Alternative business structures - coming soon!
updated on 17 May 2011
A conference in London some months ago speculated on who might be in the top 20 law firms in the UK in 10 years' time. Instead of the magic circle firms that currently dominate, with incomes topping the £1 billion mark, in first place was legal process outsourcers CPA (incorporating Eversheds), with revenues approaching £6 billion.
It was followed by Tesco Law, Freshfields (incorporating Allen & Overy), Aviva Legal Insurance Services, Clifford Baker Piper (the merged Clifford Chance, Baker & McKenzie and DLA Piper) and US/UK behemoth Skadden Linklaters. Other notable predictions included Deloitte Legal and IP consultants Marks & Clerk (incorporating Bird & Bird).
But what is currently a game turns into business reality on 6 October 2011, when alternative business structures (ABSs) - after a decade in the making - will come into being. A legal profession that has always been slow to embrace any change will have radical change thrust upon it.
What is an ABS?
Until recently, law firms had to be owned by solicitors, barristers in private practice were all self-employed, and legal executives could not become partners or run their own practices. This changed on 31 March 2009 with the introduction of legal disciplinary practices (LDPs). These allow the eight different types of 'official' lawyer, known as authorised persons - solicitor, barrister, legal executive, licensed conveyancer, trademark attorney, patent attorney, notary and costs lawyer - to go into partnership.
They also permit firms to have up to 25% of their partnership made up of non-lawyers offering ancillary services to the main purpose of the practice - ie, an accountant as CFO or providing tax advice, but not auditing, to clients. There are now over 400 LDPs in England and Wales; the main beneficiaries have been legal executives, well over 100 of whom have become partners in their firms.
But LDPs were only a staging post to ABSs. In essence, ABSs will enable lawyers and non-lawyers to share the management and control of a business which provides reserved legal services to the public. ('Reserved legal activities' are those areas of legal work that by law only an authorised person can conduct, including advocacy, litigation and certain aspects of conveyancing and probate work - most legal work is unreserved and so can technically be done by anyone).
ABSs will allow passive external investment and ownership of law firms. They are dubbed 'Tesco Law', even though the supermarket giant has never said it will enter the market
Model behaviour
There is a very wide range of possible models, but these are some of those already identified by the Solicitors Regulation Authority (SRA):
- 'LDP plus' - an LDP comprising three lawyer and one non-lawyer managers with no external ownership. All such existing LDPs will be required to become an ABS.
- A totally externally owned firm where the owner has no interest in the supply of the ABS's services. The ABS would be a ring-fenced legal services arm of the parent external owner. The ABS could take advantage of the parent's corporate brand (eg, 'Nike Law' or 'Fortnum and Mason Law').
- A totally externally owned firm where the owner has an interest in the supply of the ABS's services because it wants to cross-sell non-legal services.
- MDP - a one-stop shop comprising managers from legal and other professions providing legal and other services to clients, for example a niche property practice with surveyors, architects, town planners, property managers, builders, decorators, furniture removers and conveyancers.
- The 'Co-op model' of external ownership with legal and non-legal services. Using a corporate brand, for example, one firm provides funeral services, will-writing services and probate services.
- Private equity investment.
- Floated company (this has already happened in Australia).
- 'Hub and spoke'. The non-licensed hub would be an administration company for back-office services, but could include some intellectual services. The hub would receive a service charge from the regulated spokes which provide the legal services, perhaps under a national franchise or network arrangement. The hub could be licensed, and may need to be in some cases.
- Not-for-profit organisations providing legal services, such as charities and Citizens Advice Bureaux.
- In-house teams expanding into the market, such as local authorities.
All of these possibilities are being talked about, and no doubt some that nobody has dreamed of will emerge too.
Regulatory framework
The work to introduce the regulatory framework of ABSs is now well underway. The oversight regulator, the Legal Services Board (LSB), will license those currently approved regulators that apply so that they can in turn license ABSs.
The SRA will undoubtedly be the main ABS regulator, but the Council for Licensed Conveyancers has also won approval to license ABSs (and is building its competency beyond just regulating conveyancers), while the Institute of Legal Executives is also planning to enter the arena at some point. The Bar Standards Board is to regulate advocacy-focused ABSs from 2013.
The 2007 Act introduces the curious concept of regulators competing for ABSs' business, and it will be for the LSB to ensure that there is not a race to the bottom.
Vanguard of change
There are always people who want to be at the vanguard of any change, and a small number of players at the retail end of the market have made clear their intention to become ABSs once permitted, such as Co-operative Legal Services, which has grown to a £25 million business employing over 300 people in less than five years.
Legal expenses insurer DAS has even gone so far as to name the law firm - Bristol-based CW Law - that it will take over once it is allowed to become an ABS. Hampshire-based car accident claims management company Vamco wants to become an ABS so it can deal with a car accident claim from start to finish. A4e, the giant public sector contractor, is looking at partnerships with law firms which may help it grow its existing legal advice services. And recently, national practice Irwin Mitchell became the first law firm to publicly state its intention to seek external capital (see "Irwin Mitchell prepares to sink or swim").
But they are the exception in being explicit about their intentions. Talk constantly circulates about this law firm meeting with a private equity house, or that law firm dreaming of floating on the Stock Exchange.
It is, however, unfortunate that as the interest of law firms in external investment goes up, the interest of funders seems to be firmly in decline, according to one recent survey of the top 200 law firms.
They have looked at law firms and apparently found the partnership model too far from the corporate structure they are used to and so too difficult to invest in. Instead they are looking elsewhere along the supply chain, such as legal process outsourcing suppliers.
Impact wound
So what will be the impact on lawyers? Will ABSs lead to the destruction of the traditional and local base of the profession, or will they reinvigorate the market through innovative competition?
Here's the rub. Nobody knows. A draft LSB impact assessment last year predicted that ABSs will have differential impacts on small firms. "However, a 'big bang' impact is unlikely and many new opportunities will open up to innovative small firms," it said. It predicted that ABSs will "intensify already extant trends of commoditisation in the legal services sector"', while medium-sized City firms are likely to be the primary recipients of external private capital and benefit from external equity and access to different management structures.
The options for those who recognise the need to do something are growing rapidly. There are brands, networks, referral services, marketing collectives, comparison websites, find-a-lawyer websites and online legal advice portals among others.
Then there are the consultancies that have sprung up to help solicitors organise/manage/market themselves better, as well as various bits of clever technology that firms can buy to revolutionise the way they practise, such as by offering dynamic legal document drafting online, making the client do much of the initial work from the comfort of home. Delivering legal services online in a way that suits Generation Y is a challenge few lawyers have really got to grips with yet.
And, of course, they can go out and try to find an investor (and there are now consultancies to help with that as well).
There is a growing recognition that not everything needs to be done by qualified lawyers, and that work should be done at the right level, highlighting the growing importance of paralegals. Debate over their regulation will be a feature of the coming years.
Quality street
But it is QualitySolicitors (QS) that is leading the way among solicitors. A network of existing law firms which have all taken on common branding (eg, QS Bloggs & Co), it certainly got the profession talking with its deal to place 'Legal Access Points' in up to 500 WH Smith's stores (see "WHSmith and QualitySolicitors to offer in-store legal services"). All QS firms will also soon start opening on Saturdays and introduce a wide range of fixed-fee services. These points will be a place where potential clients can make appointments, get information, but legal 'products' and the like.
Chief executive Craig Holt describes the exclusive deal as a "game changer, providing both the key elements required for market dominance - accessibility and visibility". He says: "It provides everything the Legal Services Act was hoped to provide without the perceived negatives - accessible, consumer-friendly legal services but with the actual legal work being done by expert, leading local law firms and not unqualified staff in a remote call centre.' On the face of it, it sounds like he has a point.
Service challenge
Although ABSs will affect every sector of the legal market, clearly the pressure will be on the high street at first, where much of the work is seen as suited for commoditisation. A significant challenge for lawyers will be to show why clients should come to them, what value they add, instead of going to an unregulated provider of unreserved legal services.
A recent SRA assessment of the impact on equality of ABSs found that there is hope. Consumers of legal services have low knowledge and awareness levels of the market, the authority's research found, although they place high trust in the legal profession and in the individuals employed within the sector.
Recommendation by word of mouth plays a key role in choosing a solicitor, while there is a high degree of loyalty within the market, as consumers tend to return to the same provider for subsequent legal services. Consumers are likely to continue to use existing providers of legal services, despite the changes that are likely to be introduced. So the issue for law firms is the service they provide - people complain about not having their phone calls returned, not points of law.
There is still hope and there is still time. But as the clock counts down to 6 October, and what is now uncertainty about the shape of the new legal order begins to harden into fact, lawyers need to take a hard look at what they do and how they do it.
Though it seems unlikely that 6 October will herald some kind of 'big bang', change is undoubtedly coming - and in fact has been for some time, as more and more non-traditional providers have moved into unreserved areas of legal work. These include a host of heavyweight retail brands, such as banks and insurance companies.
As Bill Gates says: 'We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10." In 10 years' time, law students will most likely be entering a very different profession and market.
Neil Rose is the editor of www.legalfutures.co.uk.
