Ignore the Legal Services Act at your peril
7 January 2008
While the partnership as a business vehicle may not yet be dead, it could be nearing extinction.
Since the introduction of the Limited Liability Partnership Act in 2000, many law firms have converted to LLP status. The herd mentality will mean that, before long, very few firms will hold on to their traditional partnership structures as a business vehicle.
However, many firms would also argue that, although the legal structure has changed, very little beyond that has altered. Firms have continued to grow and have successfully retained their cultures, which is what really matters.
But arguably a much greater threat now exists. A threat that could not only condemn the partnership structure to extinction, but also fundamentally change the culture and way in which law firms operate.
The Legal Services Act 2007 will blow away many of the restrictions that require law firms to operate within limited constraints.
Some firms will decide that the act will make no difference to the way they are structured. But to deny its existence, or the impact it will have on the legal market, could leave a firm unnecessarily exposed.
What happens when your nearest competitor raises funds to acquire new teams? Or when it lists on the stock exchange, massively increasing its profile?How do you react when competitors use new funds to invest in IT and 'commoditise' services, enabling them to provide advice more cheaply? And how will you deal with new entrants to the market that may attack traditional income streams?These threats may not just come from law firms, but from retail outlets, multidisciplinary practices, overseas businesses or even entrepreneurs with capital backing.
One way to analyse this issue is to consider which type of law practice is most likely to seek external capital or list on a stock exchange. So far the only listed law firm in the world is Australia's Slater & Gordon.
Size-wise, Slater would not be in the top 80 firms in the UK, but its focus on the personal injury market, predominantly for trade unions, sets it apart. This type of work lends itself to efficiency improvements through the greater use of IT and leverage. The firm has also stated that it wants to grow by acquisition. Both areas require significant additional funds, so the reasons for listing are understandable.
So which UK firms are likely to follow suit? It seems to be accepted that magic circle firms are unlikely to be tempted. Why should they be? They are already extremely successful and do not need additional capital.
But what about the mid-tier? Some are grappling with increasing costs and flat income levels, as well as expensive, but supposedly necessary, overseas office networks. The Legal Services Act could provide the opportunity to rebrand and reinject not only new capital, but also new direction.
And what about regional firms, whose business could be split and the more 'commoditised' elements hived off?One needs to remember that the Legal Services Act was not designed to allow partners simply to realise capital in their business. Instead it was intended to enhance competition and improve the provision of legal services for consumers.
Twenty years ago the stockbroking community went through a similar revolution, the so-called 'Big Bang'. Along with other industries such as utilities, gaming and transport, deregulation had a huge impact.
It would be a brave law firm that ignores the existence of the Legal Services Act.