in a law firm, it shouldn’t and won’t change the nature of the service or the quality of the delivery. Ultimately the work can only be delivered by lawyers.
Private equity firms such as ourselves will have no client contact – we are not delivering or executing. The idea is to give law firms a greater financial platform. Historically, every year law firms more or less distribute all their profits out and there is little financial platform or balance sheet to speak of, because conventionally if you’ve got a group of partners that have made ‘x’ amount of money, generally that profit is shared among the partnership. Therefore their ability to raise capital to grow the firm is challenging.
I’m absolutely certain that there are certain firms that have already achieved the scale where they have the financial muscle and do not require capital. Every firm has its own strategy and vision – and it’s perfectly OK for a firm to say ‘we’ve achieved a certain status in our market and we are self-sufficient’. But I expect that would cover less than 10 per cent of the total number of English law firms.
Just because you’re a good lawyer, doesn’t mean that you are a good businessman. At the end of the day, these are commercial businesses – they employ people, they have overheads, they have costs. Therefore having people who have the expertise of running, managing and building businesses is a different skill than being a good lawyer.
That’s where the industry could benefit from alternative business structures – it will allow it to bring a level of expertise into the firm that it potentially lacked in the past. When you are running firms essentially by committee, decision-making can be paralysed.
We looked at a number of firms and one of the key things that we found was that it is quite difficult when you’ve got a firm that has 20 partners to make decisions.
Something that a private company could decide on in a week, a law firm will take three months to deal with. Essentially, lawyers are technicians – but, generally speaking, good technicians don’t make good entrepreneurs.

When one of your investments in the middle of the last decade – the Benjy’s sandwich shop chain – went bust, you reportedly said that you’d done just about everything wrong in relation to that business that you could have done. Did you learn lessons from that failure?
Yes, absolutely. The key thing there was that I’m not a retailer. My background and my success have been in people-based service businesses – advertising, recruitment, headhunting, media – I understand them. Retailing is a whole different ballgame. There you are dealing with product – and with the sandwich shop we were dealing with perishables – it was not my area.
With the law firm, I’m dealing with people who deliver a service for a fee and have a fixed costs base, which is no different from most of the other businesses I’ve dealt with. I certainly feel far more comfortable with this type of business.

CV -- James Caan
Based in London, Mr Caan is the founder and chief executive of private equity business Hamilton Bradshaw, which specialises in buy-outs, venture capital and real estate investments. In 1985 – at the age of 25 – he founded the Alexander Mann Group recruitment agency in the British capital. Eight years on he launched headhunting business Humana International and the private equity firm Hamilton Bradshaw in 2003.

A version of this interview originally appeared in The Times newspaper on 5 July 2012.

 
   
 
 
 

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