Beware the stealth ABS revolution

Although they have made a quiet start, ABSs have the power to change the face of the legal sector

Alison Bond

A year on from the first alternative business structure (ABS) licences and the legal sector is beginning to see the effects.

Although the pace of change has been slower than some predicted or hoped, there is no doubt that at the volume end of the UK legal sector ABSs will prompt radical change in the next 10 years. 

The power of the ABS opportunity has been shown through a series of high-profile deals in the volume claims sector. These include Duke Street’s investment in Parabis Law, LDC’s investment in Keoghs, Quindell’s deal with Silverbeck Rymer and Slater & Gordon’s investment in Russell Jones & Walker.

Firms must address the challenge posed by new entrants to the market including consumer businesses with deep pockets and trusted brands (insurance companies and high street supermarkets); international players with sophisticated IT and delivery systems; and providers of services including business process outsourcing. 

But ABS is also an opportunity. Firms can raise funds to invest in IT solutions, operational change, acquisitions and advertising campaigns.  There is much debate about the relative merits of external investor involvement but, like them or loathe them, there is no doubting ABS’s capacity to be a catalyst for innovation. Corporates have spent the past five years improving their operational efficiency. Many would say the legal sector, in serving these clients, needs to catch up.

This year and beyond is likely to deliver continuing consolidation, secondary private equity deals and acquisitions by adjacent service providers.

We have already seen the world’s first listed law firm, Slater & Gordon. One trend is likely to be that legal service providers (listed or not) will cease to be solely law firms and instead provide a broader range of services to businesses or household consumers.

The impact for City law firms will be less immediate. City firms do not face the same need for funding; particularly expensive private equity funding that typically looks for returns of 15-20 per cent per year.  Furthermore, many are limited by their international reach as most jurisdictions do not permit external ownership.

Nonetheless, in a recent UK law firm survey carried out by Deloitte and Winmark, 46 per cent of respondents indicated that they were likely to use the ABS regime.

ABS is not just a question of external fundraising, it is as much about challenging the status quo around service proposition and delivery models – what firms do and how they do it. 

The trend towards increased innovation and expansion into broader service offerings is not exclusive to the volume sector. In future, outsourced IT, HR and facilities management services could be supplied to businesses alongside employment law, property law and litigation advice.

The ABS system may not have arrived with a big bang, but do not underestimate its ability to instigate change, even in a sector known for the uncompromising value it places on tradition.