ABSolutely Fabulous - A Study of Alternative Business Structures and Their Role in a Changing Legal Market

7/27/2019 ABSolutely Fabulous - A Study of Alternative Business Structures and Their Role in a Changing Legal Market

1/17

A study oAlternative Business Structures

and their role in achanging legal market

June 2012


2/17

This study has been commissioned by Fox Williams LLP and undertaken by the legal

research company Jures to urther the debate on the changes taking place to the

legal market under the Legal Services Act (LSA) and, in particular, Alternative Business

Structures (ABSs) which became possible under the LSA.

About the author

Jon Robins is director o the legal research company Jures, reelance journalist and author. He has been

writing about the law or the national and specialist legal press or over 15 years.

Jon wrote The Big Bang Report: Opportunities and threats in the new legal services market(Jures,

November 2009), Shopping Around: What consumers want rom the new legal services market(Jures,

May 2010); The New, New Thing (Jures 2010); and Brave New Worlds: new thinking in legal services

(Jures 2012). They are available at www.jures.co.uk.

Jon is senior ellow in access to justice at the University o Lincoln. He runs www.thejusticegap.com.

About Fox Williams LLP

Fox Williams is a City business law rm. The rm is a avourite with business, nancial and proessional

services clients or the quality o its work, entrepreneurial spirit and responsive, down-to-earth approach.

Fox Williams is well known or its handling o complex legal and regulatory work. It is oten rst choice

or reerrals o work rom other law rms when City expertise is required.

The rms partnership and LLP practice is regarded as one o the UK market leaders. Its specialist lawyers

are sought ater or their experience and negotiating skills, as well as the level o understanding they

bring to both the management and regulation o proessional practices. They are the rst choice or

overseas law rms establishing oces in the City o London.

At the cutting edge o developments in the proessions, they are advising a number o law rms

converting to ABS on structure and relevant law, tax and regulation.

About Jures

Jures is an independent research company dedicated to the legal services market and which combines

expertise rom a number o dierent disciplines: journalism; research; PR and communications; as well as

publishing in both traditional and new media. The peop le behind Jures are the journalist Jon Robins and

Gus Sellitto and Richard Elsen o Byeld Consultancy, the legal PR specialists (www.byeldconsultancy.

com).

The research or this report was carried out by Ben Rigby, a leading legal journalist, together with Katie

Paxton-Doggett and Mary-Carmel Barbour.

About the report

[ 1 ]


3/17

Our research shows that it would be wrong to

dismiss a generally low prole start to the new

regime (only seven licensed ABSs at the time owriting and a delayed start to the licencing regime

o the Solicitors Regulation Authority (SRA)) as

evidence o disinterest by the proession in the

legislation liberalising agenda.

This is a snapshot o a proession in fux. Headline

ndings rom our research reveal that almost

our out o ten respondents (39%) have already

changed their management strategy as a result o

the LSA and over one third (36%) have reviewed

their management strategy as a result o the

LSA in the last six months. Almost two thirds

o respondent rms (63%) have contemplated

- or not ruled out - changing their partnership

structure. Hal o respondent rms (50%) were

aware o their business rivals considering

applying or ABS status.

The possibility o using the ABS model as an

opportunity to renance rms to enable growth

or better acilitate survival in a newly competitive

environment is clear to see. Over hal o our

respondents (54%) described as either compelling

or very compelling accessing private equity (or

other third party investment) to nance their rms

growth as a reason or ABS conversion. Nearly

eight out o ten respondents (77%) identied

access to nance (not available rom partners or

traditional bank borrowing) as either important

or very important when converting to an ABS.

But such radical structural change in the legal

services market does not come without internal

opposition. Loss o control was identied as thebiggest barrier (62%), ollowed by resistance

rom partners (51%). Nor is there much aith

in the new regulatory ramework. Almost hal

o all respondents (49%) said that they were

not condent in the SRAs ability to manage

successully the ABS application process.

What is clear is that the introduction o ABSs is

a catalyst or change in the proession. Many o

the new arrangements, particularly the network

and ranchise operations, could have been put

in place beore the LSA. Firms are responding

to the perceived threat o ABS by adapting their

strategies, even where this does not contemplate

converting to ABS.

The variety o business models o the early

adopters o ABS (rom sole practitioner to

consumer brand and volume conveyancer through

to the rst oreign owned ABS and the rst to be

part o a stock exchange listed company) shows

members o the proession willing to embrace

change to gain a competitive advantage.

The LSA is an enabler and is about new models

or the provision o legal services not yet

contemplated. It is very early days. Expect more.

Tina Williams

Senior Partner, Fox Williams LLP

June 2012

Foreword

This report ollows on rom our 2009 report The Big Bang Report: Opportunities

and threats in the new legal services marketwhich looked at the impact the Legal

Services Act 2007 (LSA) might have on a changing legal marketplace. Almost three

years on, this latest study looks at some o the changes that have taken place since

The Big Bang report as a result o the introduction o ABSs on October 6, 2011.

[ 2 ] [ 3 ]

Methodology

100 commercial law rms were asked to

provide answers to 15 questions using an online

questionnaire and ollow-up telephone interviews.

This initial research was carried out between

February and May 2012. It was ollowed up

with more in-depth telephone and ace-to-ace

interviews. The research questions and answers

can be ound at the end o this report.

A proession in ux

Almostfouroutoftenrespondents(39%)have

ALREADY changed their management strategy

as a result o the LSA [Q4]*.

Overonethird(36%)havereviewedtheir

management strategy as a result o the LSA in

the last six months [Q5].

Onlyatinyminority(6%)hadnotconsidereda

change in management structure [Q5].

Almosttwothirdsofrespondentrms(63%)

had contemplated - or not ruled out - changing

their partnership structure [Q6].

Asignicantminority(14%)hadactually

changed their partnership structure [Q6].

Halfofrespondentrms(50%)wereawareof

their business rivals considering applying or

ABS status [Q15].

Future fnance

Overhalfofourrespondents(54%)described

as either compelling or very compelling

accessing private equity (or other third party

investment) to nance their rms growth [Q9]

as a reason or ABS conversion.

Nearlyeightoutoftenrespondents(77%)

identied access to nance (not available rom

partners or traditional bank borrowing) as

either important or very important when

considering an ABS conversion [Q11].

Sevenoutoften(70%)identiedimproving

the rms cash fow as either important or

very important when considering an ABS

conversion [Q11].

Future models

Onethirdofrespondentswerelookingto

spin o services through an ABS (33%)

or alternatively looking to access external

investment to und growth (29%) [Q8].

Almostonequarterofrespondents(23%)

were interested in being part o a collective

membership organisation with other law

rms to share common services as part o the

network [Q8].

Overonethirdofrespondents(35%)described

ownership by a recognised brand as a

compelling or very compelling reason or

ABS conversion [Q9].

Onefthofrespondentswerelookingto

incentivise sta through oers o equity (20%)

[Q7].

Barriers to change

Lossofcontrolwasidentiedasthebiggest

barrier (62%), ollowed by resistance rom

partners (51%) [Q12].

Regulatoryandtaxissuestoppedthelistof

areas where specialist advice is needed (35%and 41% respectively) [Q10].

Almosthalfofallrespondents(49%)saidthat

they were not condent in the SRAs ability

to manage successully the ABS application

process [Q14].

Executive summary

*Question numbers in brackets reer to the questions in the Appendix o this document.


4/17

[ 4 ] [ 5 ]

The ongoing deregulation o the legal proession

set in train by last Octobers introduction o ABSs

has been characterised by commentators as either

big bang or damp squib.

A proession in transition

Almost our out o ten respondents in our survey

(39%) had changed their management strategy as

a result o the LSA [Q4]. The survey also suggests

how quickly the proession is responding to the

challenges presented by a rapidly evolving legal

services market. O our respondent rms, over

one third (36%) had reviewed their management

strategy as a result o the LSA in the last six

months and, signicantly, only a tiny raction (6%)

had not [Q5].

Change has been a long time coming. Some

11 years have passed since the Oce o Fair

Tradings Competition in the proessions report,

ollowed by Sir David Clementis appointment to

conduct his review o regulation o legal services

in England and Wales in July 2003, which, in turn,

set the scene or the Legal Services Act 2007

(LSA). October 6, 2011 marked the ormal start o

deregulation with the introduction o ABSs.

There was, however, a alse start. The SRA was

not ready to begin licensing ABSs, and it was

let to the much smaller Council or Licensed

Conveyancers to be the rst o the starting blocks.

Premier Property Lawyers, one o the biggest

conveyancing businesses, became the rst ever

ABS. The SRAs licensing regime came on stream

in the New Year and the regulator now reports

around 100 applications. To date, there are only

seven SRA-licensed ABSs. Concerns about the

SRAs readiness to license new entities are refected

in this study - almost hal o all respondents

(49%) described themselves as not condent in

the SRAs ability to manage successully the ABS

application process.

Whilst, in a proession o some 11,000 rms,

a handul o ABSs might suggest a statistically

negligible impact, our ndings contradict such

analysis. The survey indicates a much deeper

structural shit has occurred within the proession.

It might be stretching it to describe the cumulative

impact as having blown apart the established

conventions o the law as has been claimed

(The Times, May 21, 2009 in an article titled Big

Bang will expose law frms to the ull glare o

competition), but the act that almost our out o

ten (39%) respondents had already changed their

management strategy as a result o the Clementireorms speaks or itsel [Q4]. A signicant

minority had actually changed their partnership

structure (14%); and almost a hal o respondents

(49%) were considering it or had not ruled it out

[Q6].

Innovation youve never thought o...

Crispin Passmore is head o strategy at the Legal

Services Board, the oversight regulator that came

into being on January 1, 2009 under the LSA.

We never expected Big Bang. We always

resisted that as a phrase, he says.

Almost two thirds o respondent rms (63%) had

contemplated - or not ruled out - changing their

partnership structure since the October start date

or ABSs last year - a signicant minority (14%)

had actually done so. Hal o our respondent

rms (50%) were aware o their business rivals

considering applying or ABS status [Q15].

Thats not to say there isnt internal resistance to

reorms. More than six out o ten rms described

the biggest barrier to conversion was loss o

control (62%) [Q12].

The short-term impacts o liberalisation are nearly

always overestimated and the long-term impacts

nearly always massively underestimated. The whole

point o liberalisation is that its about innovation

that you havent yet thought o.

Passmore says that the Legal Services Board

doesnt have a view as to whether there are

the right number o ABSs or the right number

o partnerships in the marketplace. Regulatory

rules around structure shouldnt drive business

decisions, Passmore continues. I would encourage

rms not to think that they should or shouldnt be

an ABS. I would encourage them to think about

who their customers are, what they want and

how they, as lawyers, can best meet their needs.

What is signicant about the rst wave o ABSs is,

Passmore stresses, not their number but the variety.

Not the number, but the variety

The Co-op, together with two high street

practices, John Welch & Stammers and sole

practitioner Lawbridge Solicitors Ltd, became the

rst SRA-licensed ABSs.

The Co-operative Legal Services was, in the words

o its press release, the rst consumer brand

ocially to be licensed by the SRA. To mark that

historic occasion, the justice minister Jonathan

Djanogly visited Co-op Legals Bristol HQ. He called

it a huge milestone or UK legal services. ABSs

introduce more competition in the marketplace,

delivering competitive pricing, higher standards

o product and more choice or the consumer,

Djanogly said.

So how should the high street proession

regard the Co-ops ambitions? We are a largeorganisation entering a marketplace but, at

the same time, it is a 14bn marketplace or

consumers, comments managing director o

the Co-operative Legal Services Eddie Ryan. The

good and switched-on lawyers shouldnt be too

earul, he continues. There has been competition

in the legal services market rom day one. Now

there will be new entrants competing or 14bn.

We will be looking to get as much as we can and

looking to provide the services to ar more people,

he said.

Big Bang or Damp Squib?

Big Bang or Damp Squib? The City experienced its own Big Bang back in 1986

with the mass deregulation o the nancial services markets and the banking system.

So ar, the legal proession has proved remarkably resistant to the orces o

liberalisation. However the LSA promises to be the legal proessions equivalent

Big Bang.

The Big Bang report: opportunities and threats in the new legal services market,

Jures and Fox Williams LLP, November 2009.


5/17

[ 6 ] [ 7 ]

The Co-op has a substantial legal business with

400 sta and in May this year revealed plans to

recruit some 3,000 sta and expand into 330 o

its high street branches. By contrast, John Welch

& Stammers has seven ee-earners and eleven

support sta and Lawbridge Solicitors Ltd is a

solo operation run by practitioner Michael Pope

with his wie, Alison, ormerly a practice manager,

now director. It was always our intention to

take advantage o ABS as a means o allowing

joint ownership o the rm, and to use this as a

platorm to raise our prole and move orward to

expand the rm, he said.

More to come

In terms o the total number o applications,

the SRA has received just shy o 100, says

Ann Morgan, the watchdogs ABS manager.

Some o them are complicated, some o

them straightorward, she continues. Lots o

applications are rom currently regulated rms

including those wanting to recognise someone

who has been in the rm or a long time, perhaps

in nance or practice management, all the way

through to those that genuinely want to bring in

a signicant amount o external investment.

More recently, the SRA cleared the takeover o

Russell Jones & Walker (RJW) by the Australian

personal injury giant Slater & Gordon. Its an

important development marking the rst oreign-

owned ABS and the rst to be part o a stock

exchange listed company. It unites two powerul

and market leading personal injury brands: Slater

& Gordon, a household name in Australia, and

Claims Direct (owned and managed by RJW).

A recent prole marking Slater & Gordons

75th birthday revealed that the rms call centrehandled 60,000 calls per year and directed 25% o

those callers to its lawyers (The Age, November 26

2010).

The SRA described itsel delighted when

announcing Slater & Gordons ABS status. This

new licensed body combines a wealth o legal

services in RJW with the experience o the

Australian law rm Slater & Gordon, it said.

We knew that there was going to be a shake up

in the legal market and people needed to get their

heads around that, comments Neil Kinsella. As

ever, it has taken somewhat longer than expected

but we have been working on that since then. We

announced back in 2007 that ABSs were the way

orward, the way to become properly resourced

and access long-term committed capital.

Andrew Grech made clear that the Australian rm

is entirely comortable with the new legal services

market in the UK in an interview or Brave New

Worlds: New thinking in legal services, Jures 2012

- both in terms o the pro-competition reorms

under the LSA and the changes in litigation

unding being introduced under the Legal Aid,

Sentencing and Punishment o Oenders (LASPO)

Act 2012. Grech was highly critical o the concept

o recoverability (which he complained simply

allows insurers to again clip the ticket), the

payment o reerral ees and the prolieration onon-lawyer claims companies in the UK. Jackson is

right and Im araid to say my brethren wrong, he

said bluntly.

Theirs is undoubtedly a powerul union. A real

game changer or the personal injury market,

according to Louise Restell, ormer head o public

aairs at RJW. It could even be more signicant

than that other game-changing development last

year - Irwin Mitchells announcement that it was

to become the rst major rm to seek external

capital. Irwin Mitchells plans are about turbo-

boosting their existing model. I see the Slater &

Gordon deal as more bringing in a totally new

model, she refects. They are clearly ambitious

and are already ahead o the game in terms o

developing a new business-led approach to legal

services.

Slater & Gordon has made little secret o its

interest in the UK market. The rm told investors

in the summer o 2011 that it was exploring the

potential opportunity in the UK; meanwhile RJW

have been busy working on plans to extend the

Claims Direct brand.

The UK market was inherently attractive to Slater

& Gordon because o its size and its jurisdictional

similarities to Australia which the recent changes

bring even closer into line, commented the rms

managing director Andrew Grech. We have the

huge advantage o having a ve-year head start in

operating in a listed environment and we can bring

that experience to the UK through a kindred rm

in RJW which has the business structure and the

people to exploit that advantage.

RJW has approximately 425 sta across some ten

oces. Slater & Gordon is buying the rm or

36.4m in cash plus 17.4m in Slater & Gordon

shares. RJW CEO Neil Kinsella acknowledges that

the success o the deal depends upon what hecalls the right cultural t. The amazing thing

is that its such an incredible t between the

two rms and you can see that by looking at

our histories, he says. Both rms have a similar

prole in terms o the work that they do as well a

strong trade union history. In terms o getting our

partners behind the deal, we have been working

on that or 10 years, he says; adding that the rm

invited Sir David Clementi over a decade ago to

address partners.

Grech also shrugged o what he called the

natural ascination o UK commentators with

Slater & Gordons status as a listed company. It

somewhat misses the point, he said. For me, the

start is the company and its strategy.

So how does this latest move t in with RJWs plan

to extend its Claims Direct brand (rom accident

claims to include employment and amily law, wills

and conveyancing)? The strategy was or a law

rm brand which is a direct to market brand

without all the intermediaries between, replies

Neil Kinsella. Claims Direct plays to a particular

demographic or certain types o accidents, he

said. Slater & Gordon similarly has achieved brand

recognition in its home market with massive name

recognition, not just in Victoria but also in the

other states.

Kinsella says that his rm will not be promoting

RJW as some sort o ranchise to other rms. Wewill be a single law rm properly integrated but

we are looking or the best talent, lawyers who are

committed and passionate about doing personal

injury work, and - contrary to what some insurers

would have you believe - there are an awul lot o

people out there actually doing good work.


6/17


7/17

Williams draws a parallel with the development

o ranchises o the opticians market such as

Specsavers (the example was quoted in the

Legal Services Boards 2009 paper Wider Access,

Better Value, Stronger Protection). The LSB noted

a small number o large retailers who quickly

conquered 70% o the market ollowing the liting

o restrictions on advertising and the supply o

spectacles in the 1980s, as well as a substantial

number o independents who remain oering

niche or specialised services. Specsavers was

worth noting, the LSB argued, because each

practice was an independent business owned

jointly by Specsavers and the practitioners in an

arrangement which delivered economies o scale.

Clearly a ranchise like QualitySolicitors has to

make sure, in terms o protecting their brand,

they have very strict service level agreements like

any ranchise operation, reckons Tony Williams.

But do I, as a punter, know or care about how

its owned? No. I just want to go into a nice

well-lit, well-designed shop with state-o-the-art

equipment and get a responsive service at a

good price.

A minority o respondents (7%) were interested

in orming an ABS with other rms to oer

diverse services to be perormed by member rms,

perhaps as a ProcureCo. The idea o a ProcureCo

has been posited bringing together barristers and

other proessionals to enable chambers to oer a

one-stop shop to clients and to undercut solicitors.

The Bar has a cost advantage compared to many

rms o solicitors, the then Bar Council chair

Nicholas Green QC said in 2010; adding that the

model was not limited to the publicly unded Bar

but something that the commercial Bar could takeadvantage o as well.

It is interesting in this context to consider the

launch o Riverview Law earlier this year

described as the boldest-ever post-Legal Services

Act move involving the Bar. The idea behind

Riverview is to oer annual contracts or unlimited

legal advice or every type o corporate client

rom SMEs to FTSE 100 companies (starting at

just 200).

The underlying mantra is xed ees, comments

Riverviews chie operating ocer Adam Shu tkever.

We have tried to address all aspects o the

business market on a xed-price basis. We are very

condent that our prices will be attractive.

Price certainty is critical or corporate clients o all

sizes, reckons Shutkever, who was previously chie

nancial ocer o the support service business

Accord. I was a buyer o legal services and it drove

me mad. We had relationships with any number o

law rms and we oten received very good service,

not always. Service was not the issue. The issue

was the ticking clock.

At the oreront o the Riverview proposition is the

Bar. Out o a team o some 75 lawyers, there are

43 barristers including 12 QCs. That heavyweight

oering includes Richard Lissack QC, Riverviews

head o the business and international teams, and

Jonathan Caplan QC.

Riverview, backed by the global law rm DLA Piper

through the holding company LawVest, has also

been called the rst new entrant o the ABS era to

enter the commercial market.

What message does Riverview hope to send

out to corporate clients by giving barristers such

prominence in its oering? Were sending out the

message that we will deliver a rst-class legal team

to our clients, replies Shutkever, a non-practising

barrister.

In an article or The Lawyer(February 21, 2012),

Jeremy Hopkins, then practice manager at 3

Verulam Buildings, wrote that the Bar had or

some time talked a good game about directaccess but was inherently unable to oer an

unqualied service because o restrictions on the

type o work barristers can undertake. This means

that time and eort is required at the outset or

investigation as to the suitability o each case,

he argued; adding that it also involved providing

something o a selective service to the client

who ran the risk o being told at any time that the

barrister can no longer help.

That was not an attractive proposition, argued

Hopkins, who subsequently became director o

operations at Riverview. By contrast, his new

employer allowed or seamless and cost-ree

transition. This oers the cost and expertise

benets o direct access, but without the risk,

he said.

Direct access has been around or a while but it

has a number o limitations, comments Shutkever.

The way barristers chambers are set up they dont

have the inrastructure to support direct access.

We are enabling the gaps to be lled in a way

which is attractive and we are condent it will be

attractive to customers as well.

Another key concept (in addition, to xed pricing

and direct access to specialist legal advice through

its relationship with the Bar) is the use o online

legal documents.

People can register on the site and that gives

them membership and access to a very large library

o documents, precedents and business advice

through a personalised portal, explains Shutkever.

There is ree unlimited access to its online legal and

business libraries containing, it claims, hundreds

o documents, orms, records, contracts and other

templates, plus plain English inormation and

guides. Businesses are invited to test the quality

o the legal team by making a complimentary call

to one o their legal team.

Will these online documents, which are being

given away, be o meaningul value to users? Yes,

insists Shutkever. We want people to engage with

us. We want people to come and register, and get

value rom that material because i they do andthey like what they see, they are more likely to

become paying customers.

It is an interesting development and interesting

because it shows some o the strains are already

there in the Bar, refects Tony Williams. He sees

its development in the context o barristers

responding to consolidation in the legal services

market. He also points to the quality o the

barristers joining Riverview (not bottom eeders,

very credible...). He also calls Riverview law a

challenge to the inherent conservatism o the Bar.

A bigger challenge perhaps is represented by a

new venture in legal services by the legendary lorry

magnate Eddie Stobart. The logistics business the

Stobart Group recently launched a new service

to link members o the public and businesses

direct to a barrister without needing to employ

a solicitor. It is by some distance the most

unexpected development so ar in the post-Legal

Services Act world, noted Legal Futures accurately.

Stobart Barristers (as they are known) have no

ambition to become an ABS. Instead, they will run

under the 2004 public access regime. It could b e

argued that nothing cuts through all the negative

stereotypes about the Bar (unapproachable, elitist,

etc) than the words: Eddie Stobart.

Endless variety

There are any number o possible ABS models. The

SRA has identied the ollowing (as listed in Baker

Tillys Climate Change: orecasting the impact o

the Legal Services Act 2007 report, 2010):

LDPplus:anLDPcomprisingthreelawyerand

one non-lawyer managers with no external

partnership (now required to become an ABS).

Atotallyexternally-ownedrmwherethe

owner has no interest in the supply o ABS

services. The ABS would be a ring-enced legal

services arm o the parent external owner.

The ABS could take advantage o the parents

corporate brand or example, Nike law or

Fortnum & Mason law.

Atotallyexternally-ownedrmwherethe

owner has an interest in the supply o the ABS

services because it wants to cross-sell non legal

services.

Multidisciplinarypractice:aone-stopshopcomprising managers rom legal and other

proessions providing legal and other services to

clients. For example, a niche property practice

with surveyors, architects, town planners,

property managers, builders, decorators,

urniture movers and conveyancers.

TheCo-opmodelofexternalownershipwith

legal and non-legal services. Using a corporate

brand, or example, one rm provides uneral

services, will writing services and probate

services.

[ 10 ] [ 11 ]


8/17

Privateequityinvestment.

Floatedcompany.

Hubandspoke.Thenon-licensedhubwould

be an administration company or back-oce

services but could include some intellectual

services. The hub would receive a service

charge rom the regulated spokes which

provide the legal services, perhaps under a

national ranchise or network arrangement

(such as QualitySolicitors). The hub could be

licensed and may need to be in some cases.

Not-for-protorganisationsprovidinglegal

services, such as charities and Citizens Advice

Bureaux.

In-houseteamsexpandingintothemarket,

such as local authorities.

When Baker Tilly was drating its report in the

summer o 2010 all o these seemed possible,

notes George Bull, who heads up the accountants

proessional practices group. Some have been

postponed because o market conditions, he

continues. For example, a lawyer-backed English

ABS going to the stock exchange is unlikely to be

happening soon. Irwin Mitchell have said they will

but have indicated that the market is not right.

One legal business that has announced an IPO

very recently is LegalZoom. As we reported in

Brave New Worlds, Jures 2012, the US online legal

document service was readying itsel or an IPO

ater raising $66 million rom two venture capital

rms. LegalZoom raised the money rom Kleiner

Perkins and Institutional Venture Partners bringing

total unding to $100 million. According to the

American Bar Association Journal, it has servedmore than one million customers online in 10

years. And on 19 June, as this report was being

nalised, the company that describes itsel as the

leading online destination or small businesses and

consumer legal services announced that it had

led or an IPO that is expected to raise around

$120 million.

Tellingly, the statement says that the new unds

will allow LegalZoom to expand into new markets,

including the UK - so the IPO represents the

zeitgeist both o US businesses coming to the

public markets, and the delivery o law through

alternative business structures.

Despite what the press has said, we havent said

that we would denitely foat, said John Pickering,

Irwin Mitchells managing partner (Brave New

Worlds: New thinking in legal services , Jures 2012).

Its one o a range o options that we are looking

at. We havent nailed our colours to the mast quite

yet. We might do an IPO and were considering

other types o investment.

Six months ahead o last Octobers start date or

ABSs, Irwin Mitchell announced its plans to go or

ABS status as soon as the LSA allowed. The rm is

being advised by Espirito Santo Investment Bank to

identiy opportunities or external investment. We

want to position Irwin Mitchell to take maximum

advantage o this new environment because we

can see more opportunity than threat, Pickering

said; adding that the prime reason or external

capital was to enable us to more aggressively

grow the business.

George Bull also points to ideas that seemed

reasonable at the time which probably arent going

to evolve evolutionary dead-ends. For example,

the idea o an ABS which has the name o a big

brand but no overlap between these services and

the parent (or example, Fortnum & Mason law)

no longer seemed a runner. The prospect o in-

house teams (such as local authorities) is not such

a compelling prospect in this economic climate, he

suggests. The cuts means there is a preoccupationwith maintaining what they have.

Private equity will be there but to a great extent

most o PE presence wont be through direct

investment, Bull predicts. Most private equity

will nd its way into outsourcing, not to the rms

themselves.

Tellingly, only less than one third o our

respondents described themselves as not

considering an ABS.

[ 12 ] [ 13 ]

Nick Miller is an investment manager at Sovereign

Capital. So what is the interest in the legal services

market? Its a 25-30 billion industry that

has largely been unchanged over many, many

decades, he says. The LSA and the ormation o

ABSs shine a spotlight on it.

Miller continues: Since January when there was

rst the opportunity to apply or an ABS model,

there has been a air bit o activity, and initially

more than I thought that there would be given

that the SRA hasnt approved any private equity

backed transactions.

Enter the Dragons?

Over hal o our respondents (54%) described as either compelling or very compelling

as a reason or ABS conversion accessing private equity (or other third party investment)

to nance their rms growth [Q9]. More than one out o ten respondents describe

the possibility o raising unds on the stock exchange as either compelling or very

compelling.


9/17

[ 14 ] [ 15 ]

He cites the example o QualitySolicitors and Duke

Street conrming an investment o up to 200m in

personal injury umbrella rm Parabis Group (which

includes the claimant business Cogent Law and the

deendant rm Plexus Law). Duke Street conrmed

it had bought a signicant stake in the group and

valued the deal at between 150m and 200m.

Duke Street partner Iain Kennedy was reported as

saying: The intention is to support management

with Duke Streets operational expertise in

transorming the business rom a proessional

services rm to a business process outsourcer, and

to drive the continued consolidation o the legal

services industry via Duke Streets successul buy-

and-build model. (Law Society Gazette, February

6, 2012).

There are a number o private equity businesses

or the SRA to consider. Were waiting on the edge

o our seats to better understand what is going

to come out o those decisions, Miller says. The

SRA has a big task ahead o itsel and needs to be

careul about establishing precedents.

What is the most compelling proposition that

would interest Sovereign Capital? There is no

particular area o law, replies Miller. Certainly

the volume-end o the market eels more like a

business. What doesnt interest us is non-specialist,

midmarket law rms.

Why? The key issue about such rms or Sovereign

would be around their governance, he replies.

For example, where there might be a dozen equity

partners, all at various stages o their careers, some

looking to invest capital to grow the business

and some looking to take as many drawings as

possible. One thing that the ABS structure willbring in, hopeully, will be tighter governance

inorming management to deliver better upon a

proper business strategy.

Sovereign Capital operates what Miller calls a buy-

and-build strategy. We are in the UK midmarket

and one o the more active equity houses, he

says; adding last year the rm handled over 30

transactions.

We are looking to take a platorm investment

generally i a business that is making 2 to 10

million EBITDA (earnings beore interest, tax,

depreciation and amortisation). We look to build

the business so that it grows signicantly.

We look at ragmented markets. You cant get

more ragmented than the legal services sector.

A story to tell

Tony Williams advised Lyceum Capital, a private

equity und that made no secret o its interest in

the legal services market. As Williams points out,

that interest pre-dated 2008. We suddenly went

into a downturn and most law rms in the last

two years have been completely un-investable as

a proposition.

The private equity model is now undamentally

dierent, says Williams. In 2008 it was all about

chucking in as much cheap debt as you can

and then a spot o nancial engineering. Now

it is a question o whether there is a strong and

sustainable growth case that can justiy in three

to our years a higher valuation. The criteria are

dierent now.

Private equity was originally expected to take

stakes in law rms, improve management

and systems and to take an exit with capital,

refects Baker Tillys George Bull. There is a sort

o eeling that possibly because there arent

many big opportunities that they can take in

non-proessional service areas, they have money

available and they are taking a bit o a punt.

He believes that the ocus o PE houses rms

is presently on outsourcing (Business Process

Outsourcing rst and Legal Process Outsourcing

second...).

Bull reckons there are two issues with direct

investment into law rms. Number one: the

quality o the management and the infexibility

o partnership structures which make it quite

dicult to ollow the traditional private equity

model. Number two is exits. He reports that

Slater & Gordon originally looked at private equity

to nance the RJW deal when the market was

in good shape beore deciding to cut o ut the

middleman by going straight to the market.

Now in 2012 the market has changed, says Bull.

It is not as easy to see how private equity could

take an exit rom the market three to ve years

ater investment.

One well known private equity investor who hasnt

been deterred rom direct investment into law

rms is ormer Dragons Den star, James Caan.

As this report was going to press it was annou nced

Hamilton Bradshaw, his private equity company,

had entered into a landmark agreement with

the equity partners o Knights Solicitors to invest

capital in the law rm (subject to approval rom

the SRA).

So what might tempt private equity? New and

disruptive models o business with very able

management teams, replies Tony Williams.

It is less likely to be more traditional models.

I you havent got anything exciting to say in a

consolidating market, just how likely are you to

be a winner?

QualitySolicitors, he reckons has a clear

proposition, as do Parabis. Whether you disagree

or not with that proposition doesnt really matter

as long as there is a credible story to tell, adds

Williams.

Interestingly, ownership by a recognised brand -

as a compelling reason or ABS conversion - was

also strikingly high - over one third o respondents

(34%) described it as a compelling or very

compelling reason [Q9].

Known unknowns

Tax and regulatory issues topped the list, 41% and

35% respectively. A lot o law rms will not have

their own in-house tax expertise and tax will play

an important part in these structures, comments

Fox Williams Tina Williams. She also points out

that the results refect a wider conusion around

regulation o new entities. The results show how

unknown the entire ABS conversion process is. It

remains something o a black art at the moment.

Nobody really knows the process that the SRA is

applying. All they know is that it takes a long time

and requires answers to searching questions.

One such unknown is how proessional indemnity

insurers might respond to a totally new type o

entity in the proession. Bhavik Desai is assistant

vice president on the open market team at

Chartis. We are relatively nervous about ABSs,

he acknowledges. Where you have an ABS

involving a claims management company and a

personal injury lawyer, that is ne because you are

internalising the work between people who were

already working together.


10/17

[ 16 ] [ 17 ]

Where you have an accountant, a lawyer, a

surveyor and an estate agent, this is where

traditionally you had the raud rings. We are

worried that one side o the business might put

pressure on the other side o the business.

The legal proession needs to be independent,

Desai argues. There are also issues where you

bring proessions together and one side is used

to holding client money and the other side is not

again it could create issues and tensions. We

do not want to take on new ABSs unless we are

condent o what the make up o the new entity

is. In terms o cover, Desai says that they dont

quite understand yet how the minimum terms and

conditions will work. Lawyers have the broadest

cover in the market and the SRA will need to

dene what activity is covered going orward.

David Cable, head o proessional indemnity, at

Allianz Global Corporate & Specialty, says that

We are just not sure what we are acing. New

investment should also bring innovation and new

types o structure so we shall wait and see what

comes.

Under pressure

The results indicate the level o nancial pressures

modern law rms are under. Nearly eight out o

ten respondents (77%) identied access to nance

(not available rom partners or traditional bank

borrowing) as either important or very important

when considering an ABS and seven out o ten

(70%) identied improving the rms cash fow.

irrespective o whether the law rm is an ABS or

not, they need to ensure they are satised the law

rm is well managed and has good internal risk

management procedures.

This is how we risk select and we will continue

with this approach. Insurers will need to take into

consideration some additional exposures. Where

an ABS has external unding, this could put added

pressure on the rm to hit certain prot targets.

This could lead to riskier work being taken on by a

rm, a rm stepping outside their area o expertise

in order to generate revenue, etc, etc.

Cable says there is particular concern around multi-

disciplinary ABSs. Whilst they have the pressure o

ensuring external investors received their return on

investment, having dierent proessions operating

under one roo poses possible conficts o interest,

possible coercion and cross discipline exposures.

Uncertainty is the main worry or us, agrees Desai.

One simple way to improve cash fow is to

manage lock up better, refects Tina Williams.

A lot o rms arent very good at it though.

More than six out o ten respondents (62%) cited

allowing partners to retire with capital prot as

an important or very important consideration.

It shows a huge naivety, comments Tina Williams.

I they believe that any private equity house is

going to throw signicant capital at partners and

watch them ride o into the sunset, they need to

reconsider.


11/17

[ 18 ] [ 19 ]

The relatively high score or enhanced tax

structure was, according to Williams, not

surprising given the 50% income tax rate (going

down to 45%). That is obviously really hurting

rms.

Loss o control

Loss o control was by some margin identied as

the biggest barrier - ollowed by resistance rom

partners to ABS conversion. Unsurprising perhaps

or a proession that has successully remained

independent and ree rom mixed ownership

models up until the LSA.

The RJW/Slater & Gordon tie-up illustrates that

complex deals can be brokered. As already

stated, Slater & Gordon is paying 36.4 million

in cash - 8.8m deerred or up to two years

subject to perormance milestones and 10.3m

on completion to repay bank debt - plus 17.4m

in Slater & Gordon shares subject to restraints

on sale or our years. This creates a real interest

on the part o RJW partners to see the combined

operation succeed, comments Tina Williams.

Cost and burden o regulatory compliance was a

major barrier (40%) to ABS conversion, just behind

complexity o ownership structures (41%), and

management time commitment (42%) [Q12].

She points out that the SRA has up to six months

under the LSA to complete a licence. It is very

important that the individuals who were involved

- investors and, in this case, the Australian rm

understand rom us what the expectations are

o new owners and what we expect in terms o

cooperation. With larger organisations, such as

listed companies, there are companys pension

unds holding interests in the organisation and

overseas checks.

But even with the small rms there can be some

interesting little wrinkles that we do need to get

to the bottom o, says Morgan. They are more

straightorward and inevitably quicker or us to

process. It is when somebody suggests signicant

changes, it becomes a longer process.

Just over one out o ten rms (11%) identied

regulatory issues arising rom overseas oces,

possibly refecting the New York Bar Associations

recent ruling that lawyers cannot practise in the

state i their rm is owned by non-lawyers - even

i their owners are overseas.

Unortunately but perhaps not surprisingly - or

the SRA, there was a airly emphatic (49%) vote

o no condence or the watchdog [Q14]; despite

almost two-thirds o respondents (65%) being

likely or very likely to seek advice rom the SRA

in connection with ABS conversion [Q13].

Like walking backwards, slowly

Colin Ives is head o proessional services tax at

the accountants BDO LLP. The SRA has been in an

articial world rom the start, he says. They need

to realise that the LSA was put in place to be all

about the consumer.

Does it take a long time or a deal like RJW/Slater

& Gordon to go through the licensing process?

Not particularly, replies Ann Morgan, the SRAs

ABS manager. The key is a rms engagement

with us through that process.

It isnt a happy situation, says Colin Ives. The

unds available or an acquisition would typically

only be guaranteed or three months by the banks

and so i you are waiting three months, that is just

not good enough. Peoples jobs are at stake.

David Edmonds, chair o the Legal Services Board

recently described to the Law Society Council

the approach o the proession like walking

backwards... slowly. The LSBs Crispin Passmore

calls complaints rom lawyers surprising given

the act that so many previously complained that

change was happening too quick. I have no

idea whether they are going ast enough. Frankly,

Id be disappointed i applications went through

on the nod because they were big names. Id

be disappointed i they didnt check peoples

backgrounds properly. Its way too early to say they

arent doing that ast enough though.


12/17

[ 20 ]

Appendix

[ 21 ]


13/17

[ 22 ] [ 23 ]


14/17

[ 24 ] [ 25 ]


15/17

[ 26 ] [ 27 ]


16/17

[ 28 ]


17/17

www jures co ukwww oxwilliams com

Tina Williams

Fox Williams LLP

Tel: 020 7614 2502

[email protected]

For further information please contact:

Gus Sellitto

Jures

Tel: 020 7092 3988

[email protected]

Documents

ABSolutely Fabulous - A Study of Alternative Business Structures and Their Role in a Changing Legal Market