Focus: Alternative business structures – Law and new order

There’s more to the ABS model than attracting the man in the street and procuring external investment. Partners at the big corporate firms, take note…

So, alternative business structures (ABSs) have nothing to do with big commercial firms, do they? The announcement that DLA Piper is investing in a prospective ABS called LawVest and aimed at the business market put paid to that notion once and for all.

LawVest is a holding company developing a new ‘market-disrupting brand, pricing and service delivery model’ for business clients. DLA Piper has a minority stake, alongside HR consultancy business AdviserPlus and various individuals.

Vested interest

The precise details of what LawVest plans to bring to the market remain under wraps, but it seems that, with DLA Piper’s sights set globally, the firm sees the LawVest model as giving it a stake in a part of the domestic market that will not be a strategic priority in future, but where it will still have clients that need advice. LawVest offers a way of servicing them through a different vehicle.

Last month virtual law firm Everyman Legal, which numbers some senior commercial solicitors in its ranks and whose target market is entrepreneurs, announced its intention to seek admission to junior stock exchange ShareMark. The equity it hopes to raise will allow it to build the framework and structure to support a rapid scale-up of its operations.

Early riser

Then there is the fast-growing­Parabis Law, which has developed a £100m business in less than a decade through the union of a range of insurance-related businesses, including both claimant and defendant law firms. It is already a de facto ABS and will become a multidisciplinary practice (MDP) when allowed.

It has also indicated strong interest in private equity investment as Parabis continues to develop. It recently joined forces with an ­accident management company to offer insurance companies and brokers a white-label ABS to revolutionise motor claims processes.

What’s it all about?

So it is wrong to think that ABSs only affect the high street. Similarly, there is a potent misconception that ABSs are just about external investment. These myths mean many partners assume that, because they are not on the high street and their firm does not need a capital injection, they can ignore what is happening. Those who have taken the time to look more closely believe this is deeply ­misguided.

There are stories of investors looking at what they could achieve by consolidating a number of commercial practices; in-house departments becoming ABSs and offering their services to other businesses, turning a cost centre into a profit centre; corporate finance boutiques made up of lawyers, accountants, bankers and the rest; and many other ideas besides. Until ABSs go live, however, most ­people are keeping shtum in public.

“Although most big firms toe the line and say they don’t want external investment, it wouldn’t surprise if some did because they see a strategic advantage in funding expansion,” says head of the Legal Services Institute (LSI) Professor Stephen Mayson.

James Hunt, who set up Everyman Legal, is more dramatic about the changes to come. He sees the division between business and consumer law as “an artificial construct of the past 25 years”. Entrepreneurs will not care about it, he predicts.

“They’ll see a mouth-watering £10bn fragmented legal market at the bottom of a £23bn market. Having introduced significant efficiencies, and hence enormous profits, from the bottom of that market, they’ll move up the value chain.”

David Green, chief executive of MTA Solicitors, a large consumer firm that is also building up its ­commercial presence in London, agrees. He can see considerable attraction to offering a white-label service to potential new entrants to help them mitigate risk.

“Once people get a handle on the private client-SME [small and ­medium-sized enterprise] market, they’ll start offering services to the big boys,” he says. “Someone, somewhere is going to say that the commercial market’s where the money is and have the balls to put a group of top-notch lawyers together and target it.”

Comin’ at ya

Anyone who has seen a Quality-Solicitors legal access point in their local WHSmith, or walked past a Lawyers2You stand in any of around 50 shopping centres across the ­Midlands, will know that the face of legal services is changing: law is being taken to the public, rather than the public having to seek out the law.

Another aspect of this is the ­growing use of online legal services, and particularly automated document creation, for both consumers and SMEs. In addition to the various services provided through more than 30 banks and other financial institutions by Epoq Legal, next year will see the entrance to the UK of two big US document operations attracted by the opening up of the UK market: LegalZoom – said to be the best-known legal brand in the US – and Google-backed Rocket Lawyer, through which 40,000 business ­contracts were created last year.

Much has already happened ­without ABSs. There was nothing from a regulatory point of view to stop QualitySolicitors happening a decade ago, but it has taken the mood music of the Legal Services Act (LSA) to encourage innovation.

QualitySolicitors is at heart a marketing collective aimed at building a national brand. While common ­service standards, fixed fees and group buying are also features of the offer, in the main it is about becoming the Specsavers of the legal world – visible, accessible and well-known.

It has first-mover advantage, with 110 firms and 220 branches around the country already, not to mention its WHSmith stands. With private equity house Palamon Capital ­Partners taking a majority stake in it last month, chief executive and former barrister Craig Holt now hopes to reach the goal of more than 1,000 branches in every significant population centre by the end of next year.

Holt warns commercial lawyers that they need to take note of what is happening on the high street, because it will be coming to them too.

“The key themes that will be seen on the high street – dramatic consolidation, decreasing asymmetry of information between consumer and provider of legal services, need for innovation in efficiencies, service delivery and fee structures and the greater significance of brands – are exactly the same as will be seen in the corporate/commercial markets,” he says.

“It’s about cutting cost and ­stripping out inefficiency,” agrees Christopher Tite, head of corporate finance at LG. “City lawyers need to be extremely aware of what’s happening on the high street, because to a degree it’s already manifesting itself in their marketplace.”

Tite was an early pioneer in delivering legal services in a new way when, with Mark Lewis (now head of outsourcing at Berwin Leighton Paisner), he established Tite & Lewis in association with first Pricewaterhouse-Coopers and then Ernst & Young. Tite & Lewis merged with LG in 2004.

Mid slide

There is already a number of catalysts for change in the corporate legal ­market – and various responses, most notably various forms of outsourcing. Tite sees ABSs as one of the main drivers of that change. It goes without saying that nowadays ­corporate clients are becoming more demanding, and Tite says they are increasingly aware that they can source legal services in different ways and are influenced to some extent by what they see on the high street.

Karl Chapman, non-lawyer chief executive at LawVest, acknowledges that “the magic circle firms aren’t ­losing any sleep at the moment”, but he and others draw a distinction between the big M&A market, which will remain the province of the largest firms, and more regular commercial advice, which is already being driven down to lower-cost niche or regional practices. Green at MTA notes that you do not have to go to a big firm to find a good employment lawyer, for example.

Law firm consultant Sara Dixon of Firm Beliefs sees this downward ­pressure as good news for those mid-sized firms that conventional wisdom says are facing the big squeeze.

“In-house lawyers are segmenting their work more effectively,” argues Dixon.

It is also possible that pressure will come up from below. If new entrants can make inroads into the SME/ owner-managed business market, then those law firms that are losing work at the bottom may start pushing upwards instead to try to pick off work from those above them.

Licence to bill

As of today there is just one ABS in the country – Leicester-based ­volume conveyancing business Premier Property Lawyers. The business has been able to steal a march on its mainstream legal competitors because it is regulated by the Council for Licensed Conveyancers, which is already up and running as an ABS licensing authority. The Solicitors Regulation Authority (SRA) will start licensing ABSs early next year – and then the fun should really begin.

But it is likely to be slow at first – this is a ‘wait and see’ profession. The SRA says it is in “serious discussions” with just 15 potential ABSs consisting of six different types of organisation: law firms, claims management companies, major retailers, accountancy firms, loss adjusters and private ­equity houses.

It seems a safe bet that among those 15 are Irwin Mitchell, which has already announced its intention to become an ABS and seek external capital, and the legal arm of the Co-operative, which, as detailed on page 7, is committed to becoming an ABS at the earliest opportunity.

Like any law firm that has become a legal disciplinary practice since 2009 and admitted non-lawyer ­partners, Irwin Mitchell will have to become an ABS anyway within a year of the new regime kicking in. It shows how the LSA has already changed the business, according to managing partner John Pickering. This year the firm restructured the way it operates, creating a two-tier structure and a new corporate vehicle.

“Since then we’ve seen other firms also signal their intention to adapt the way they work and, from the client’s perspective, I think that’s a good thing,” says Pickering. “Our focus now is on making sure we’re in the best position possible to take advantage of any opportunities that may arise.”

While undoubtedly it will use some of the money it raises to enhance an already slick and almost revered proposition in consumer legal ­services, surely it will make further investment in its growing corporate capability, particularly in real estate.

Co-operative Legal Services already has a 400-person legal business, built in just five years; its last full-year revenue of £24.2m would place it 89th in The Lawyer’s top 100. Profit in 2010 stood at £3.9m. The news that it has recruited two very well-known ­family lawyers to launch a family law service next year shows that it is prepared to invest in names who give it ­credibility in its bid to become the lawyer of choice for consumers.

Neil Kinsella, chief executive at Russell Jones & Walker (RJW) – another firm that has led the way in recognising the need to confront the challenges of the LSA – reckons it will be “healthy” for the legal market if non-City names are up there (in time) among the biggest practices in the land, showing that they are viable options for the best talent.

Mayson at the LSI also foresees the ranks of the ‘big’ firms becoming more mixed. Businesses such as the Co-op are not going to be run as partnerships focusing on average profit per equity partner, and in time “this will influence the City”, he reckons.

Cash call

Kinsella’s ambition has long been for RJW to be one of the leading ­independent consumer law firms in the UK. To do that he says the firm needs scale and “a voice in the market”, as well as capital to achieve it. “The sort of scale we’re talking about – real transformational change – will need external capital,” he adds.

Although there is more to ABSs than external investment, it nevertheless preoccupies a lot of minds. But of course the required disciplines of external investment will be very different from what law firms are used to – sharing ownership and even management decisions would be hard for some partners to swallow, as would having to leave profit in the business rather than taking it all out every year. Listing would also mean far greater public scrutiny of the business and a share price buffeted by forces far beyond the firm’s control.

The reality, however, is that the partnership is a “capital-constrained” model, points out Matthew Gwynne, who works with law firms at private bank Investec. But investment need not mean private equity or flotation and giving up control – a corporate structure that allows project-style finance is one option. “It’s difficult to get security out of an LLP apart from personal guarantees,” he says. “There might be other ways with an ABS.”

A report last month from Espirito Santo Investment Bank, which is advising Irwin Mitchell, predicted that, while the top firms may be able to put off changes in the short to medium term, “such an attitude would be unsustainable in the long run”.

It identified two key drivers for the take-up of external financing. “The need for capital to fund expansion and law firms’ doubts about the internal strength of their organisations,” was one, the other being “the need to retain human capital and keep pace with labour market forces.”

But the problem of gaining buy-in from the whole partnership, and the expectation of ‘significant returns on equity holdings’ are among the ­factors holding investors back.

Bring and buy

George Bull, head of professional practices at accountants Baker Tilly, sees two immediate attractions of ABSs to City firms. The first is MDPs, thought to have been killed off by Enron, which did not actually involve an MDP, but revived by the LSA.

The ability to bring in non-lawyers as partners enables firms to recruit well and broaden their service offerings.

Tite at LG says the biggest accountancy firms may feel constrained by the Sarbanes-Oxley Act in the US to get into MDPs, but that “there’s a market segment around integrated services that some people will want to buy”. In the same way that Deloitte snapped up surveyors Drivers Jonas last year, maybe a surveying business will look to buy a law firm that brings commercial property expertise in-house, he speculates.

One firm that will embrace MDPs is Scotland’s Turcan Connell, a specialist private client practice that was spun out of Dundas & Wilson in 1997. It offers a wide range of ancillary services, such as investment management, financial planning, accounting and taxation, and runs a family office for around 30 families.

It has signalled its intention to become one of the first ABSs in ­Scotland (under rules that are a bit behind those south of the border and which also require majority lawyer ownership) to allow its non-lawyer staff to become partners and also look at strategic partnerships with other parties interested in the ­interdisciplinary model.

Bull’s other opportunity is ­restructuring firms in a way that allows partners and others to realise their capital value – a tantalising prospect for a profession brought up on the notion that you leave a ­partnership with the capital you put in 30 years before and nothing more.

Bull describes it as a “hybrid” LLP, whereby the firm creates a corporate member of the LLP, probably as the controlling member. Anyone could potentially hold shares in the ­corporate member, post-ABS at least, including external investors, staff through a share scheme and retired partners, who could continue to receive incomes from their ­investments.

Even if a firm sets this up initially purely as a way to move out older partners, the structure is nevertheless in place to accept external investment and also have shares as a currency for acquisitions.

“[Unlike partnerships, a model that investors are backing away from], a company with a share ­structure is an entity that equity investors can understand,” says Bull.

Robert Colthorpe, a partner at ­corporate advisory firm Europa ­Partners, emphasises the importance of lawyers seeing ABSs as a way to develop “more effective and efficient capital structures”.

Farther investment

Then there is the international angle. The SRA reported in July that it had received “strong interest” in ABS investment from abroad and from non-English law firms that want to use the structure. They include one of China’s largest law firms, which said it is planning in time to create an ABS targeting Chinese investors to the UK with a one-stop shop of professional advisers, including solicitors.

Stephen Kines, a former partner at Linklaters and Bird & Bird, creating for the latter a Central and Eastern Europe practice, has set up a ­consultancy dedicated to advising major Chinese and Indian law firms on creating ABSs to help them build global practices from the UK.

While there are various ways these firms could expand to follow their clients – much in the way that UK and US firms have done historically – Kines is promoting London as the foundation for the first stage of branching into Europe.

“London would be a good place to start for the first-level investment [in expansion] because of the financial markets and also because of the ­flexible structure provided by ABSs,” he asserts. Africa and the Americas would be stage two, he adds.

Kines says an ABS structure would allow for “flexible relationships” at the beginning, falling short of full ownership, and rather than a traditional branch arrangement ensure an “equality of relationship” between the City lawyers recruited in London and the parent firm in China or India. This would be vital to create a ­“platform for talent”, he says. It would also enable external investment.

This is further evidence that ­ultimately ABSs are just a tool, not an end in themselves. Colthorpe at Europe Partners says firms need to focus on what they need to do ­strategically and then work out how best to engineer it, whether as an ABS, a Swiss Verein or some other structure.

ABSs are undoubtedly coming to the City – not as fast as they are to the high street, but there is a lot more happening than managing partners across the Square Mile let on.

“Lots of practices in the City are looking at the implications of ABSs,” says Dixon at Firm Beliefs, “either as an option for their own growth and development, or out of fear, ­suspicion or knowledge that their competitors are doing it with a real purpose.”

Who’s who in the new legal world – some of the names you may have seen

AA Legal Services – currently an online legal document service powered by Epoq Legal, with Cogent Law (part of the Parabis Group) sitting behind it for further advice. Over-50s organisation Saga, which is owned by the same private equity business as the AA, has a similar offering.

Access Legal – the consumer brand of Shoosmiths.

Claims Direct – the once damaged personal injury (PI) brand resuscitated by Russell Jones & Walker. Now looking to branch out into other areas of work.

Connect2Law – intra-lawyer referral and support service set up by Manchester firm Pannone in 2001 and now franchised out to 20 regional ’hub’ firms across the UK. Around 2,500 law firms are currently members. Pannone also has an affinity arm that offers a white-label legal service.

Co-operative Legal Services – the legal arm of the Co-op, set up in August 2006 and committed to becoming an ABS. Now has more than 400 staff and a turnover in excess of £25m. Offers PI, will writing, probate and estate administration, conveyancing and employment services, adding family to this list next year.

DAS – this leading legal expenses insurer has long been committed to becoming an ABS and has even named the firm, Bristol’s CW Law, that it will take over, bringing most of the legal work currently sent out to panel firms in-house.

Face2face Solicitors – another would-be national network and more recognisably an actual franchise, a ’law firm in a box’ for start-ups and breakaway groups. Launched its first branch in Shrewsbury recently. – a budding national branded law firm network developed by City solicitor Gary Yantin, which he describes as a “branchise”.

In-Deed – AIM-listed online conveyancing service, set up by Rightmove founder Harry Hill and fronted by Location, Location, Location presenter Phil Spencer, which refers clients to panel law firms.

Lawyers2You – the consumer brand of Birmingham law firm Blakemores, with stands in shopping centres and events across the Midlands. Set up nearly two years ago, it now delivers more than 6,000 leads a month. Blakemores wants to franchise out the concept and is trialling it with six firms. The aim is for a network of 150 independent law firms by 2014 as well as international expansion. – a joint venture between Yorkshire law firm Last Cawthra Feather and Ajaz Ahmed, the founder of Freeserve, to launch city centre law shops where consumers will be able to receive immediate help. Will pilot in Leeds and if successful franchise it around the country.

QualitySolicitors – growing national network of law firms that have adopted the network’s branding and standards. Currently 110 firms in 220 locations, plus stands in large branches of WHSmith, and growing fast following private equity investment last month. Aim is to be in 1,000 locations by the end of next year.

Simplify the Law – a new franchise set up by former City solicitor Jonathan Brewer pitching to practices of between two and 20 partners with turnovers from both private client and commercial work of £2m-£10m.