Settling the bill
21 May 2007
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It is a truism to say that nobody knows for sure what the future will look like, but if there is one person well placed to predict how the UK legal market might look in a few years, it is Law Society president Fiona Woolf.
Woolf announced her aim of visiting every firm in the top 100 to hear first-hand their issues when she took office in July last year. It was a well-timed trip. The UK legal market is on the verge of a regulatory shift that will see structural changes on a scale never before seen. Carter, Clementi and the Legal Services Bill all loomed large in Woolf's discussions with dozens of managing partners nationwide.
"There's immense curiosity out there," she says.
Now, partway through her term as Law Society president, Woolf is nearing the conclusion of her ambitious mission. And she has also extended it by visiting a range of firms outside the top 100, including bulk legal services providers such as Southport-based Barnetts Solicitors.
By the end of her term in July Woolf will have heard from more than 100 managing partners about what their ambitions and fears are about the future shape of the market.
What Woolf has found confirms that, along with the immense curiosity, there is also a great deal of activity out there. Although the Legal Services Bill is still currently passing through Parliament, a number of firms are already positioning themselves to take advantage of the opportunities it presents.
As reported by The Lawyer (12 February), national firm Russell Jones & Walker is looking to become the first law firm to take advantage of the Clementi reforms by radically overhauling its entire business structure. The firm, which acquired personal injury (PI) company Claims Direct in February 2003 and recently hired the former head of legal policy Louise Restell from Which? to help hone the firm's consumer focus, is hoping to be the first to utilise an alternative business structure (ABS) as a way of transforming itself into a household brand for consumer legal services.
Elsewhere, South East firm ASB Law has launched a standalone volume business focusing on process-driven residential conveyancing and remortgaging, PI and uninsured loss recovery work (The Lawyer, 14 May), while the first 'Tesco law'-style legal service was launched on 30 March by the Co-operative Group (www.thelawyer.com, 30 March).
Two of The Lawyer's shortlisted entries for this year's Niche Firm of the Year category at The Lawyer Awards 2007 next month - South West public sector-focused property boutique Davitt Jones Bould and Scottish volume debt recovery and remortgage specialist Anderson Fyfe - are firmly in favour of the opportunities created by the Clementi reforms for expansion purposes.
Meanwhile at the bar, 7 Bedford Row is looking to be the first set to go down the ABS route by bringing in other professionals to support its activities.
"Chambers have standard business assets such as the brand, staff and the building," says 7 Bedford Row chief executive Steven Allen, "but they don't tend to be good at leveraging any of the value from these assets. The impact of Carter and Clementi will be to force chambers to be larger and to begin better leveraging economies of scale."
On Woolf's trip she has so far visited more than a dozen firms that have standardised and systematised their delivery of legal services in preparation for the changes. These include forward-thinking firms such as DMH Stallard, which has been on an acquisition spree recently aimed at beefing up its volume business offering.
"They're clearly going places," says Woolf. "They gave me a list of current rules that get in the way of consolidation."
Firms such as DMH, ASB and Anderson Fyfe are fashioning themselves into businesses poised to take advantage of Clementi-style innovations, such as third-party capital and partnerships with non-legally qualified professionals.
"There's a significant degree of sophistication of thinking going on," claims Woolf. "There are six different forms of ABS. Five are opportunities for us and only Tesco law is a threat.
"It's also clear that many firms are very interested in taking non-lawyers on board."
Who will make the first move?
So there is an appetite for change and activity, although Woolf says that, as regards outside equity or floating, nobody she has met has shown any desire to be the first mover.
Woolf's last comment chimes with the prevailing mood in the market in relation to law firms floating. According to George Bull of accountancy firm Baker Tilly, the idea of firms going public or selling off stakes to private equity houses appears to have dampened down.
"The market's perception has steadied," argues Bull. "It's now more sober and reflective. There's a realisation that cashing out comes at a price."
A recent survey commissioned by financial adviser Noble & Co, however, suggests that law firms would offer investors a strong investment case, including high returns on capital, good cashflows and high-quality earnings (The Lawyer, 14 May).
Meanwhile in Australia today (21 May), bulk legal services provider Slater & Gordon made its stock market debut, proving that there is indeed an appetite for public shares in a law firm.
On top of that there is already anecdotal evidence from research carried out for this year's inaugural The Lawyer UK 200 Annual Report, which points to more favourable interest in law firms attracting some form of external capital than last year. Baker Tilly's Bull, however, believes it is likely that only a limited number of law firms will eventually seek a stock market flotation.
"I think there'll be candidates for a float, but it's difficult to see the logic of a listing for a mid-tier firm that doesn't major on the delivery of retail legal services such as debt recovery, remortgages or insurance litigation," argues Bull. "Why take in external money with strings when you can debt finance expansion via the banks? The most likely model will be the consolidator, where external equity is used to acquire other firms and to achieve economies of scale. But it will depend on the business streams."
Bull's argument highlights the trend towards increasing market segmentation, which will become even more pronounced as the structural changes are implemented. The takeover of Scottish commoditised lending and recovery practice Golds Solicitors by Irwin Mitchell in March was one of the first major deals struck specifically to take advantage of the new dawn. It is unlikely to be the last.
For a growing number of operators in the legal market, the watchwords are now commoditisation and consolidation.
The emergence of the segmentation trend was most visible in last year's The Lawyer UK 100 Annual Report. The firm with by far the highest average profit per equity partner (PEP) was two-partner litigation shop Avalon Solicitors. It trumped Slaughter and May's average PEP of £1.12m by more than £6.5m.
The revelations by The Lawyer (9 April) about the profit of Doncaster-based, three-partner PI boutique Beresfords served only to underline the trend. Like Avalon, Beresfords made much of its money (£97.8m to be exact), from miners' litigation claims. Senior partner Jim Beresford made £16.8m in a single year.
So one vision of the future is that of increasing polarisation between those firms providing low-cost bulk services and the high-margin players at the upper echelons of the top 100. Comparing the relative profitability, revenue per lawyer and practices of these firms, simply because they all reside in the UK top 100 on turnover grounds, will become increasingly difficult.
But the reality is likely to be that the availability of external equity and the increasing commoditisation of retail legal services will eventually have an effect on the upper echelons of the legal market.
"It's going to change the way business models work and change pricing structures right across the market," says Bull. "Firms will have to look at their own competitive positions, which means working smarter."
Bull's argument is echoed by Woolf, herself a former partner at CMS Cameron McKenna, who says that the trend towards standardisation and systematisation is already drawing the attention of some of the larger firms.
"It may be that some areas that are under enormous fee pressure are already applying different models to the way they're carrying out business," says Woolf. "That means standardising and systematising practice areas such as M&A and banking, which is already happening."
Clearly, the future is now.