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Sector trends

Embracing the alternative

How legal firms can benefit from the opportunities presented by alternative business structures rather than maintaining the status quo.

When alternative business structures (ABS) were first introduced by the Legal Services Act of 2007, it was greeted by some as the legal profession’s apocalypse.

The act allowed non-lawyers to have a financial stake in a law firm, which many feared would create a marketplace dominated by big corporates churning out low-quality legal services.

In fact the uptake of ABS by the legal sector got off to a slow start, with the first ABS licensed by the Solicitors Regulation Authority (SRA) in 2012.

Jump to 2019 and much has changed. But the SRA’s decision to liberalise the sector looks just as prescient and no less disruptive than was previously imagined. Almost 1,300 firms are now operating as an ABS in England and Wales, of a total of more than 10,000 law firms, according to the UK Legal Services Market Trends Report 2019. And they’re twice as likely to anticipate growth than traditional practices.

Creating a sustainable business model

For Viv Williams, chairman of consultancy Symphony Legal, the disruption to the sector was not caused by ABS but by a traditional model resistant to change.

“The disruption is a consequence of a profession failing to plan for the future,” he says.

It was this staid approach that contributed to the regulator seeking to make legal businesses more sustainable as a going concern and their services more accessible to consumers.

The traditional, often male-dominated partnership model required new partners to invest in a firm when they joined. These partners would then reap the benefits of any profit made, often sharing it out between them rather than reinvesting it into the business, restricting both cash flow and further growth.

“If the partners themselves did not want to invest in their firms, they survived by the generosity of the banks, who were looking for the high cash balances in law-firm client accounts,” says Williams.

Since the implementation of the international banking regulations Basel III, these deposits are no longer as attractive to banks. And requiring investment from new partners is not always an option for firms today, as many younger or future leaders do not want the responsibility of ownership.

The ABS model has encouraged increasing volumes of private equity into the sector, providing firms with investment capital and allowing them to retain value and run the practice as a business – an advantage they had not previously enjoyed.

Investing in growth

The opportunities presented by private equity and external investment have resulted in some household names converting to ABS structures, marketing legal services in new and innovative ways to to deliver solutions.

And where private equity is concerned, growth is the goal. For example, Doorway Capital, a private-equity business specialising in law firms, took a 100% stake in law firm Simpson Millar.

Traditional firms that insist on clinging to an outdated model have good reason to be anxious. They will inevitably be competing with firms that have converted and can operate a more capitalised, agile and forward-thinking business

Doorway founder Steve Din says: “Our equity is targeted in three ways in this business: we’re very keen to make sure that that business invests heavily in technology; a large amount of our capital has been set aside to ensure the law firm develops its own brand and develops its ability to market on its own two feet; and it also has a war chest, which allows it to draw money from us to acquire other law firms.”

While there is significant interest from private equity in the profession, many firms are too small to benefit from this. For those who want to take advantage of the ABS model, other options include incorporation or selling the business to employees through an employee ownership trust.

Transforming for the future

Traditional firms that insist on clinging to an outdated model have good reason to be anxious. They will inevitably be competing with other law firms that have taken the step to convert and can operate a more capitalised, agile and forward-thinking business. And they also face a secondary threat from outside the legal profession, with other industries adding legal services to their portfolios.

Williams says: “We have big national brands such as Direct Line coming into the legal market, and we have opened the door to accountants and IFAs by deregulating legal services in traditional private-client work such as wills and probate.”

However, despite the fear that ABS would pave the way for accountants – particularly the Big Four – to steal law firms’ lunch, this has not proven to be the case. Accountancies have indicated less a desire to tackle the law firms head-on than to provide integrated services that combine with tax, consultancy, finance, IT and project management. This presents law firms with potential opportunities through collaboration and partnership, as well as possible threats.

Adapting to meet demand

Law firms cannot be complacent and need to invest to equip themselves for the future.

The big accountancy firms are readily adopting AI and machine-learning technology whereas many law firms have been slow to do so due to the significant upfront cost.

Author Richard Susskind, who has written extensively about technology and the future of professional services, says the Big Four are ahead with their legal technology and, while the legal sector itself is making progress, the great leap forward has yet to emerge.

Making this kind of investment is of crucial importance to any business, as it will help to reduce costs and increase efficiency.

Firms also need to start adapting the way in which they deliver legal services to meet evolving customer expectations. For example, many firms are still charging an hourly rate for their services, whereas clients and customers want certainty and pricing services on an estimated price model.

Moving with the times

The figures speak for themselves. Over the past seven years, there are 700 fewer firms pracitising conveyancing, according to the Land Registry, while the number of firms offering legal-aid services has fallen 20% in five years. Further to this, the Civil Liability Bill will affect personal injury firms, many of which do not have a sustainable business after April 2020.

“Law firms that practise in the traditional way are no longer sustainable and predictably will either merge or fail,” says Williams.

Meanwhile, he is seeing an increasing number of traditional firms setting up a ‘lifeboat’ ABS, readying themselves to convert at the point when there is no alternative. Perhaps it is worth firms considering whether it is better to make the move now, embracing the opportunities presented, rather than waiting for the last call.

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