Where is the Alternative Business Structures revolution heading?

Where is the Alternative Business Structures revolution heading?

By Nick Hood 

When the Legal Services Act 2007 was enacted, it’s doubtful that its sponsors could have foreseen a Cyprus-based construction consulting firm embracing the concept to enhance its international credibility.  Nor would they have anticipated it bringing together Bucks County Council & the Bucks Fire Authority as law services providers. 

These are just two of the most recent developments in this extraordinary phenomenon, which has previously seen such diverse new players as the transport company Stobarts, the Co-Op, a Nordic family wealth management office, the legal textbooks co Jordans, the outsourcing giant Capita and the insurers Direct Line enter the legal market.

The original imperative for this radical change to the fusty collegiate world of lawyers owed much to the need to facilitate the introduction of external capital and with it, the sort of management expertise that might propel the profession into 21st century.  It was also an envious nod to the success of accounting firms in becoming proper businesses, in which the gross habits of the partners no longer constrain the net income of the firm.

The Solicitors Regulation Authority has now issued well over 200 ABS licences in the two years or so since the legislation came into force. Most have got off to good starts, although a premature stock market listing may have been behind the closure last June of the conveyancing ABS, In-Deed Online. Amid a sea of far greater troubles, Co-Op Legal Services reported a £4.3m loss for the first six months of 2013 despite a rise in revenues, having only broken even in 2012.

Last November, the Legal Services Board published research showing that the newly created ABS firms were more productive and more efficient at handling complaints than traditional law firms.  This is hardly surprising, given their greater availability of capital to invest in systems; their more commercial instincts; and the priceless advantage of building firms from the ground up, without any of the legacy issues inherent in old technology, antediluvian working practices and petty partnership politics.

As the relentless march of the growing ABS army gobbles up more and more of the legal services market, some will ask whether this is yet another example of collateral damage created by the Jackson reforms and the savage cuts to the criminal legal aid budget.  This is a particularly poignant question, at a time when 136 mainly small high street firms have been forced to close because they could either not get or not afford professional indemnity insurance cover.

For sure the creation of imaginative ABS pairings had started well before Jackson bit last April, but it has accelerated sharply since then and much of the innovation before Jackson was in anticipation of the impact on the profitability of the legal services market that the changes would inevitably bring. 

Some of the action is little more than the deployment of ABS methodology as a  convenient tool for overseas consolidators, like the prolific Australian firm, Slater & Gordon.  Another theme is the exploitation of cross-selling opportunities, explaining the interest for example of the legal expenses insurer, ULR Additions, and of course the accounting leviathans, KPMG and EY.

Some of the more exotic new entities owe much to the convenience for complete legal outsiders of dipping a toe in another market through a ring-fenced entity at a time of serious structural disruption in the UK market. This is where much of the fall out will occur as the ABS market matures and the initial “irrational exuberance” abates once reality bears down on some of the more ill-considered, over-egged business plans.

Unfortunately, one inescapable downside of bringing hard-headed commercial business attitudes and financial discipline to the cosy, coddled legal world is that investors will walk away from failing ventures without a trace of sentiment. Unlike partners in traditional partnership structures, LLP protection notwithstanding, they will have made sure that their personal assets are not at risk and they will have no professional reputations to protect.

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About the author:

Nick Hood is a Director of the legal costs firm, Kain Knight.  He is a Chartered Accountant and also an insolvency practitioner with the Begbies Traynor Group, as well as a business risk analyst for corporate health monitoring experts, Company Watch.

Email: nick.hood@kain-knight.co.uk 
Tel:  +44 (0)7967 658 296