The Managed Service Organization is the key to PE investment in Law Firms The business case for PE participation in law firms is just so strong that current regulatory hurdles will not prevent this from happening. It seems unlikely that PE will want to be actively involved in the day to day legal operational aspects of a law firm, this will like today be left to the lawyers. Regarding legal work and client contact nothing will change, lawyers remain autonomously in control. Private Equity will likely focus on operations and expansion. Their interest is to grow the value. This as such is aligned with the interests of the partners. With today’s regulatory hurdles still in place in most jurisdictions, the structure of the Managed Service Organization (MSO) is what is making most sense. The MSO separates all non-legal elements from the legal. One should think of all back-office, the office space, the brand, the capital requirements. The legal services arm and the MSO cooperate under a service level agreement, whereby the legal arm receives services in exchange for a fee. Partners and potentially other lawyers and non-lawyers working with the firm will have a stake in the MSO of which the PE is the largest shareholder, but probably not the majority shareholder. One could easily think of other ownership structures for PE depending on creativity and regulatory requirements, but the core elements will remain that PE will not want to interfere with the legal aspects and that partners will have a share in whatever entity that will be created. Building a case for Private Equity (PE) participation and Management Service Organization (MSO) models in European law firms requires navigating a legal landscape that was significantly reinforced by a major European Court of Justice (ECJ) ruling in late 2024. While the court recently upheld strict bans, the argument for proportionality and necessity remains the primary pathway for future reform, especially when framed through the lens of market evolution and the "inconsistency" of current member state regulations. In December 2024, the ECJ delivered a landmark judgment in Halmer v. Rechtsanwaltskammer München (Case C-295/23). The court ruled that German laws prohibiting purely financial investors from holding shares in law firms are compatible with EU law, specifically Article 49 TFEU (Freedom of Establishment) and Article 63 TFEU (Free Movement of Capital). The court reasoned that a member state can legitimately assume that a lawyer’s independence and compliance with ethical obligations (like avoiding conflicts of interest) could be compromised if they are beholden to financial investors focused on profit maximization. This ruling currently serves as the "shield" for bar associations across the EU. To challenge this status quo, the focus must shift to the "suitability" and "necessity" prongs of the proportionality test. One could argue that while protecting independence is a legitimate aim, an absolute ban is no longer the "least restrictive means" available in a modern economy. •                     The Inconsistency Argument: Under EU law, a measure is only "suitable" if it pursues its objective in a consistent and systematic manner. One could point to the fact that many EU countries allow ‘non-professional’ ownership in other sensitive, public-interest professions like pharmacy (e.g., Commission v Italy, C-531/06) or medicine. If the "public interest" and "professional independence" in these sectors can be protected through regulatory oversight and structural safeguards rather than total bans, the legal profession's absolute prohibition appears discriminatory and inconsistent. •                     The MSO Model: One could defend the MSO model by emphasizing the separation of clinical (legal) decision-making from administrative and financial management. By drafting "ethical firewalls" where the PE investor manages the business side (HR, IT, marketing) while lawyers retain 100% control over case strategy and client advice, this provides a less restrictive alternative to an outright ban. •                     Technological Necessity: One could argue that the "necessity" of outside capital has changed. The legal industry now requires massive investment in AI and legal tech to remain competitive and provide "Access to Justice." If law firms cannot access equity markets, they are forced into debt-heavy models that may actually create more financial pressure on lawyer independence than stable equity partners would. The fact that nearly 12% of law firms in England and Wales operate under Alternative Business Structures (ABS) provides a real-world "control group" for such argument. There has been no documented systemic collapse of legal ethics or independence in those jurisdictions. This empirical data suggests that the "risks" cited by the ECJ in Halmer are speculative rather than inevitable, making a total ban "manifestly inappropriate" in a modern Internal Market. Article 15 of the Services Directive (2006/123/EC) requires member states to review requirements that limit shareholding in professional companies. While the ECJ in Halmer gave states a wide "margin of appreciation" here, one could argue that as the market for legal services becomes increasingly digital and cross-border, the restrictive German or French models create a "chokepoint" that hinders the development of a unified European legal market, thus violating the spirit of the Directive. In the MSO model, the law firm remains 100% owned by qualified lawyers, satisfying the "professional control" requirement, while the MSO owns the firm’s non-legal assets, such as real estate, IT infrastructure, and the employment contracts of non-legal staff. The "Ethical Firewall" is established by ensuring that the MSO has no access to the firm’s "privileged" data or client files. Utilizing a "cost-plus" or fixed-fee compensation structure for the MSO removes the direct link between a specific legal outcome and the investor’s return, thereby neutralizing the "profit-at-all-costs" risk that the ECJ cited as a justification for the ban. This structure mirrors the "Double-Veto" system used in other highly regulated sectors. In this setup, the MSO manages the "business of law" while the lawyers retain a "professional veto" over any business decision that touches upon ethical duties. By codifying this in the firm’s articles of association and making it subject to audit by the national Bar, the MSO model meets the proportionality test: it achieves the goal of capital infusion (modernization) without sacrificing the "public interest" goal of lawyer independence. The absolute ban is an "over-inclusive" measure that ignores these sophisticated governance tools already proven effective in the medical and accounting sectors. To navigate the requirements that forbid profit-sharing with non-lawyers while satisfying tax authorities, the MSO must transition from a "revenue-sharing" mindset to a "service-delivery" mindset. In the eyes of European Bar associations, any fee that fluctuates purely based on the law firm's profit or gross legal fees is a "red flag" for illegal fee-splitting. Therefore, the case must build a "defensible fee architecture" that relies on objective market metrics rather than the firm’s financial success. The legal argument for the MSO's fee structure rests on the "Services for Value" principle. One must argue that the law firm is not sharing profits, but rather paying a "commercially reasonable" price for essential infrastructure. To do this, the Management Services Agreement (MSA) should avoid a flat percentage of legal fees. Instead, the fee should be composed of discrete charges for specific services—such as a fixed monthly fee for IT systems, a per-head fee for HR management, and a market-rate lease for office space. Unbundling the fee demonstrates that the MSO is earning a return on its invested capital and operational effort, not on the lawyer’s professional advice. From a tax perspective, particularly in high-scrutiny jurisdictions like Germany (under the Außensteuergesetz) or France, the MSO and the law firm are "related parties." This triggers the Arm's-Length Principle, requiring that the transfer price for management services mirrors what an independent third-party provider would charge. One should use the Cost Plus Method (CPM) or the Transactional Net Margin Method (TNMM) to build the case. Under the CPM, the MSO identifies its total costs (salaries of non-legal staff, software licenses, etc.) and applies a documented "markup" (typically 5% to 15%, depending on the risk and value added). This markup is legally defensible as a legitimate business profit for the MSO, distinct from the "legal profits" of the law firm. A significant risk in the MSO structure is the "Constructive Dividend" (Verdeckte Gewinnausschüttung in Germany). If the tax authorities determine that the MSO is overcharging the law firm to siphon off profits into a lower-taxed entity or to benefit PE investors, they may recharacterize those payments as non-deductible profit distributions. This would result in a double-taxation penalty. To mitigate this, the case must include a "Benchmarking Study" that compares the MSO's fees to third-party providers like ADP (for HR) or commercial real estate firms.

Private Equity investment is rapidly emerging as a transformative force in the legal sector, offering law firms access to capital, operational expertise, and new growth opportunities. While regulatory barriers remain in most jurisdictions, innovative structures such as Managed Service Organizations are enabling firms to engage with outside investors without compromising legal independence. The evolving landscape — marked by increased partner mobility, generational shifts, and the rise of artificial intelligence — demands that law firm partners proactively assess the strategic implications of PE investment. Firms that embrace these changes may gain significant competitive advantages, but careful consideration of opportunities and risks remain essential to ensure long-term success.   The past months, not a week went by without at least 2 or 3 articles on Private Equity investments in law firms. The biggest news arguably was about McDermoth considering a PE funded MSO structure. Where previous Alternative Business Structures (ABS) were limited to smaller law firms in jurisdictions that allow, outside ownership, McDermoth is a 1800 lawyer, 20+ offices giant, with about 2.2 billion in revenue, operating in jurisdictions where ownership is strictly limited to registered lawyers only. After the pandemic the legal sector has seen some unprecedented changes. The rapid emergence of Artificial Intelligence is one of them, but also the executive orders against some law firms by the Trump administration. The disruption of international trade and the global economic order are causing firms to reassess their international presence, causing expansion and reduction into and from certain jurisdictions. Today it is still hard to predict the impact of AI on the legal industry. It seems unlikely that the traditional pyramid structure will survive, which will have direct implications for leverage and pricing. It is not unlikely that AI will fundamentally disrupt the delivery model of legal services. A small number of firms such as A&O-Shearman (Belfast) and Clifford Chance (Newcastle) seem well positioned with their advanced AI integration and low-cost legal support centers. Most firms, except for perhaps the absolute elite, will need to reinvent their business- and service delivery model. Talent has become increasingly central to certain segments of the market. In New York today, profit shares of 25-30 million are no exceptions among the top-firms. Partner mobility has increased in the most legal markets, and has become a key element in growth in revenue and profitability. The ability to hire and retain talent is now central to a firm’s success. In the next five years or so the industry will see a great number of today’s rainmakers retire, putting a lot of emphasis on structured succession planning. At the other end, the Gen-Z young talent has a slightly different perspective on career and success in life. The above are just a selection of challenges facing law firms today. It would be easy to dedicate a whole article on this topic, but this in this article I want to focus on the opportunities and risks of Private Equity investment in law firms. Law firms offer an attractive investment potential to Private Equity because of the traditionally high client retention and the predictable cash flows. There is still a lot of market fragmentation, allowing for a buy-and-build approach. Law firms generally have a solid reputation and a great growth track-record: ever since the 1950ties profits have consistently gone up, not even Goldman Sachs can say that. From the law firm’s perspective, engaging with outside investment would offer access to capital for expansion, talent, technology or acquisitions. Private Equity also adds operational expertise, bringing professionalized management and performance monitoring. It will help with succession planning, addressing partner retirements and ownership transitions. Private Equity will also create economies of scale, consolidation, talent retention, brand visibility and access to the investor’s ecosystem. This sounds like a win-win situation, right? Reality is that outside ownership in law firm is currently prohibited everywhere except for a handful of areas, most notably England and Wales where Alternative Business Structures have been allowed since 2007 (Legal Services Act). Further, Arizona, Utah and Washington DC, spring to mind, as does Australia. The results so far have been lackluster: most investment has been in low profile smaller firms that did not grow to great fruition. Because of this ban on non-lawyer (co)ownership, Private Equity and interested law firms are now looking at the Managed Service Organization (MSO), whereby all non-legal functions and activities get separated from the lawyer work. This would  include all staff services, office lease and also the brand. There will be a Service Level Agreement (SLA) and partners will also get a stake in the MSO. This structure allows for the legal arm to remain fully independent and in compliance with the current bar regulations, although some would argue that even this would not be allowed. The discussion on the regulatory topic revolves very much around independence. The ideal theoretical lawyer is totally free from any commercial considerations and only acts in the best interest of the client. In my experience today indeed lawyers act in the interest of the client, but that does not mean that they are free from commercial considerations. In effect big-law already has been a business for many years. Law firms have a strong focus on profitability and partners are subject to predefined performance criteria. Partners that trail behind are kindly requested to leave the firm. Partners are mostly no longer partners in the true sense of the word, they are shareholders instead. Structures are optimized for tax purposes and limiting professional liability. Also in the day-to-day operation of the firm, much is left to management and not to the partner meeting. It has been reported that both for the merger between A&O and Sherman & Sterling and recently Ashurst and Perkins Coie, the partners were not consulted prior to the merger being announced. The theoretical ideal has long been overtaken by the reality of law firms operating very much like any other business. So the question is if PE ownership really represents a fundamental threat. I am not convinced that will be the case. From the point of perverse incentives, Litigation Funding seems more risky to me and this has by now been widely accepted. “You can take change by the hand, or it will grab you by the throat” (Churchill) Today there seems to be a lot of momentum to make PE investment in law firms happen. On 28 November we organized a seminar on the topic which drew great attendance, I doubt if this would have been the same half a year ago. In August 2025, six business law firms in Sweden left the Swedish Bar Association to become AGRD Partners, a new legal service group backed by Danish PE firm Axcel. It is most likely that this is only the start and over time more law firms probably from other jurisdictions will join AGRD partners. Today that would mean leaving their National Bar Association. Leaving the Bar for most lawyers will be a price too high to pay. Membership provides a quality guarantee, legal privilege and the right to litigate in court. But once you peel away the emotions and look clinically at the facts, most work lawyers do, certainly in an advisory practice, could be done without membership. Bar Associations will need to navigate carefully, but proactively and with speed to avoid structurally losing members in the near future. Once a number of law firms will adopt PE investment, this will disrupt the level playing field. Such firms will have a significant competitive advantage over their peers, leaving those peers trailing behind. Private Equity will certainly not be the best way forward for every law firm. As the legal sector stands on the brink of significant transformation, now is the time for law firm partners to proactively evaluate the strategic opportunities and risks of Private Equity investment. By being proactive your firm can position itself to capitalize on new growth avenues, maintain competitive advantage, and navigate the evolving landscape with confidence. We will be most happy to facilitate this process.

September 2023 it was announced that three Kirland & Ellis partners would move to Paul Weiss. According to people close to the matter, the trio would each receive $20 million in annual compensation at their new firm. This is quite exceptional as today at Am Law 25 firms, only a handful of partners have comp in excess of $20 million. The news will undoubtedly leave a number of partners elsewhere in town feeling all at once very unhappy and under-rewarded. Modified lockstep For compensating its partners, most firms today have a system that includes elements of merit based compensation as well as seniority based. Some well-known firms with pure lockstep have introduced merit based differentiators in order to retain and attract star partners. What the modified lockstep looks like varies wildly. Most firms have adopted a set of – sometimes very detailed and complicated – rules for calculating each partner’s profit share. Others involve a compensation committee or have the managing partner decide. Compensation for yardstick Why is partner compensation such a hot topic in many law firms? Partners in business law firms invariably earn more than 99% of the population, so why not just be happy with it and focus on clients and family? One reason is that partner compensation is used as a yardstick for the success of the firm. Partners always compare PEP with other firms, seeing a close competitor have higher comp will trigger a heated debate on the firm’s strategy and sometimes results in star partners leaving. Also the opposite is true: a highly competitive partner compensation is a prerequisite for lateral hiring of rainmakers, which in turn could help the firm become even more successful. This is what’s happening at Paul Weiss. Which compensation model is best? Ideally in a firm, all partners are equally successful in the market and are happy to cooperate with each other. If the bandwidth between partners is narrow, there will be no need for merit based differentiation and lockstep will help avoid partners starting to compete with each other. Each partner will always act with the interest of the firm in mind. Unfortunately there is no ideal world in which each partner is equally successful and also partners are inclined to prioritize self-interest before firm-interest. This will even happen in lockstep firms as each partner is under pressure to meet his/her target. Partners start monopolizing client relationships and are trying to get files in which also other partners are active, to be administered under their name. Now the solidarity which underpins the lockstep is compromised, cracks will start to appear. Collaboration will suffer and star partners will demand action against slackers. One could also start from the other end assuming that self-interest is the norm and make the compensation fully merit based. This could even go as far as partners charging internally for helping out in another partner’s file. Such ‘eat what you kill’ compensation systems will allow for a very large bandwidth in partner performance, but provide no incentive for collaboration. Fully merit based systems also give young new partners a difficult start as in order to make an income they will have little alternative than working in other partners files at a reduced rate and without quickly growing a client base of their own. Since both lockstep and ‘eat what you kill’ have their problems, it comes as no surprise the hybrid modified lockstep has become the most popular. In reality the modified lockstep suffers from the same issues: collaboration remains an issue and the weak partners irritate the star partners. “There is no evidence to support that compensation impacts partner performance” Carrot and stick As stated, in our practice we have seen a great many different partner compensation models. Most of them have a few things in common: they favor a small group of partners and they aim to influence partner behavior. Let’s examen both in more detail. Mostly compensations systems favor the more senior partners with an established practice. One argument could be the firm must prevent such rainmakers to leave. While there certainly is some truth in that, it also creates problems, notably when it comes to succession. Also this group is typically also involved in the leadership of the firm whether it be formal or informal. Granting themselves the largest cut can in a way be self-serving. And I have not even mentioned ‘origination credits’, which also disproportionately favors this group. Over there years we have done multiple in depth analysis and never have we found any evidence that individual partner performance and behavior can be significantly influenced by compensation. Never have we seen a weak partner show better performance after his/her compensation was cut. Receiving less money will not transform a weak partner into a strong partner. This is similar for other aspects that are part of a partner compensation formula: rewarding collaboration hardly increases real world collaboration. Partners that feel comfortable collaborating will collaborate regardless and those that prefer to work on their own will continue to do so even it this means they will miss out on a small percentage of their compensation. As a rule of thumb: partner compensation is not the right tool to change the status quo. Only culture can do that. The bigger picture Partner compensation is one of those topics that we come across a lot when working with our clients. Many law firms spend disproportionate amounts of time discussing how to divide the profit among the partners. The problem I see is that having lengthy conversations on how to distribute profit does not make the firm as such more profitable. These discussions are just inward looking and a time and emotions consuming energy drain. We have found there are typically two triggers for discussing partner comp. The first is heavy lifters complaining about partners that seem to enjoy a free ride and don’t put in the effort. The other trigger is the wish to change partner behavior, typically this means stimulating collaboration. As mentioned before, there is no evidence that partner compensation changes partner performance. Taking away money from a weak partner will just legitimize their weakness. Giving more money to a top performer will only keep him/her happy for so long. We have looked in depth at lateral movements of partners across a number of markets. In some markets lateral movements are common in other markets they remain rare and are frowned upon. One thing partners that move firm have in common: the primary motif for moving is rarely money. Typically, they have lost confidence in their firm’s strategy or have developed cultural or interpersonal issues. A partner that likes the firm culture, gets along with other partners and feels supported, is unlikely to leave for more money. Using PEP as a yardstick for performance also has its flaws. Generally we at TGO Consulting prefer to look at profit margin, revenue per lawyer and a number of other indicators more relevant to a firm’s performance. Bottomline Law firms are well advised to have a permanent focus on performance and profitability on a firm level and not so much on an individual partner level. Partners should spend less time discussing internal matters and more time identifying and sharing business opportunities. Firms should invest in creating or maintain a result driven, inclusive, collaborative culture. Partner compensation should not disproportionally favor a small group and should be supportive for young partners who are still developing their practice. Any system that meets these criteria will do. Writing this article I noticed there is so much to cover when it comes to partner compensation, that it is impossible to squeeze it all in 1000 words. Potentially this is a good topic for my next book, what do you think?

this page still functional but outdated - please visit our new homepage Reports TGO Consulting conducts research into aspects of the legal market worldwide and publishes reports that provide insights into both clients’ buying behaviour as well as the organisations of legal service providers. We collect and analyse market data, conduct in-depth interviews as well as quantitative surveys, whichever will be fit for the purpose at hand. We are currently, amongst other, working on a report on legal markets in Africa, as well as a report jointly with a Fortune top-10 company that will examine current and future tools in buying legal services. Partner mobility in the German market This is the first report that presents an in-depth analysis of lateral partner moves in the German market over a longer period of time. It covers the hiring activity of the 25 top-ranked law firms in the German legal market since the start of 2011. For the first time, it is revealed that the German lateral hiring market has evolved to reach an unprecedented high and that partners are shifting across the board. An analysis of the data provides an insight into the practice areas that are most concerned and which type of firms are hit the hardest by equity partners seeking opportunities elsewhere. In a sector where the hunt for talent is fierce and law firms are scrambling to shape themselves for the opportunities to come, top lawyers are simply in too high demand to be loyal. The results of this report can be seen as a sign of the times we can expect ahead. With Brexit on the horizon firms will jostle to position themselves in order to benefit from a shifting market. In an ever more competitive playing field the fittest will survive. A PDF version can be downloaded for free by clicking on the report. If you are interested in a complimentary hard copy please do not hesitate to request one here . Commoditisation of legal services Few of us have failed to notice how clients are changing the manner in which they purchase external legal services and their efforts in putting pressure on pricing. At the same time, law firms are reporting more or less business as usual. How can this be? TGO Consulting undertook a quantitative survey amongst lawyers aimed at canvassing to which extend there is a real downward pressure on the price of legal services. Senior lawyers from over a 100 business law firms across Europe were invited to participate on-line, on an anonymous basis. Further, 15 general counsel, or persons in charge of managing outside legal services, were interviewed face-to-face on the subject of commoditisation of legal services. All interviewees represent internationally operating companies that are large buyers of legal services. The results presented in this report are thought-provoking and we hope that our conclusions stimulate a further debate. A PDF version can be downloaded for free by clicking on the picture of the report on the left side of this text. If you are interested in a complimentary hard copy please do not hesitate to request one here .

Jaap Bosman and Vincent Cordo. Book on the realtionship between law firms and clients. Value Matrix and Creation-Production-Devide "Transforming relationships between law firms and their clients" About the book During the past 50 years or so the relationship between clients and their lawyers has fundamentally been the same. For sure the 2008 Financial Crisis rocked the boat a bit, but things soon went back to normal. In general, despite occasional critical words, clients are happy with their lawyers. Relationships tend to be loyal. Despite ‘daily’ communications, there is however surprisingly little dialogue. Law Firms have limited understanding of the inner workings of their clients and vice versa. This book will explain in detail what the drivers are on ‘the other side’. In doing so the book will explore how the use of data analytics will soon transform the legal industry and how the relationship between law firms and their clients must be reinvented to enable law firms to still be profitable while clients receive better value. A must read for anyone working in the legal sector! Free updates and information sharing The topic of this book is the ever-evolving relationship between clients and their law firms. Due to the growing popularity of Legal Operations, technological developments and the rise of Alternative Legal Service providers and other market disruptors, it is impossible to publish a book that is completely up-to-date. We have therefore created a website www.bosman-cordo.com through which the information in the book will be complemented and updated. We will share information, statistics, and graphs with you as our reader for free. So, visit the website regularly and use the opportunity to share your thoughts and let us know what you would like us to publish next.

TGO Consulting - Award winning strategy consultants for the legal sector. Serving a global clientbase. Enhancing law firm profitability. what we do TGO Consulting are award winning business consultants focusing on the legal sector. We have a strong client base spanning most of Asia, Europe and the Americas. Our approach is fact based and result driven. We help our clients to maintain or improve their profitability. We work on the basis of a Financial Business Analysis© for which we have developed our own unique standardized model. This FBA© will highlight low hanging fruit and provide a benchmark against the market. Having decades of experience in the legal industry, we know the dynamics of partner groups inside out. During the process this will help overcome resistance and create buy-in. "everything must change for things to remain the same" - Guiseppe Tomasi di Lampedusa - Private Equity investment, the new normal for law firms? Partner Compensation reality Preferring Profits over People articles of interest about us If it comes to serving a global client base and experience in working in different jurisdictions across the world, TGO Consulting is second to none. While understanding your home market and culture, we bring a wealth of experience in best market practice around the world. We know the legal industry inside out, past, present and future. We know your competitors and we know your clients. we strongly focus on enhancing our clients’ profitability the power of truly offering global best practice our new book Right now the world is facing unprecedented challenges. The business of law no exception. A New Dawn helps lawyers navigate the crisis. Practical and easy to read, just what you need today. a new concept There is no linear relation between time and value. We created the Creation-Production-Divide Concept©, a revolutionary new way to explain where the value is. This concept will fundamentally change the business of law. we strongly believe being a lawyer is about human skills a human-centric approach Being lawyers ourselves and having gained almost two decades of experience in private practice and in-house, we understand the dynamics of the partner group like few others. Although we always focus on our clients’ financial performance, we are strongly aware that the business of law is a human business before anything else. Understanding peoples’ drivers and behaviours is key to achieving lasting results. power curve Succession remains a sensitive and complex topic. The TGO power curve© analysis immediately shows succession and leadership vulnerabilities in the firm. This is just one of our data-based models in use. in the press 1/1 Interview on legal technology in La Gazette du Palais 未来十年，律师事务所的五大趋势 Article on the future of the legal profession Feature article in ACC Docket on how to prioritize for inhouse lawyers