Are there any realistic alternatives to the traditional partnership set up?

In December 2015 we looked at where we thought the legal profession was heading in 2016 and predicted that there would be “a rise in alternative external sources of legal advice including in-house lawyers setting up as consultants, and barristers increasing their direct access opportunities to allow individuals and clients to instruct barristers without an intermediary”.

Not all of you were in agreement however, with Kevin Wheeler suggesting in his most recent post that the impact of ABS on the legal market “has been over-hyped and [he doesn’t] expect the sort of transformation in the legal services market predicted by others. The impact of these regulatory changes on the larger commercial legal practices will be negligible”.

I take a more pragmatic view of the viable options.

It is no surprise that the traditional law firm partnership set up, with the bulk of profits being distributed amongst a small number of equity partners sitting at the top of a rather hierarchical (and often patriarchal) business organisation is becoming a rather outdated concept. The introduction of alternative business structures (ABS) in the wake of the Jackson reforms, coupled with societal changes and financial stresses has certainly triggered a rethink. Indeed, recent research indicates that the majority of junior lawyers believe the partnership model is outdated. We might be in agreement that the model is outdated, but is there a realistic alternative?

ABS

The first alternative business structures were licensed in 2012 and numbers have grown steadily, with a recent search for ABSs on the SRA website (as of 1 December 2015) producing some 444 results. One of the benefits of the ABS model is that capital can be injected by companies or individuals outside the legal sphere, who may also bring with them a different approach to doing business, disrupt outdated processes and breathe new life into stagnant partnership structures.

Knights Professional Services was an early adopter of the ABS model, selling a stake in its practice to Hamilton Bradshaw, a private equity firm founded by Dragons’ Den star James Caan. It is now reportedly “in advanced talks” to acquire regional firm Darbys Solicitors which would, according to Chief executive David Beech, push the firm into the top 100 UK law firms by revenue. Commenting on resistance shown by the legal industry to moving away from traditional business models, Mr Beech noted that there is “still a significant fear factor when you use the words 'private equity investment' amongst the legal profession, both for being an unknown quantity and as a perceived threat towards the established ways of doing law”. More recently, he argued that “only by moving away from the traditional partner model will law firms achieve their full potential in today's post-recession market.”

Another ABS, Riverview Law, which undertakes its work using fixed fee arrangements, has also been emerging strongly. It describes its business model as “being built from the customer up not the law firm partner down” and has been mentioned by Richard Susskind as the type of organisation in which Tomorrow’s Lawyers may want to work. Riverview invests heavily in technology and is currently focusing on artifical intelligence as a means of giving itself the edge, having recently acquired knowledge automation business CliXLEX.

ABSs are continuing to increase in popularity, as the flexibility of this structure allows different industries to come together and pool their expertise. However, many firms still want to stay law-centric and the possibility of conflicting goals can reduce the allure of this type of collaboration.

Going public

Gateley was the first UK law firm to float on the stock market when it went public in June 2015. Speaking at the time, CEO Michael Ward said the “IPO will provide the platform for the continued success of the business, as well as accelerate its growth opportunities and facilitate value creation through an increased ability to acquire, incentivise, differentiate and where sensible diversify.”

Across the pond, Jonathan Molot, co-founder of litigation finance firm Burford Capital and professor of law at Georgetown University Law Center, had a more prophetic reaction: “It should serve as a wake-up call for the entire industry and more firms should follow suit. For some lawyers, moving away from the partnership model will be terrifying – but it’s an essential evolution, not just for the success of individual firms but for the legal sector as a whole.” He further warned that the “partnership structure is fundamentally flawed, confusing ownership and employment to the point that undue emphasis falls on maximising billable hours in the short term and undervaluing client service, employee well-being and firm profitability in the long term”.

Another publicly listed firm with a high-profile UK presence, Slater & Gordon, recently experienced some turbulence with its share price in the wake of the Autumn Statement (relating to government plans to reform whiplash claims) – an incident which highlights the potential volatility attached to being publicly listed.

It’s likely that more firms will go public in order to secure financial capital to help with plans for growth but many will be wary of the attached transparency and potential volatility of the stock markets.

Sole practitioners, virtual firms and experimental models

While many of the larger firms continue to merge and grow even bigger, many experienced lawyers are deciding to quit the rat race and set up their own boutique firms, either with a few like-minded colleagues or entirely on their own. The 2014 LexisNexis Bellwether report found, amongst other things, that 75% of sole practitioners decided to go solo as an active lifestyle decision. The 2015 report noted that smaller firms and “sole practitioners should be able to respond to [new] challenges much faster than larger firms”.

Meanwhile, technological development and the growing popularity of flexible working has aided the successful establishment of various so-called “virtual firms” – such as Excello Law and Keystone Law – which enable lawyers to maintain a large degree of independence whilst remaining under the umbrella of a firm. Other innovative methods of providing legal services are being explored by a range of firms and (often American headquartered) companies, such as DWF, LegalZoom and Jacoby & Meyers and Rocket Lawyer.

Although the traditional partnership model will no doubt continue to dominate the legal sphere in the UK for many years to come, as competition becomes more intense, more business-centric and technology-led methods of delivering legal services will gradually precipitate a paradigm shift in the prevailing orthodoxy. There are already several realistic alternatives to the partnership set up, including the ABS and sole practitioner models as well as the possibility of going public. But the advantages these new business models may bring, such as better opportunities for growth or collaboration, also have potential downsides such as less control and dilution of a focus on legal services. It may well be a case of trial and error before the legal industry finds its feet and decides on the optimal business model for today’s fast changing world.