Luke Johnson: Trade Unions are stifling New York

The Big Apple's trade unions are pushing up the cost of doing business, serial entrepreneur Luke Johnson says. He also argues that the standard fee model for legal firms should be abolished.

by Luke Johnson
Last Updated: 06 Nov 2012

I recently went to New York, as ever a metropolis bursting with signs of free-market capitalism. But there were also constant reminders that it's a union town too. I went past the location of our ill-fated Belgo restaurant on Lafayette Street where we lost almost $5m some years ago. We made the mistake of building it using a non-union construction crew, and as a consequence the site was picketed. This included militants sticking a 20-foot inflatable rat outside the entrance. Not exactly a welcome mat for prospective diners.

Later, I met a theatre impresario who told me about a show he produced in both the West End and on Broadway. In London it took three people to handle costumes, casting and management. In New York it required 13 people to do exactly the same tasks - the minimum complement, according to trade union diktat. No wonder staging a musical there costs about five times as much as the equivalent production here.

I also talked to a local hotelier who explained the nightmare of dealing with unions in the hospitality industry. He has hotels where everyone from waiters to chambermaids to bellhops enjoys collective bargaining rights. Unsurprisingly, the wages bill in his hotel restaurants runs to 40% of revenue - despite the propensity for New Yorkers to dispense generous tips - which the servers keep in full. The comparable labour figure here is nearer 30%. Returns for the owners of such establishments there must be miserable.

Meanwhile, the Brooklyn dockyards are steadily dying, as trade shifts to ports where longshoremen and crane drivers don't receive salaries of up to $125,000 a year. And exhibitors at the Javits Center, the major trade show venue in New York, are required to use unionised plumbers, electricians, freight handlers, carpenters and cleaners. As you might imagine, the costs of having a stand there are prohibitive.

Of course, Manhattan continues to prosper, because it is the business and financial capital of the US, which is a vast and hard-working nation. But without such inefficiencies, local monopolies and restrictions, the city could be so much more productive and successful.

One of my favourite branches of literature is the field of self-help writing. Part of the reason I like such works is that critics tend to despise them as sub-intellectual. Yet how can anyone hate books whose overwhelming focus is on personal improvement, and which carry such an optimistic message? Arguably, everything from the Bible to the novels of Dickens falls into this category. At heart, they are all uplifting stories, conveying a belief in redemption and a better future.

The Americans are modern masters of the genre. I picked up a copy of the first great guide to making money while on my US trip: The Science of Getting Rich, by Wallace D Wattles. It was published in 1910 and is the seminal work on what is known as 'The Law of Attraction'. While the philosophy might not be everyone's cup of tea, the simple lessons remain constant over the ages: self-confidence; a plan; action, not words; willpower; positive thinking. All obvious stuff - but not easy to do.

Indeed, I bought another recently published book while there, called The Best Advice I Ever Got, edited by US television presenter Katie Couric, with brief insights of roughly a page each from about 75 celebrities. And of course they offer the same timeless wisdom: 'Trust Your Gut' from Hugh Jackman; 'Learn to Listen' from Steven Spielberg; 'Always Do Your Best' from Jimmy Carter; 'Get to Work Early' from Michael Bloomberg; 'You Quit, You Fail' from Morgan Freeman - and so on.

Cynical Brits may sneer, but to me these aides-memoire are always helpful to us mortals struggling to make progress in a challenging world.

I believe the standard fee model for legal firms, whereby lawyers charge clients by the hour, should be abolished. It encourages them to take longer than they should, overstaff jobs and resist changes that could streamline their services.

In the corporate finance field, income for investment bankers, brokers and M&A accountants has slumped because the boom in deals has collapsed. But not for the law profession, it seems. They still quote just as much for transactions as ever, which means they continue to believe they are worth £500 or more per hour.

But a few breakaway outfits are trying to push a new structure, making use of low-cost suppliers of rote elements of the legal process, based in places like South Africa or India. Consequently, they can undercut their old-fashioned rivals and bid for business on a fixed-price basis. I hope that adopting technology to improve productivity - as happens in every other industry known to man - will eventually come to the lawyers, forcing them to offer more efficient and better-value services.

Yet I suspect posh law firms will still hold themselves in incredibly high regard. A gentleman from Skadden, Arps, Slate, Meagher & Flom emailed asking if I would speak at an International Bar Association conference for no fee. This is an event attended entirely by lawyers, for the benefit of their partnerships. I would have to do many hours' work to prepare the speech on a specialist subject, and obviously attend to deliver it - for nothing.

I'm willing to do free speeches for good causes, but I'm not so desperate for an audience that the above occasion qualifies. It's curious how lawyers think they really deserve to command huge sums per hour, but hold the efforts of others in such low regard.

Luke Johnson is chairman of Risk Capital Partners.

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