legal innovation 2013_updated

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www.bakertilly.co.uk

Legal innovation 2013 New developments in an old profession

June 2013

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ContentsIntroduction 1

Overview 2

Structure 8

Funding 13

Delivery 17

Management and people 22

International 28

To the future 31

2013 Legal Innovation Report 1

Introduction“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten,” Bill Gates once said. “Don’t let yourself be lulled into inaction.”

A large number of people have not been lulled. If the changes that have occurred in the legal market in England and Wales in the past two years are anything to go by, then by 2020 it will be unrecognisable.

In our October 2010 report Climate Change: forecasting the impact of the Legal Services Act we anticipated accelerating change as law firms and other legal service providers evolved to take advantage of new market opportunities. At the time, those opportunities seemed to arise principally from regulatory change and the availability of alternative business structures. In the event, evolving client needs as well as the challenges of a difficult economy have combined to create an environment for innovation.

Almost three years on from our last report, we review what’s happened in the intervening period. Despite the innovation which we see, the modest pace of change may reflect a lack of consumer awareness of what is going on. In the retail legal services market of the future, the most successful operators will undoubtedly be those who establish a whole-of-life relationship with their customers.

In the provision of legal services to business, pricing pressures and the increasing sophistication of clients are arguably the key drivers of innovation by legal service providers.

So where will all this end? Undoubtedly, the pace of change will increase. The most adaptable, the most innovative legal businesses will survive and grow. Others will disappear in a continuation of the trend which has already seen many firms closing down.

In a report where innovation is the theme, we explore the ways in which law firms have changed their structure, funding, service delivery, management and people. We look not only at the position in England and Wales but Scotland and the international firms too. What has happened, what is happening and what will happen?

At the end of each section, we have summarised our thoughts on how each aspect of the legal services market place might look in 2020. We don’t expect all our readers to agree with everything we say, but we hope you will find our report interesting and thought provoking.

George Bull National Chair of Professional Practices Group Baker Tilly

Legal Innovation Report 2013 2

It has not necessarily turned out that way, however. At the time of writing, the Solicitors Regulation Authority (SRA) had issued 144 ABS licences, and the CLC 35. The SRA has more than 100 still in the pipeline and has been under considerable pressure to speed up the approval process. Of equal interest have been new businesses emerging that do not require an ABS licence but that have been encouraged to enter the market because of the wider mood of liberalisation.

Riverview Law is one of the highest-profile of these, but if two words sum up the non-ABS initiatives they are ‘Stobart Barristers’ – the arm of the famous logistics company that now connects consumers directly to a barrister. Stobart’s entry to the law was probably the most jaw-dropping moment in the market since our first report, Climate Change, in October 2010.

It has subsequently become shorthand for what some perceive as the wrong direction in which the law is moving as a result of liberalisation, particularly in the wake of the revelation that Stobart’s is likely to bid for a criminal legal aid contract under the new price-competitive tendering regime being introduced this year.

A quick reminder

The term ‘alternative business structure’ appears as a heading in the Legal Services Act 2007, but has no statutory meaning; the SRA calls them ‘licensed bodies’. In essence they are businesses with a lawyer and a non-lawyer owner/manager that conduct reserved legal activities. A ‘lawyer’ is a member of one of the eight branches of the profession recognised by the Act: solicitor, barrister, chartered legal executive, licensed conveyancer,

On 6 October 2011 the first alternative business structure (ABS) came into being – Premier Property Lawyers, the conveyancing arm of property business myhomemove. As a volume business that had – because it was regulated by the Council for Licensed Conveyancers (CLC) – benefited from private equity investment since 2005, it was a fitting start to a regime that many thought was particularly aimed at such practices.

Overview


patent agent, trade mark attorney, costs lawyer and notary.

The reserved legal activities are currently conveyancing, probate, advocacy, litigation, administration of oaths and notarial activities. The government recently rejected a Legal Services Board recommendation to add will-writing to the list. It is also starting to investigate whether ‘general legal advice’ – however that is to be defined – should become reserved to deal with the problem that consumers assume anyone providing legal services is regulated, when they need not be and often are not. The board’s chief executive, Chris Kenny, recently expressed a personal view that the status quo over reserved and unreserved legal activities is unsustainable and the answer may be for all legal advice to be regulated.

Though the SRA and CLC are currently the only ABS regulators, several more are in the pipeline: the Bar Standards Board, which wants to regulate ‘advocacy-focused’ ABSs; the Institute of Chartered Accountants in England and Wales, which needs to become one to support its bid for its members to have the right to conduct reserved probate work; the Intellectual Property Regulation Board; and ILEX Professional Standards (the regulatory arm of the Chartered Institute of Legal Executives).

ABSs… the journey so far

The largest category of ABSs licensed to date are those deemed by some to be the unexciting ones – those firms with non-lawyer partners and which are not otherwise planning any structural change to their practices. This has ranged from sole practitioners bringing in their spouse as a partner to large practices, such as City of London firm Bristows, with an accountant partner. But these ABSs should not be overlooked: only a few years ago having a non-lawyer partner was unthinkable; now it is not only commonplace but even de rigeur.

One characteristic shared by the early movers in ‘ABS land’ is a corporate management style. This includes not only the new entrants, which are already corporate in structure and nature, but also the legal partnerships that have moved away from the traditional partnership culture. This is not an easy transition and not one to be embarked on by the fainthearted. However, for all but perhaps the smallest of firms, it will be a necessary transition to undertake.

Consumer brands have been expected from the start, although to date The Co-operative is the only one with a licence. Though BT has a licence, its new legal arm will at the outset provide legal services only to corporate customers, initially in the motor claims market, but with an eye

Stobart’s entry to the law was probably the most jaw-dropping moment in the market since our first report, Climate Change, in October 2010. It has subsequently become shorthand for what some perceive as the wrong direction in which the law is moving

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to expanding into other areas of law. The AA and Saga – which are owned by the same private equity company – have their applications in with the SRA. Rumours abound of big retail names joining them; for those with banking arms, it appears to be a straightforward brand extension.

Structurally, rather than set up a firm from scratch, they may well follow the example of some of the country’s biggest insurers, such as Admiral and Ageas, which have launched joint venture ABSs with specialist personal injury (PI) law firms to handle policyholders’ claims. Direct Line has also unveiled ABS plans. These are a response to the huge shake-up in civil justice and costs that took place on 1 April 2013, and in particular the ban on the payment of referral fees in PI.

It has been interesting to see and hear how some businesses that would not previously have thought of providing legal services are now considering whether to enter the market in response to the recent ban on referral fees. Rather than referring their customers to a panel of lawyers in exchange for a referral fee they are now exploring the possibility of delivering legal services themselves. Some have decided it is not for them. Nevertheless, the referral fee ban may have provided the impetus for a seismic shift in the market over the next few years as businesses start to explore the opportunity afforded by ABS for their customers.

ABSs have come at just the right time for insurers but these new joint ventures are the subject of heavy criticism from claimant solicitors: first, because in allowing the law firm and insurer to share profits via an ABS, they can facilitate the same transfer of value that plain referral fees used to; and second, because of the risk of the solicitors having a conflict of interest between clients and the insurer. The SRA insists that it is very aware of both of these issues.

Indeed, a sizeable minority of the ABSs can be directly linked to the civil justice reforms: Quindell Portfolio, for example, is an AIM-listed company that has acquired three PI law firms in the last year, along with a host of other businesses, as it looks to build an end-to-end claims outsourcing service for insurers.

Around half a dozen accident and claims management companies have formed ABSs with similar ambitions of providing an integrated service; Sheffield law firm Proddow Mackay has linked up with a claims management firm, an insurer and a broker in separate ABSs in an effort to add volume to the firm.

Arguably this is the continuing fallout of the solicitors’ profession’s failure to take the initiative in 1999 when legal aid for personal injury was withdrawn and ‘no win, no fee’ agreements became the norm.

Only a few years ago having a non-lawyer partner was unthinkable; now it is not only commonplace but even de rigeur.

Rowan Williams, Head of Professional Practices Group, London and South, Baker Tilly

Businesses that would not have thought of providing legal services are thinking about whether to enter the market as a response to the recent ban on referral fees. Steve Carter, Head of Professional Practices Group, North, Baker Tilly

Legal Innovation Report 2013


This brought with it the rise of claims management companies and other work introducers, on whom many law firms relied, with the result that they must now find other ways of continuing the relationship that do not involve a direct fee in return for being referred a piece of work.

Private equity is becoming more prominent, although initial interest has not yet followed through into high levels of investment. Insurance law firms Parabis and Keoghs have received investment from Duke Street Capital and LDC respectively, while the headline writers had fun with former Dragon’s Den star James Caan’s investment in Staffordshire firm Knights. He has subsequently added ‘virtual’ law firm Excello to his portfolio.

Another virtual practice, Everyman Legal, became the first firm to receive investment from private

individuals. Its six private investors have become shareholders of the firm, which specialises in acting for entrepreneurs.

A separate ABS category is those embracing regulation for the first time, such as will-writing business Parchment Law Group and leading probate provider King’s Court Trust. This is an area of law in a difficult regulatory position – the reserved aspect of probate work is narrow, meaning almost all of it can be done by non-solicitors; meanwhile, as already mentioned, the Legal Services Board has recommended to the government that will-writing, but not estate administration, become a reserved activity. If accepted, this will bring a whole new class of legal services provider inside the regulatory net.

Legal Clarity, a Birmingham-based business, has also made such a move. Since 2007 it has offered legal drafting and

company secretarial services to accountants, solicitors and entrepreneurs. It did not need to be regulated because it does not conduct reserved legal activities – it also had a non-lawyer investor – but was run along law firm lines and has chosen to become an ABS to give clients the extra reassurance they would expect when taking advice on substantive legal matters.

Not-for-profit organisations can also form an ABS; the Community Advice and Law Service in Leicester now owns an ABS that offers competitively priced work in areas recently removed from the scope of legal aid, using the proceeds to support its free services and make it less reliant on government funding and grants. It also keeps the service’s fee-charging business at arm’s length from its free service (and they are in different locations).

Private equity is becoming more prominent, although initial interest has not yet followed through into high levels of investment.

George Bull, National Chair of Professional Practices Group, Baker Tilly


Multi-disciplinary practices (MDPs) have been slow to take off. Perhaps the ‘purest’ to date is specialist construction law firm SLS Solicitors Limited, which has been bought by Systech International, a global consultancy that project manages aspects of some of the world’s largest infrastructure and energy projects. Systech now offers legal, commercial and technical services to its clients under one brand.

There is also Red Square London, which specialises in helping wealthy business people from Russia and Eastern Europe relocate to London; it acquired its licence in order to add legal services to its business services portfolio.

Finally, Price Bailey became the first accountancy firm to form an ABS. The firm, an eight-office practice across East Anglia, London and Guernsey, created Price Bailey Legal Services after recruiting a solicitor to run its large payroll solutions department, which often strayed into areas of employment law. ABS status allows the firm to promote that offering in the market, but Price Bailey is being very cautious about expanding beyond that – it advises law firms and does not want to tread on their toes.

The application by the Institute of Chartered Accountants in England and Wales for the power to grant its members the right to conduct reserved probate work

and to regulate ABSs will, if successful, bring another group of practitioners within legal regulation. The Institute’s research indicates that around 250 firms might seek accreditation: 150 sole practitioners, who would have authorised firm status, and 100 larger practices, most of whom would look to become ABSs.

Then we have companies that see an ABS as a platform for expansion. Legal expenses insurer Abbey Protection plc became an ABS and then acquired Manchester commercial law firm Lewis Hymanson Small, completing a three-pronged strategy to expand its services to the SME market.

Becoming an ABS allows AIM-listed Abbey to scale up its 60-lawyer call centre to provide a wider range of commercial litigation services beyond those covered by insurance, to offer these through some of its affinity clients – the biggest of which is the Federation of Small Businesses – and, by buying a law firm, to have access to expertise in areas of law which it does not initially want to resource in-house.

The CLC has licensed Conveyancing Direct, a volume business that is part of the Connells estate agency group, which in turn is owned by Skipton Building Society. The firm said ABS status gave it more scope to grow into other areas of legal services.

No large firm has yet unveiled a significantly new or different way of practising corporate law.


Finally, there are the entirely new entrants to the market – the likes of Brilliant Law, backed by Betfair founder Bert Black, and Bobby Dhanjal Legal Services, set up by an IFA in Leicester, who see a market ripe for a new way of structuring legal practices and delivering services differently. We look at these two firms later in the report.

So what haven’t we seen? There remains a fair degree of professional reluctance to go down this road; our survey shows that nearly half of respondents do not expect to bring in non-lawyer owners (even though 70% have a non-lawyer in their management

team), while a third would not consider external investment.

ABS-related activity among the largest law firms has been conspicuous by its absence, although some surveys suggest strong interest in multi-disciplinary practices. This is not, however, surprising. Even if there was a need for cash that only external investment could meet, the international resistance to ABSs, which we detail later in the report, remains as big a stumbling block today as it was when we discussed this issue three years ago.

There are examples of innovation and creativity among these practices: Lawyers On Demand, the contract lawyer offering developed by Berwin Leighton Paisner, stands out and has been copied by others as the concept of flexible resourcing really begins to take off. A number of ‘virtual’ or ‘dispersed’ practices have also emerged – such as Halebury, Gunnercooke, Keystone and Axiom – and these have attracted the kinds of lawyers and clients that indicate this is not a passing fad.

But, in the main, no large firm has yet unveiled a significantly new or different way of practising corporate law.

n Yes

n No, but expect to

n No, don’t expect to

n Uncertain

Have you put a new structure in place to allow non-lawyer ownership?

23%

4%

27%

46%

n Yes

n No, but expect to


n Uncertain

Do you have non-lawyer management or a non-lawyer non-executive member of your management team?

70%

25%

5%

0%

n Yes, definetely

n Yes, possibly

n No

n Uncertain

Would you consider having an outside investor?

11%

39%

32%

18%


In BT Law we already have an in-house team expanding into the market, and this is also likely to happen in local government as Kent Legal Services (KLS) – the legal arm of Kent County Council – is planning to launch an ABS, probably in conjunction with a law firm. The aim is to expand the pioneering council’s presence as a provider of legal services in the wider market. KLS already advises 330 bodies across the public sector – including police, fire, education and health authorities – as well as other councils. The ABS play could extend KLS’s reach to the likes of utility companies, which are currently beyond the power to trade that local authorities already have.

Regulatory scrutiny

Any proposed structure for an ABS has to be approved by the SRA. It has recently reviewed the application process and put a greater focus on ensuring early on that the risks posed by the new firm are understood by regulator and applicant alike, and that plans are put in place to mitigate these risks.

Examples given by the SRA include:• Proposals to share premises

with third parties or other departments of an MDP – how will client confidentiality be protected?

In the October 2010 Baker Tilly Climate Change report, 10 possible ABS models were identified and most of these have either already come to pass or are set to. However, we have yet to see a floated company – while it is often reported that national law firm Irwin Mitchell is to float to secure the external investment it has said it wants, this has never been confirmed by the firm itself – nor a totally externally owned firm where the owner has no interest in the supply of the ABS’s services. In this model, the ABS would be a ring-fenced legal services arm of the parent external owner and could take advantage of the corporate brands, such as ‘Nike Law’ or ‘Fortnum and Mason Law’.

Structure


• Outsourcing – what activities are undertaken by the outsourced service provider? Will they be within the jurisdiction? How will the quality of their work be monitored?

• Multiple offices – how will conflicts of interest be identified and managed?

• Governance – how will the firm be governed? What steps have been taken to ensure no individual is too dominant?

• Nominee companies – is there clarity over who will own and run the firm?

Structure is, of course, a significant part of this process and there are examples of SRA demands for changes. For example, as part of the process to secure the licence, Abbey Protection’s trading subsidiary, Abbey Protection Group Ltd, had to undergo a restructuring that saw non-legal divisions transferred to a new, wholly owned subsidiary.

During the application process, Abbey managing director Chris Ward said: “One of the biggest issues has been having to work within the parameters of the 2007 [Legal Services] Act and its suitability for MDP applicants such as ourselves. It certainly doesn’t make the path to ‘a freer and more competitive marketplace for legal services with innovative and customer focused ideals’ easy to navigate.”

The SRA put restrictions on Parabis’s offshore operation in South Africa, where it conducts pre-litigation claimant motor injury file handling. Conditions attached to its ABS licence state that Parabis must not increase the proportion of non-legally qualified fee-earners to legally qualified fee-earners from the existing ratio of 34:1 without the SRA’s prior approval. It must also not change the nature of the work undertaken by its South African arm without the SRA’s prior approval. The final condition is that Parabis must notify the SRA at least 28 days before opening another overseas office.

Parabis CEO Tim Oliver explained that the SRA wanted to make sure that the South African office is run exactly as it would be if it were in the UK; so if Parabis wants to expand in Pretoria, the supervision ratio of lawyers to non-lawyers will need to be similar to that in the UK. He added that if Parabis decides to start doing other work in South Africa, it would need to flag that with the SRA to ensure that it does not breach the separate business rule (SBR).

The SBR is perhaps the biggest structural stumbling block. This prevents solicitors and ABSs from hiving off non-reserved legal work into unregulated businesses, but for non-legal businesses that already conduct non-reserved work – which covers most legal activity – and then want to set up an ABS, it can cause real problems.

Chris Ward, Managing Director, Abbey

Having to work within the parameters of the 2007 LSA… certainly doesn’t make the path to ‘a freer and more competitive marketplace for legal services with innovative and customer focused ideals’ easy to navigate.

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For the SRA, the rule prevents law firms and solicitors from seeking to avoid regulation, and provides clarity and simplicity to consumers of legal services. However, the Legal Services Board thinks it should be scrapped. In a recent letter from the board to the SRA, chief executive Chris Kenny said: “We struggle in particular to understand why a business that has successfully delivered legal advice outside of legal regulation without any evidence of consumer detriment should be compelled to bring those services within the oversight of the SRA in order to deliver reserved legal activities.”

Mr Kenny said that the issue is only likely to grow: “At the retail end of the business, we are concerned that the rule, combined with the approach to what you call MDPs, may create artificial boundaries within the market between firms that want to deliver non-reserved activities and those that want to deliver reserved ones: if the price of delivering reserved services is regulation of other legal services that do not need to be regulated, that adds to the costs that consumers pay, distorts competition and prevents innovation.” Of course, this could be resolved by the extension of reservation to all legal work – as indeed Mr Kenny himself has suggested – but this is highly unlikely to happen for several years.

In the meantime, Mr Kenny said any risks that do arise from the mix of reserved and non-reserved work can be managed through conditions on law firms and ABSs, or on individual practising certificates.

This was the approach the SRA took with the joint venture ABS set up between insurer Ageas and Cardiff’s NewLaw Solicitors. It provided a waiver to the SBR that the connected businesses of Groupama Insurance, Tesco Underwriting and Ageas Insurance “may only continue with the prohibited separate business activities identified at the date of this decision, namely the conduct of third-party claims up to, but not including, litigation”. The Community Advice and Law Service was also granted a waiver from the SBR, otherwise all of its free services would have had to be regulated.

Starting from scratch

Alternative business structures and new entrants are the least of some firms’ concerns in the litigation market, especially personal injury litigation. The recent changes to the portal fees and the Jackson reforms make some business models unsustainable.

The recent changes to the portal fees and the Jackson reforms make some business models unsustainable.

Steve Carter, Head of Professional Practices Group, North, Baker Tilly


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An advantage new entrants to the market have is the chance to start from scratch, not just in relation to corporate structure, but in the whole way the business is structured. Riverview Law, says chief executive Karl Chapman, was built from the customer up – by asking what clients want from legal services – rather than from the law firm partner down, and seeks to change the way organisations buy and use legal services.

He says: “With Riverview Law we’re applying common sense business principles to a market that has been protected from real competition for too long. We have many advantages law firms don’t have; we started with a blank piece of paper, we spent time talking to businesses about what they want, and then we designed an operating and customer service model that delivers it – top customer support people, lawyers and legal assistants, combined with end-to-end technology and low overheads.”

Brilliant Law is also taking a very modern approach to building the business. “It is difficult to ‘broad brush’ the whole legal sector, but historically law firms have relied on personal connections to win work – certainly in the corporate sector,” says CEO Matthew Briggs. “With volume litigation and personal injury, a lot of that is through affinity partners and linking in with large work providers

such as insurance brokers and claims management companies.

“The way we see it at Brilliant Law is very different. What we are building here is a multi-channel and multi-dimensional marketing strategy to create one of the most future-proof models in the market. We still value referrals and personal recommendations as they are a really important part of our strategic aim to become one of the most recommended in our sector. But in addition, we are highly focused on creating a ‘digital shop window’ – establishing an online presence with branding through search engine optimisation and page search advertising. We are creating mechanisms to allow consumers to procure legal services in a different way.”

Brilliant Law developed its products by researching what people were looking for online, such as employment contracts, asset purchase agreements and shareholder agreements. “Our intelligent approach allows us to cherry-pick key areas we know people are searching for,” Mr Briggs explains.

“In addition, we are looking at affiliate relationships and affinity relationships where we support other brands and partner up with other entities who have a similar type of product set, targeting the same demographic to provide a more holistic offering to the business community.”

The ABS Bobby Dhanjal Legal Services was the brainchild of the eponymous Leicester-based IFA and operates as a separate entity – and in a different location – to Bobby Dhanjal Wealth Management.

“Coming from owning a financial advisors firm, what we bring into the legal market is a business acumen and proactive marketing philosophy,” says Mr Dhanjal. “We are looking to replicate that same formula in the law. The work within legal services providers is changing and price is becoming more of an issue. On top of that, there is packaging and looking at the whole delivery of services.

“Our approach has been to come into the sector, looking at its structure, and see how that matches ours. We are delivering legal services in a different way to the traditional billable hour model. But there are a couple of ways in which traditional firms can deal with the changing legal landscape. They can embrace it and see what it can bring to their own firm, or see it as a threat. New tools and ideas may allow traditional firms to operate in a better way. In all sorts of businesses, new ideas need to be embraced.”

New tools and ideas may allow traditional firms to operate in a better way. In all sorts of businesses, new ideas need to be embraced.

Bobby Dhanjal, Owner, Bobby Dhanjal Legal Services

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DAS has ambitions to become one of the half dozen or so consumer brands that some predict will come to dominate the legal market in the years to come. As part of this, in 2011 DAS bought online legal services company Everything Legal. Everything Legal – which owns legal advice website Law on the Web along with more than a hundred niche legal sites which together have getting on for 3 million visitors – gives DAS a strong direct route to market.

The separate business rule was one of the problems with the ABS application, says Kathryn Mortimer, DAS’s head of legal services and managing director of DAS Law. “Many businesses now investing in law firms may find that their activity could potentially offend the separate business rule. The SRA indicated from the outset of our application that our employees operating the legal advice line service to our 10 million policy holders would have to move into the legal practice and be regulated by them.

“There is one condition on our ABS licence which relates to the subsidiary Everything Legal Ltd, which has run PPI mis-selling claims for the last three years. The SRA has taken the view that this service is prohibited separate business activity as it is essentially carrying out pre-

litigation work. I argued that PPI mis-selling is never litigated, but the SRA did not accept this argument. We have reluctantly agreed to move all those activities into the law firm.

“It is this sort of situation which is causing a lot of ABS applicants’ problems. For example, accountants wanting to apply for an ABS joint venture could find that tax advice will fall under the separate business rule. I’m convinced it is slowing down the process because it can create havoc with an existing business’s internal structure.”

Ms Mortimer said she understood the thinking behind the rule: “It is driven by the fear that non-lawyer investors in law firms who don’t want to be under the onerous compliance regime of the SRA will buy a law firm and carry on certain legal aspects of the business out of sight. The SRA is concerned about losing visibility of part of the legal services they regulate.

“It will make business think twice about ABS licensing because it could mean restructuring processes simply to accommodate the SRA, which is not what they want to do.”

DAS Back in 2007, legal expenses insurer DAS was the first company to announce its intention to become an ABS and subsequently was one of the first to submit its application. However, it took a year to approve, with the company finally able to launch DAS Law – following the acquisition of Bristol firm CW Law – on 1 April 2013.

CASE STUDY

Predictions for 2020The increasing complexity of law firm structures will challenge the regulatory framework.

A fundamental review of what legal activities are regulated will reshape the market.

Law firms and ABSs will adopt marketing strategies much more reminiscent of retail operations.

Consolidation in the market will be driven by demand from big brands to have white-labelled legal offerings.

But there are more than 10,000 law firms out there, a good number of whom would love external cash but do not have the business case to convince an investor. This could be because they do not have a compelling use for the money (compelling to the investor, that is) or the management and/or structure to deliver the vision. Fewer than one in three in our survey felt that they had a good understanding of an outside investor’s requirements.

Christina Blacklaws, who joined The Co-operative from private practice, acknowledges the challenge for law firms trying to compete without this kind of backing. “I had a vision when I approached The Co-operative; to bring that into reality requires a small army. It’s phenomenally expensive and time-consuming from resources that law firms simply don’t have.

“The huge problem with traditional practices is the competing and conflicting interests in the partnership. That really comes to a head when the debate turns to investment. That’s what ABS gives. We are fortunate that we have internal funding where we don’t have to compromise our integrity or vision.”

It is, of course, a tension at the heart of smaller partnerships that the older partners eyeing up retirement are far less enthusiastic about loosening the purse strings than their younger colleagues looking to build for the future.

Kathryn Mortimer at DAS says she is in the same position as Ms Blacklaws. “We have in the insurance company a huge infrastructure of IT, HR and other facilities and we have access to capital as we are not in the legal environment of relying on billing of cases and turnover of legal fees. When you’ve got a big company like DAS owning

It would be an exaggeration to say that external money is pouring into the legal market, but there has been enough activity to date to suggest that plenty more is to come. As well as Duke Street, LDC and James Caan’s Hamilton Bradshaw – mentioned earlier – there was Palamon Capital Partners’ acquisition of high street brand QualitySolicitors in autumn 2011.

Funding

n Yes

n To some extent

n No

n Uncertain

Do you feel you have a good understanding of the requirements of outside investors?

28%

60%

12%

0%

n Yes

n Considering doing so

n No

n Uncertain

Do you plan to incorporate to provide you with a currency i.e. shares?

16%

21%

51%

12%

Christina Blacklaws, The Co-operative

The huge problem with traditional practices is the competing and conflicting interests in the partnership.



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a law firm, the opportunities are endless. We can invest in expensive and long-term systems for the business because we see it as a long-term operation.”

There is a longstanding fear among solicitors that external funding will lead to inappropriate, unethical pressures being brought to bear on them, although this does seem to stem from a belief that lawyers are in some way more ethical than non-lawyers. The ABS regime is highly regulated in part to address this and Kathryn Mortimer says the requirement for ABSs to have compliance officers in place – one heading up the legal practice and another with oversight of finance and administration – is a useful tool.

“With a role in an insurance company I bridge that gap between a lawyer in a law firm and a lawyer in a non-law firm. Insurance companies have a very different culture to traditional law firms so – although not in our case – integration can pose all sorts of problems. Insurance is more focused around Financial Services Authority regulation, underwriting and claims ratios, whereas lawyers are more concerned with confidentiality, service and SRA compliance.

“There can be potential tensions between lawyers and non-lawyers. You have to have a very robust compliance officer in a law firm who can control non-lawyer owners. Where there is non-

lawyer investment in, for example, claims management companies or retailers owning law firms, there is greater need for strong compliance as you have to be very mindful of the penalties.” (These can be up to £200 million under SRA rules, and up to £50 million for individuals.)

The world’s first listed law firm, Australia’s Slater & Gordon – which in 2012 acquired UK firm Russell Jones & Walker and recently added three more personal injury practices to its UK arm – addresses the possible conflict between client and shareholder interests directly, stating: “Lawyers have a primary duty to the courts and a secondary duty to their clients. These duties are paramount given the nature of S&G’s business as an incorporated legal practice. There could be circumstances in which the lawyers of S&G are required to act in accordance with these duties and against the interest of S&G shareholders and the short-term profitability of S&G.”

Bobby Dhanjal considers that Financial Services Authority regulation has been “a lot tighter” than that of the SRA. “Now the SRA is adopting a more robust style of regulation, I’m going to be bringing in a different way of working where the environment is that every single thing we do is under scrutiny.

“The legal sector is very strong and I think the changes happening to the legal landscape will create more healthy competition. I do believe there’s going to be a batch of solicitors’ firms that don’t make it – it is down to the individuals and how they run a business. There is a lot of scope for external investment in the legal sector now, but the problem is to invest, there’s got to be something of substance to put capital into. Again, the firms that survive will be because of the culture created by individuals, not because of takeovers.”

The Scottish market is in a similar state to that south of Hadrian’s Wall, including suffering the shock of an unexpected collapse when Semple Fraser went into administration in March.

There is a growing trend for Anglo-Scottish mergers, with some firms looking for the apparent safety of a larger practice and then mid-sized firms thinking that they need to do the same to remain competitive. It has generally been English firms taking over smaller Scottish operations rather than the other way round, and while there is a tinge of sadness that some of the old names are disappearing, partners realise that change is necessary for progress.

Karl Chapman of Riverview Law has little truck with the traditional model – except for the opportunities it presents to his business. “Historically you’ve

There is a tinge of sadness that some of the old names are disappearing. Partners realise that change is necessary for progress. Shirley McIntosh, Partner, Baker Tilly

2013 Legal Innovation Report

15

had law firms funding themselves primarily through bank facilities, whether loans to the partnership or to individual partners. This is changing rapidly as banks re-assess the exposures they have to law firms and as they change the way they calculate risk. That is why you are seeing, sadly, law firms going bust.

“Add to that, you’ve got totally ‘clean’ new entrants funding themselves through equity and other instruments, who are able to operate in an entirely different way. At the moment many are biding their time, getting their brains around what to do, but there will be an influx of new capital in the next three to five years which will drive and accelerate the changes already happening. Some new entrants will take advantage of distressed law firms and others will back new entrants on a scale people haven’t seen before in the legal market.”

It is, however, a dilemma facing both sides that while funders prefer proven business models, the edge provided by ABS is much more to do with development models which, by definition, are untested. It takes a particular kind of investor to put their money into a start-up which, to gain traction, will need to grow quickly.

One firm trying to position itself for the oncoming storm is Tees Solicitors, a law firm turned ABS with 200 staff in six offices across the northern home counties.

Chief executive Paul Stothard says: “We’ve checked what we are doing from the start with potential brokers and investors and taken wise counsel on where we should tinker or fundamentally shift the business to become ‘best-dressed’ when any opportunities arise for possible external investment.

“I think there’s a fear that investors will come in with a three-to-five-year exit plan, taking substantial returns and that it all gets a bit hard-nosed. The clever ones recognise the return is achieved through a number of things in terms of quality of people, how you manage them, brand and efficiencies.

“We don’t know for sure what’s going to happen in the legal sector but we’ve been talking about what an equity investor would look for in our business since 2006. It is not to say we want external investment, but we’d be disappointed if we did and we were not the best dressed at the dance. It is like telling children at school to pass all their exams because it gives them more opportunities. The more boxes we can tick, the more options we have. It is a work in progress and we are having to do it at an appropriate rate.”

Talk of ABS always conjures up the image of external investment – being the exciting end of the possibilities – although the experience to date shows clearly that cash is just one part of the

story. But those with an eye on external equity need to present themselves in a way that potential investors can understand, while at the same time understanding how their own businesses are valued. We find that firms which have a strong business case have a fear of striking a deal at the wrong price – this remains relatively new ground in the law firm world. Slater & Gordon paid around five times earnings for Russell Jones & Walker, which some see as a rule of thumb to start on; in its more recent acquisitions multiples of 3.5–4.5 have been used.

Matthew Briggs of Brilliant Law says: “Unless law firms start to measure their performance robustly then it is going to be an issue for any outside investor. It goes back to the quality of internal management in law firms. What are their internal financial controls? Are they making prudent financial decisions? Clearly with the firms that have gone [under], their financial rigour was flawed.”

Karl Chapman adds: “Irrespective of ABS, new entrants and new trade and equity investors, the funding regime for law firms is changing anyway because banks are forcing it. From a law firm perspective it really is the perfect storm – regulatory change plus increased competition plus a weak economy plus changed banking arrangements plus a partnership structure plus customer action equals a maelstrom.”

We don’t know for sure what’s going to happen in the legal sector but we’ve been talking about what an equity investor would look for in our business since 2006.

Paul Stothard, Chief Executive, Tees Solicitors

16

The firm’s aim is to act as a legal ‘best friend’ offering fixed-fee legal services to businesses and consumers. The initial focus is on corporate work, with a series of fixed-price packages for start-ups and SMEs in addition to a ‘pay as you go’ menu of fixed-price ad hoc services, along with downloadable legal documents. The ambition is to have up to 400 staff by 2016.

Chief executive Matthew Briggs says: “We run Brilliant Law as a corporate enterprise with all the things you would expect – internal controls, systems, objectives, business plans and weekly cash flow monitoring.

“Our model appeals to investors as we are able to measure performance quite accurately. We can predict, with a high degree of certainty, our five-year business plan and what we can deliver. Those clear ratios give an investor a good indication of return and that is a key part of our business model compared with traditional practices.

“As more ABSs come into the market, they will be run and managed in a more commercial way, more robustly and with a more intelligent internal understanding. That will give comfort and reassurance to investors to know exactly what they are getting involved in.”

As explained earlier, this non-legal background also means Brilliant Law is looking at its routes to market very differently, with digital marketing high on its agenda. One way that traditional law firms are “very primitive” is in marketing themselves, says Mr Briggs – they do not know how to explore and exploit different techniques. It is unlikely that many would recruit the former head of marketing at WeBuyAnyCar.com, as has Brilliant Law.

Brilliant Law mainly works on fixed fees but believes that not everything can be done that way. “We still have a billable model, but we understand the internal dynamics of the sector and we make sure the price is right – overlaid by what the market will pay,” says Mr Briggs. “It is about being profitable, yet still appealing to the consumer.

“Do traditional law firms really fully understand how to measure their internal metrics? And added to that, do they have the wherewithal or systems to deal with that? As a pure-bred start-up we intentionally put all these things in place from day one and built on them as the platform.”

Brilliant LawBrilliant Law describes itself as “the first true pure-bred ABS start-up”.

Set up by non-lawyers, its principal investor is Bert Black, the founder of Betfair and a man with an £82m fortune, according to the Sunday Times Rich List. Having successfully disrupted the gaming market, he is now turning his attentions to the law.

CASE STUDY

Predictions for 2020As both investors and law firms better understand each other’s requirements, investment will flow more readily.

A process of natural selection will thin out those without the backing to compete.

A ‘trade’ in law firms will emerge as investors look to exit – with few law firms business planning more than three years ahead, fears over the regular three-to-five-year investment cycle will recede.

Law firms will adopt proper performance metrics

17

“I know there’s a big focus on online as a delivery system and of course that’s very important, but a much more fundamental shift that is going on is really about self-help. People now have a willingness and ability to do things for themselves that lawyers have done for them previously.

“That is both by helping themselves using online as a mechanism or tool, and by getting greater confidence to serve themselves in the legal services area. So there will be an increasing focus on enabling people to help themselves.”

Thanks a bundle

‘Unbundling’ legal services is a hot issue right now, with the contraction of the number of people eligible for legal aid a particular driver. It has been endorsed by Law Society president Lucy Scott-Moncrieff, who told a legal aid conference in March that solicitors should look at offering clients advice on parts of a case as well as traditional retainers. The “regulatory and

insurance challenges” thrown up by unbundling were “not insurmountable”, she said, although certainly there are issues – such as over the scope of retainer – that are being investigated.

Yorkshire law firm Oxley & Coward is one to take up the challenge, recently launching a ‘Pay as You Go’ service for family law clients who are no longer eligible for legal aid. The scheme sees clients take on some tasks normally done by a solicitor, so that they only pay for advice and professional experience when needed.

The idea is that with clients being the first point of contact and dealing with documents and administration, legal costs are kept to a minimum. The firm charges an agreed fixed fee for representing ‘Pay as You Go’ clients at court.

Then there is a sole practitioner in north London, Emel Hussein, who has launched a business offering a range of unbundled legal services at fixed fees, including

“If we are looking to 2020 and 2030, I think the one thing that is certain is that services, in terms of the way they are delivered, or the client experience, will be completely different,” says Andrew Grech, managing director of Slater & Gordon.

Delivery

Andrew Grech, Managing Director, Slater & Gordon

If we are looking to 2020 and 2030, I think the one thing that is certain is that services, in terms of the way they are delivered, or the client experience, will be completely different.



18

consultations via Skype for people who need help conducting their own cases.

Her iSolicitorUK site offers a web ‘shop’ with a menu of fixed-fee services, run by a team of freelance lawyers working on a fee-sharing basis and covering a swathe of the south-east. As well as face-to-face fixed-fee case handling, iSolicitor includes such services as a £50 Skype or telephone consultation, lasting at least 30 minutes, a £150 document check service for up to 10 documents, aimed at litigants-in-person, and a £65 one-off ‘letter before action’ service in conjunction with the online consultation.

Another driver is the expansion to the UK of online legal document assembly services such as RocketLawyer and LegalZoom. The danger has even been recognised by the conservative American Bar Association, which passed a resolution earlier this year that lawyers should offer unbundled legal services to the public in order to improve access to the law – and also to compete with these services. It said that as well as improving access to justice for a rising number of self-represented litigants, unbundling services into more affordable chunks would help lawyers expand their client base.

Process servers

Unbundling is a manifestation of one of the longer-term trends in the law: separating process from value. In the future there will be little value in process – that can be done either by technology or lower-cost, non-qualified staff. Clients will, however, pay for the substantive legal work that requires expert advice from a lawyer. This also raises the difficult issue of how much lawyers should give away for free before starting to charge.

Andrew Grech says: “I know that there is a lot of focus on value-based pricing and it is important to constantly ask the question, ‘What is the value of this piece of work to the client?’ Good firms have been doing that for a long time; there’s nothing new or revolutionary about that. The more important change is an attitudinal one, which is very deep seated and does run across the whole landscape of users of legal services.

“There is a much stronger propensity for clients to want to be in control and decide for themselves how they will pay for legal services and how fees for legal services will be determined. Our way of describing it is that once the lawyer was king, now the client is king. The transition the profession is going through is adapting in a fulsome way to that idea.

“Some firms have already made that adaptation and some have to some extent, and others still are resisting it. But the acceptance of that idea is fundamental to who thrives and who will no longer be able to thrive in the market.”

That concept applies equally to business clients, argues Karl Chapman of Riverview Law, and much of it comes back to fixed pricing. He argues that while regulatory reform was the lightning rod, the real change is being driven by customers. “They’ve had enough and suddenly they have increasing choice. Just one or two years ago the only real choice for a general counsel was to accept the hourly billing model from all law firms or to do it themselves in-house.

“Now they have businesses like Riverview Law providing high-quality, cost-effective outsourced solutions on a fixed-price basis. The genie is out of the bottle and hourly billing will never go back in.”

This is supported by a recent survey of in-house lawyers at large multinational companies, conducted by City of London law firm Field Fisher Waterhouse. It found a widespread desire to move away from the hourly rate model, and for external law firms to share risk.

Furthermore, an as-yet-unpublished Legal Services Board survey of the legal needs of some 9,000 small businesses will report

Unbundling is a manifestation of one of the longer-term trends in the law: separating process from value.Rowan Williams, Head of Professional Practices Group, London and South, Baker Tilly


19

soon that just one in eight small businesses believe that lawyers provide a cost-effective solution to legal problems. This suggests a far larger unmet legal need among SMEs than among the general public.

Hit the road

One of the more advanced examples of how delivery is changing is the website Road Traffic Representation, an online legal service for those faced with prosecution for motoring offences. This uses artificial intelligence through a question-and-answer process to diagnose – for free – not only the likely penalties for the offences charged, but also the potential for any defence.

It provides a range of low-cost tools to help – such as letters of mitigation – but if the visitor then wants representation, the site selects and appoints a barrister and then automatically briefs counsel by collating all of the data collected during the online process. It is at this point that the visitor pays a fixed fee for representation, i.e. pays for what is valued and not for mere process.

Its creator, solicitor Martin Langan, argues that the traditional model of legal services has been sustained by mystique and protectionism. Protectionism was pulled down by the Legal Services Act 2007, but he suggests that many of the new entrants to the market are “making the most of

the status quo in terms of how work is done, which still keeps prices high even if they are offered as fixed fees rather than hourly rates”.

He continues: “The big game changer is the power of technology to pull back the curtain of mystique. We largely gave up paying scribes to read and write for us centuries ago and there is now no longer any reason why we need to pay someone to tell us what the law says and how it can be applied. Many lawyers still cling to the view that their websites shouldn’t give away the ‘Crown Jewels’ – that is, they should tempt you into the shop but not tell you anything that will make this unnecessary. This is a view that will soon mean no one will even bother to look in their window.”

Channel surfers

The key to delivery in the future is choice. Tees Solicitors’ Paul Stothard says: “We are in a world of choice where people want to receive legal services as they expect. There’ll be categories and sub-categories of people who will demand a certain style of delivery. That is either through web, telephone, mobile devices, online information. There’ll be a place for call centres. Some people will be happy with receiving standard forms because of the price benefit. It is an accessibility and value equation – how much is this transaction or issue worth to me?”

Karl Chapman, Riverview Law

Regulatory reform was the lightning rod but the real change is being driven by customers.

For Kathryn Mortimer at DAS, however, not offering face-to-face service is a way to keep fees very competitive. “We are quite focused on commoditising legal services where we will be delivering services to the public over the internet, or by telephone and email and not through traditional face-to-face client engagement,” she explains.

“That means that we can offer fixed-price services at very competitive rates, because we are not hampered by having to run an office with a public front. I think there is so much opportunity in this area. Legal services in the UK are worth about £26 billion and £15 billion outside the City of London – so there is huge potential.”

The complication for traditional law firms, says Mr Stothard, is the new competition from brands. “The key with brands, which we are just scratching the surface of with Tees, is the consistency of service. If Co-op, for example, ports across to its legal offering the consistency of service it offers elsewhere, such as its funeral care, then they’ll win.”

Mr Stothard adds: “The competition barriers to the legal profession have gone, so what

are we going to do? Pricing has been one response and it is being driven down all the time in certain commoditised processes. The genie is out of the bottle on the true cost of some transactions. The other inevitable response is consolidation. Why? Because of the cost savings associated with it. At last firms are having to look very carefully at cost.”

Tees is also taking a more aggressive stance. “If new entrants can come into law and try and take our clients, then we should be taking them on in their own backyard.” The firm’s next move is to create a ‘Tees’ umbrella and begin to expand into other industries.

Law firms know they need to be looking at new ways of delivering services but the problems for many are a combination of limited capital resources and the old phrase “they don’t know what they don’t know”. While law firms believe they are forward-thinking in their use of technology to offer a better client experience, nothing has really changed yet. The challenge will come when the next generation of law firms think of extraordinary ways to use technology to wow clients and deliver routine legal services in completely different ways.

The winners among legal service providers will be those who create whole-of-life relationships with their customers. That will represent a genuinely disruptive force in the marketplace. To date, ABSs have had insufficient time to create those relationships so have created less disruption in the market than might have been expected.

The next generation of law firms will not only have access to completely new methods of delivery of service but also to the creative input of non-lawyers coming at problem-solving from a totally different angle. It is not inconceivable that these next-generation law firms will provide many of their non-contentious and advisory services via dedicated tablets given to each of their clients.

Kathryn Mortimer, DAS

Not offering face-to-face service is a way to keep fees very competitive.

George Bull, National Chair of Professional Practices Group, Baker Tilly

ABSs have created less disruption in the market than might have been expected.

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It made clear its intention to become an ABS early on and, along with two small law firms, Co-operative Legal Services (CLS) was the first ABS to be licensed by the SRA. Its preliminary results for 2012 showed that CLS’s revenue was up 12.8% to £33 million, delivering a profit of £26,000 “in this start-up phase, after absorbing significant investment for growth costs”. This would place CLS at 76th in The Lawyer magazine’s table of the top 100 law firms by turnover.

In May 2012 CLS announced plans to create 3,000 jobs over five years in a bid to create the largest consumer law business in the country. Currently based in Bristol, it will also open five regional hubs across England and Wales in addition to the new family law operation in London.

Christina Blacklaws, CLS’s director of policy, says: “We have more of a retail model as we are entirely consumer-focused. We have a vision, we research that it is going to work for our chosen demographic, and then we build it from there.”

Research and development is not a concept you hear very often in the law. Maybe that’s because it is too costly and difficult for traditional firms to do. Ms Blacklaws says: “What we have is a £14 billion organisation that is fully supporting us in research and development to meet our aspirations.”

The clearest example of its approach has been its new family law service. It has won one of two government national family legal aid contracts to deliver a telephone advice service for those people still able to claim legal aid help and 78 face-to-face contracts across locations in England and Wales. The network is made up of its own offices, Co-operative Bank branches, National Family Mediation centres and its six panel barristers’ chambers.

CLS established its family law division in September 2012 and Ms Blacklaws says it has helped around 8,000 people since then, providing around £250,000 worth of free initial legal advice to those not eligible for legal aid as part of that. By the summer CLS will have around 60 fee-earners doing this work, making it probably the largest family law practice in the country.

It is all done on a fixed fee (there are 87 different family services) and Ms Blacklaws says CLS is fully signed up to the concept of unbundling. In family law it provides self-help tools supported by YouTube videos, while in employment law they are developing tools that aim to resolve a dispute as early as possible. It is part of CLS’s differentiator, she says: “We’re a small part of a larger business that has a different set of goals to other businesses.”

The solicitor recalls that the administrative side of legal work used to be “quite soothing” when she was in private practice, but adds: “I don’t think lawyers should be paid for doing administrative work or providing information that should be freely available.”

Co-operative Legal ServicesThe Co-operative has been offering legal services since 2006, taking advantage of rules for membership organisations and also of the limited nature of reserved legal activities.

CASE STUDY

Predictions for 2020It will be clients who decide how they receive their legal advice, not their lawyers.

Unbundling will see greater integration of legal and other services; in time this could see consumers ‘build’ their advice package online in the same way that they do with holidays now.

Multi-disciplinary offerings will help lawyers reclaim their former role as hommes d’affairs, offering a wrap-around advice service to clients.

The rise of the fixed fee seems unstoppable – and it will no longer be calculated in such a way as to deliver the same result as the hourly rate.

Face-to-face advice will always have its place, but it will be much more closely integrated with other delivery methods and will become less frequents


22

An increasing number of firms have brought in non-lawyer managers, in some cases making them partners, but the idea of collegiate decision-making remains in many of these firms.

“We’ve taken the view that the partnership model is dead,” says Paul Stothard, chief executive of Tees Solicitors. “We believe that the only way businesses in the legal sector will be able to thrive and survive and attract sufficient funding is to adopt a corporate model.

“We say that because new entrants to the legal sector are not limited by how much an individual partner can raise. The partnership model is not sustainable. Under the Legal Services Act, new entrants can have funding from –

within reason – anybody. There is a more free flow of capital into the sector than there ever was before.

“What’s driven that are a few things which came crashing together. The Legal Services Act opened the sector up and there was the financial crisis of 2008. That precipitated banks getting twitchy and what we’ve seen in a number of examples is that the banks’ attitude towards the more traditional structures has changed quite dramatically.”

The likes of Riverview Law and Brilliant Law did not think twice about setting up with corporate structures. Mr Stothard – an accountant who is now in his third law firm CEO role, after Shoosmiths and what was then Townsends – knows the problems

Management and peopleOne of the less surprising trends from the last three years and looking to the next seven is the pressure on the partnership model. Terminology is used loosely here – while there remain examples of big corporate organisations using the partnership model to great effect, such as Goldman Sachs, in the law it is shorthand for a non-corporate way of operating (and indeed funding). This has traditionally meant a solicitor doubling up as the managing partner, juggling fee-earning and management, with all other partners having their say in the running of the partnership and, crucially, taking all the profit out at the end of the year.

Paul Stothard, Chief Executive, Tees Solicitors

We’ve taken the view that the partnership model is dead.


23

of a traditional partnership better than most.

“I’ve been a chief executive in law firms since 1996. I think that most law firms are managed by lawyers perfectly well day to day. The challenge they always face is that within their peer group – apart from the biggest firms – they are still expected to do client-facing work. Therefore, management is fitted around the day job. Operationally it probably works fine and if something drops, then they deal with it. But strategic management requires quality time spent on looking forward to spot the problems/opportunities early.

“They are not ‘advanced motorists’, planning the journey and looking into the distance. If they are fitting management around the day job and suddenly spot a hole in the road, then the reaction is jerky and you get a lot of travelsick people on board. I would never suggest it is a capability problem with lawyers; it is a priority and time availability issue.”

Confused owners

For Kathryn Mortimer at DAS, non-lawyer management introduces new ways of thinking. “A positive of non-lawyers owning law firms is that they come with a different strategic view of how a business should be run. I say this as a qualified solicitor – some lawyers are not always particularly good

businessmen. They are good at running cases and generating income, but in terms of running a business, identifying procedures to be streamlined, and investment in systems to deliver legal services in different ways, lawyers are not leading that change, whereas if you bring in a businessman to run a law firm and if they are the right person, then they can make considerable improvements.”

For all but a small number of law firms there has been a continued pressure on margins and this, in turn, is forcing many firms to move to a more corporate culture; especially in the way they reward partners.

Andrew Grech, managing director of Slater & Gordon, reckons the combination of lawyers and non-lawyers, “constantly applying themselves to the question of how we can improve client service… has very much transformed our approach”.

He continues: “The application of more sophisticated management thinking to making sure we fully understand our clients’ needs, desires and aspirations is fundamental. And that is true within some of the better traditional magic circle law firms, some of the new business models that have popped up, and in some of the leading consumer law firms – we consider ourselves among that group.”

n Yes

n No, but expect to


n Uncertain

16%7%

26%51%

Have you lost business to a non-lawyer competitor?

n Yes, actively pursuing

n Yes, considering doing so

n Haven’t considered this

n Wouldn’t consider this

Have you considered providing non-legal services via an appropriate non-lawyer party?

18%19%

44%

19%


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Riverview chief executive Karl Chapman has little time for the way traditional law firms are managed: “You can make a strong argument that law firm partners have confused ownership with management and that they have struck entirely the wrong balance between income and capital. This has huge knock-on consequences.

“Most senior and managing partners we speak with recognise the need for change, indeed they know what they need to do, but the partnership model makes it very hard for them to make that change. At one level I feel very frustrated for them. At a competitive level, long may the partnership model continue.”

“Making a law firm fit for the emerging legal market will take time, and requires two things that most law firms don’t have: the appetite for significant cultural and behavioural change, and a balance sheet that can support a people and technology re-structuring. Most firms don’t have a strong balance sheet because all the profit is distributed to the partners at the end of each year. They just don’t have the flexibility that well-capitalised new entrants have.”

People power

Last year, Edinburgh-based Fox & Partners became the first law firm in the country to be fully owned by its employees. Founder Carol Fox says: “Within traditional law

firms the power is still taken by very few people right at the top. We have committees here at Fox & Partners, it is about democracy in the workplace with listening lunches and allowing the staff to bring any concerns to the fore.

“In the next 20 years, if you want to survive in the marketplace you are going to have to deal with things in a different way. There is a crisis among some bigger firms who are finding themselves trying to take an outdated model and examine how it functions internally. An awful lot of firms can be shockingly bad employers and it is difficult to tackle that culture.

“People are reluctant to challenge it because they see their career, which they have worked so hard for, on the line if they do. But I would hope that it will change – maybe slower than I would like, but we’ve set out on this path and I want others in the legal sector to follow us. Maybe our model means we take more time having to consult with everyone, but in the end the result is much better for all concerned. We are trying to do something different here to challenge that traditional model.”

Fox & Partners is evidence that as the approach to management changes, so does the approach to people more generally. Paul Stothard says: “As we go forward in this firm – and most firms of a reasonable size – having someone dedicated to look after

You can make a strong argument that law firm partners have confused ownership with management and that they have struck entirely the wrong balance between income and capital.

Karl Chapman, Chief Executive, Riverview

25

the finances is important but the increasingly really enlightened firms have recognised the need to have someone who knows what they are doing with people.”

Karl Chapman highlights it as a key priority: “We work very hard in our business to make sure that all our team are in the same canoe, with a paddle, going in the same direction. In most law firms the people are in different canoes, some don’t have paddles, those that have are paddling in different directions, and some jump over board to swim to other law firm canoes. The lateral hire model for growing a law firm shows you how fundamentally flawed the business model actually is.”

Succession planning is an interesting area. It used to be the case that the goal for a high flier was equity partnership. The existing partnership model is (and the existing partners are) still reliant on this. However, aspirations are different now. We are frequently seeing money or fame as the drivers. This is resulting in the requirement to motivate and incentivise people differently with innovative remuneration systems. Equity partnership is often not on the shopping list. This is clearly going to cause firms some financial issues as existing partners retire and withdraw their capital. You will need to plan.

The average age of practising certificate holders is increasing

each year, new admissions to the roll were down 25% in 2012 and new contracts offered in 2012 were only 76% of the admissions figure. It’s hard to see where the next generation of partners is going to come from, much less how they are going to finance their entry to partnership, assuming they even want to be partners. In fifteen years from now there will probably be half as many firms as many of the four-partner-and-fewer firms (which make up 85% of the total) simply fail to find successors.

Pre-packs – the new retirement plan?

Many of the smaller firms around the regions are caught in a trap. The ageing partners can’t retire because they can’t find new partners to take over, can’t close because they can’t afford the run off insurance cover and can’t sell the business on because no one is prepared to take on the successor practice responsibilities. For these firms, improbable as it would have sounded two years ago, pre-packs may offer the only way out.

Together forever

Bobby Dhanjal reckons that the dynamics of working with solicitors is different when you come in from outside the profession. “You have got to have solicitors working alongside you,” he says. “If you are coming into the legal sector and focusing solely on price, the solicitors

will point out that you may be disregarding the quality of advice and customer service.”

Change is likely to come to the way lawyers are trained as a result of the Legal Education and Training Review, publication of which was expected at the time of writing. Mr Dhanjal welcomes it: “The industry is changing and the way in which solicitors are trained needs to change too. With our firm, I’m going to create a new level in place of the traditional paralegal. My staff will become business development managers. I want them given legal tasks at an earlier stage, rather than just administration, to see how well their skills can adapt to becoming a trainee solicitor.

“I want them to become proactive trainees going out and getting business, rather than the traditional reactive solicitors of the old model. By having this programme for the continued professional development of our staff, it will better prepare them for the changing legal world where you need to have more business acumen.”

At Brilliant Law, Matthew Briggs says: “If you want to have a long-term model in the legal sector, a number of things are going to have to change. That is strategically – how you manage, plan and execute it – and making sure the right people are in the right roles, not necessarily solicitors.

It used to be the case that the goal for a high flier was equity partnership. The existing partnership model is still reliant on this. However, aspirations are different now. We are frequently seeing money or fame as the drivers.

Rowan Williams, Head of Professional Practices Group, London and South, Baker Tilly



26

“Lawyers need to fulfil the work, but it requires experts around them to make sure the business is run beyond just being a law firm. A firm needs to take the view that what it is running is a corporate enterprise – which just so happens to provide legal services.

“I want to push boundaries on client service but the converse is that solicitors need to engage with a more entrepreneurial commercial environment which sees things quite differently to a traditional practice. The things we do here don’t get taught commonly in traditional firms.

“It is fundamental to have the right people in the right roles in any business – but in the legal sector there is the added dimension of having the correct structure, but ensuring the personalities and professional relationships are appropriate. At Brilliant Law a stereotypical insular lawyer will not fit in – we are entrepreneurs here and they need drive and vision.”

This is leading to the creation of new types of job, as predicted by Professor Richard Susskind in his book The End of Lawyers?. The likes of Riverview, Co-operative Legal Services and Parabis are demanding a new approach to educating and training new lawyers as they create different roles for them, such as project management and data analysis.

Riverview is creating a host of new roles – all of which need some degree of legal knowledge – such as project managers, scoping and pricing analysts, management information and data analysts, knowledge management specialists and client managers. “Some of the best people we’ve got are senior lawyers doing legal workflow and process analysis,” says Karl Chapman. “However, legal competence is only part of the picture. Clients need to know what to do with the advice to give it any value.”

Co-operative Legal Services is launching a ‘Learning Academy’ later this year that will offer all staff training for a range of skills and qualifications, including becoming qualified lawyers. Speaking last year at a Legal Education and Training Review event, James Atkin, head of legal, risk and compliance at CLS, predicted that ABSs in particular are “likely to employ and train specific skills for specific elements of client interaction and service delivery, including behavioural as well as technical skills”; while some roles will require detailed legal knowledge, others “will demand a broad but relatively modest knowledge of a large number of legal areas”.

“This isn’t to say career development opportunities will be limited. There will be a greater range of roles, opportunities to move between them, internal training opportunities, more

‘on the job’ training, and opportunities to manage teams which perform these new roles. It ought to be easier to get a first foot on the ladder without having a qualifying law degree, post-degree qualification and training contract or equivalent.”

Mr Atkin said that legal services roles will increasingly focus on limited aspects of the customer or operational journey, such as advice, sales, operations, audit and reporting. “Some roles in larger providers will have very little or nothing to do with law, and more to do with risk management, project management, technological solutions and pure service considerations.”

He said future provision should make appropriate training and qualifications available “for the wider variety of customer-facing roles we will see. This means behavioural as well as technical skills have to be developed.”

James Atkin, Head of Legal, Risk and Compliance, Co-operative Legal Services (CLS)

Some roles in larger providers will have very little or nothing to do with law, and more to do with risk management, project management, technological solutions and pure service considerations.

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The firm specialises in claimant employment and equality matters, and all legal work will be carried out by the separate independent law firm Fox Solicitors. Fox & Partners has also joined a family of employee-owned businesses under the umbrella of Baxi Partnership, a company that helps to fund, establish and support such companies.

The firm is run by a management board made up of representatives from every area of the business, ensuring that legal, administrative and support staff all have a say in its direction and strategy.

Founder Carol Fox says: “I come from a background in employment rights with a law degree specialising in employment and discrimination law. Having got into the position of setting up a firm of my own, I wanted to practise what I preach and treat everyone with respect through a model which reflects those values. Employee-ownership enables that vision.

“I’ve worked in three different law firms and didn’t feel comfortable with a hierarchy where only a few equity partners took the rewards for everyone else’s hard work. I believe there are very serious

issues in traditional law firms with how they treat women – the internal workings leave a lot to be desired. I wanted to do something entirely different.

“I certainly hope that this model can help change the way the legal sector is run. What we are seeing is the death of the traditional law firm. They are all trying to merge to stay alive, but just merging an old structure with another old structure won’t work.

“We’ve stood back and looked at the market with imagination and creativity by involving all staff and sharing the rewards more fairly. Research shows the benefits of employee ownership come from the difference in team work and atmosphere among staff. The difference between this model and other new models like an ABS is that employee-ownership is not just about the bottom line. It is about how you treat people so they want to work hard to share in the success. The ABS model is more about enabling different players to come into the market... But there remains this hierarchy, which is not examining any of those key values we stand for.

“The employee-ownership model is a real opportunity to address

those issues. We should be looking again at a different way, particularly in the legal profession where we are bound by a code of ethics. It is a good bedrock to build upon – that’s the theory.”

Fox & PartnersFox & Partners in Edinburgh broke new ground for the legal profession last year by becoming the first law firm wholly owned by its employees. All of the firm’s 10 staff have an ownership stake in the new entity, as well as full representation within new management arrangements.

CASE STUDY

Predictions for 2020Who a ‘lawyer’ is will change significantly as a range of roles develop within legal businesses that do not involve directly providing legal advice; non-lawyer owners in particular will look at what a person brings to the business, not their qualification.

Skills such as project and process management will be critical to the future success of firms.

Regulation will focus on the entity’s activity, rather than the various individual legal professionals.

The idea of partnership bestowing ownership rights in the same way as it does currently will die out.

New competition will not be shackled by historic cultural barriers. This inability to deal with cultural change is what is hampering many law firms’ efforts to move with the times.Steve Carter, Head of Professional Practices Group, North, Baker Tilly


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The firm, which was established in the early 1980s, provides legal and tax advisory services. It has an annual turnover of €100 million (£82 million), 160 lawyers and 320 tax advisers, with nine offices in Italy and one in Beijing in addition to London, which opened in 2011. The firm says the decision to apply for ABS status “opens up the possibility to offer tax compliance and accounting services”.

Announcing the application last year, London partner Colin Jamieson said: “The Italian legal market is very different to the UK. While we could provide a full range of business services in the UK, we would have to keep the financials separate. So we have decided to apply to become an ABS to allow us to ensure we can build a fully integrated office here, providing a full range of multi-disciplinary services.”

Closer to home, Scotland will have its own form of ABSs – although

non-solicitors will only be able to hold a minority stake – later this year. It is not yet clear how the 49% ceiling will play out in practice, although some are already looking at ways to get around it.

Leading private client practice Turcan Connell has been on record for some time as wanting to become an ABS so that it can promote non-lawyer personnel. “There have been quite a few enquiries of the Law Society of Scotland, but more about the Turcan Connell model than external investment,” says Shirley McIntosh, Tax Partner at Baker Tilly.

Back in 2011, a report for the SRA indicated that it had already received “strong interest” in ABS investment from abroad and from non-English law firms that want to use the structure. They included, it said, one of China’s largest law firms, which was planning to open an office in London as

InternationalApart from Australian law firm Slater & Gordon, as yet there are no other ABSs of an international nature (although DAS is owned by Munich Re).

One coming soon should be Italian multi-disciplinary firm Pirola Pennuto Zei & Associati, which wants to allow accountants and lawyers in its London partnership to share revenues and profits.

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part of a long-term plan leading eventually to the creation of an ABS targeting Chinese investors to the UK with a one-stop shop of professional advisers, including solicitors.

The report’s author, Alison Hook, who is now the SRA’s international adviser, says that two years down the line the interest is still there, but nothing has really gathered pace. “There’s a real sense internationally that people are waiting and seeing,” she says.

The reality is that becoming an ABS is of limited value to overseas firms – unless they are looking to enter the English and Welsh market – given that they would need to have a solicitor owner and conduct reserved legal activities to be eligible. “You can do a lot of things as a foreign lawyer in England and Wales without needing to be regulated,” Ms Hook observes. “I don’t see a queue of other Slater & Gordons. If someone comes up with an exciting new way of doing corporate practice through an ABS, however, then people will sit up and take notice.”

“Where I do see more international interest,” she continues, “is in governments and regulators outside of Europe looking at the experience here and developing their own ideas.” Countries such as Canada and Singapore are investigating ABSs, although in many others, law firm structures need to develop a long way before

they could even begin to think about ABSs.

But of particular interest is the forthcoming report by the European Commission on the Establishment Directive, the piece of legislation that facilitates the movement of lawyers across EU borders. Ms Hook says the commission has been looking at ABSs. “Europe is an increasing patchwork in terms of non-lawyer involvement in law firms, with a growing number of countries allowing a limited percentage of non-lawyer partners. It makes a mockery of any idea of a single market. The European Commission is aware of the sensitivities and likely resistance to the adoption of the ABS model outside the UK, but is nonetheless interested in promoting more flexibility in law firm structures.”

Certainly resistance continues – the German Federal Bar has been a vociferous opponent of ABSs since the Legal Services Bill was going through Parliament in 2006, arguing that non-lawyer ownership represents a serious threat to the independence of lawyers working at such firms. It has said repeatedly that ABSs will not be allowed to practise in Germany.

Meanwhile, the body representing the 179 French bar associations last year passed a resolution that ABSs cannot be viewed as law firms and will not be allowed to operate in France. The Conseil National des Barreaux said ABSs

conflict with the independence of the legal profession. The decision was made even though French avocats have, since 2011, been able to set up a form of multi-disciplinary practice with some other professions, such as accountants and notaries. It is likely to mean that if an English firm with a Paris operation became an ABS, it would need to find a structure to isolate the French arm from it.

It is a similar story across the Atlantic, where an American Bar Association (ABA) investigation into limited forms of ABS – excluding the prospect of passive non-lawyer ownership – was gradually watered down to the point where it dropped plans for any changes to its policy prohibiting the non-lawyer ownership of law firms altogether. “The case had not been made for proceeding” with the reform, its Commission on Ethics 20/20 decided.

The plans to open up ownership were strongly opposed by a group of nine leading general counsel in the US, who argued that it would damage lawyers’ professionalism. They said the proposal opened the door to arrangements “that make the practice of law more like other businesses and less like the distinct profession it has always been”.

Also last year, New York lawyers were banned from running the Big Apple office of a UK

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ABS with non-lawyer owners, following a decision by the New York State Bar’s committee on professional ethics. It said such an arrangement would fall foul of a rule which forbids a lawyer from sharing fees with a non-lawyer, and from “practising law for profit with an entity that includes a non-lawyer owner or member”.

The opinion said this would be the case even if the New York lawyer was dual-qualified as an English solicitor. However, a separate opinion issued last year means that a New York lawyer could be a member of an ABS if working in England and Wales.

These stances will only increase the caution of the largest City of London law firms towards external investment and goes some of the way to explain why none of the biggest firms have thus far embraced ABS status. It is no surprise that a challenge by New York-based national personal injury firm Jacoby & Meyers against the bans on external investment in New York, New Jersey and Connecticut is being watched so intently.

Andrew Grech, managing director of Slater & Gordon, predicts that there will be “a definite but slow move to opening up ownership structures for law firms generally,

but particularly stylised in the form of the UK legislation. We’ve had a number of delegations from law societies in Singapore, Hong Kong, Malaysia and law firms in China who have come to visit with us to talk through the practical implications of non-lawyer – and in our case public ownership – of law firms. They are all in various stages of preparation of reports into whether they should go down that path or not.”

He continues: “There’s a very mixed level of understanding of what it entails. Broadly, it is an education process and in my experience it will be many years before it bears fruit. I don’t believe we will see sweeping changes occur quickly, but I do believe it is set on an inevitable course towards the UK regulatory model. The real question is whether it takes five, 10 or 15 years.

“We are seeing some changes take place already. For example, the Malaysian parliament passed some legislation several months ago to make it easier for foreign law firms to practise domestic law in Malaysia. It’s a first step, but I think demonstrates that the process of change undertaken in Australia and the UK is now underway.”

One of Riverview Law’s first moves after launching in February 2012 was to open an office in New York to act as a conduit for US companies needing English legal advice. “One of the great opportunities for the English legal system is that it is at the forefront of the change in the legal market which will inevitably roll around the world. The only question is time frame,” says Karl Chapman.

“We get lots of contact from international players wanting to engage with us. They see us almost like a research and development incubator for what they see happening at some point in their markets. They want to know what models are working and how to deploy them in their domestic territory.

“In the next five to 10 years, UK legal businesses can carve out a bigger world share. It helps that, along with the US, people want access to the English courts because they are seen as fair. Combine this with the changes occurring now, and we are ahead of the curve collectively as an industry. It is a dramatic opportunity to explore.”

There will be a definite but slow move to opening up ownership structures for law firms generally, but particularly stylised in the form of the UK legislation.

Andrew Grech, Managing Director, Slater & Gordon



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We need to think about the next generation of consumers, too, and how they will want to engage with their legal service providers. Where will they see the value? Management teams making these predictions may not be in the same generation and so need to think carefully about this. We are already in the ‘Age of App’ where consumers want to use internet-based solutions to deal with day-to-day issues themselves. They are doing this now to an extent we couldn’t have anticipated ten years ago so how can we predict the development of technology solutions ten years from now?

The ball has started rolling and we can only see it gathering pace over the years to come. In a few months there will be around 300 ABSs and as the number and variety grows, they will become more ‘everyday’ and assimilated into the legal culture. From those roots many trees and branches will grow. There

are around 11,000 law firms in England and Wales, the vast majority having four partners or fewer. That the number of such firms will fall in the coming years seems beyond doubt; the only question is how steeply it will do so. The established high street law firm with deep roots in its community should still have a place, but nobody can afford to ignore what is going on around them. Our survey shows that most firms either have changed or will change their strategy due to the Legal Services Act, although views remain very divided on whether the Act will have a positive effect on respondents’ businesses.

Paul Stothard of Tees Solicitors says: “If it is a road, then there’ll be a few wrecks along the side, some of them new models and others existing models that didn’t make it. The better analogy is probably the airline industry. Freddy Laker tried to take on British Airways as the first low-

How much do consumers understand about the changes, and what difference has that understanding made? Does the consumer actually want change and if so is the profession absolutely clear about what this looks like? There is a danger that businesses can spend much time, cost and effort reinventing themselves, only to find that the consumer doesn’t want to buy what’s on offer.

To the future

n Yes

n No, but expect to


n Uncertain

39%

9%

47%

5%

Have you changed your firm’s plan or strategy due to the Legal Services Act?

n Yes, significantly

n To some extent

n No

n Uncertain

17%

67%

14%2%

Do you think your business will have changed significantly in 18 months’ time?

cost operator, but the big boys rallied and he failed. But now we have budget airlines in every country, some of the big boys are still running, but others have had to merge or disappear because they couldn’t compete.

“In the legal sector, they’ll be all sorts of innovations as people compete, there’ll be a consolidated market and the really good firms at the top will still be there.”

While nobody should be ignoring what is happening, a large swathe of solicitors are still doing so, whether wilfully or not. But society is changing so fast, driven by technology that could not have been imagined when the current crop of managing partners were growing up and qualifying, that it is inconceivable the legal profession alone can resist the tide of change.

And it is not as if the law is at the cutting edge. It is striking that moves that are considered innovative in the legal market are commonplace in other sectors. Matthew Briggs of Brilliant Law expects the market

to look radically different in five years’ time as a result of greater competition. “Increased competition will improve consumer choice and therefore reduce prices. What we are doing at Brilliant Law is based on consumer research and, to a degree, common sense.

“You’ve got consumer-centric people coming into the sector and a consumer who wants to procure services in a different way. Price is a massive factor, but also transparency and certainty. At the moment people don’t feel they get value for money. The incumbents are not – painting with a broad brush – delivering or understanding what the consumer generally wants.

“The legal sector has not had to change for hundreds of years as it has been a closed shop with high barriers to entry. Those have now changed. Innovators can come into the sector and do it in a different way.”

And do it they will.

n Yes

n To some extent

n No

n Uncertain

Will the Legal Services Act have a positive effect on your business?

14%

37%30%

19%


Baker Tilly UK Audit LLP, Baker Tilly Tax and Advisory Services LLP, Baker Tilly Corporate Finance LLP, Baker Tilly Restructuring and Recovery LLP and Baker Tilly Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Baker Tilly & Co Limited is authorised and regulated by the Financial Conduct Authority to conduct a range of investment business activities. © 2013 Baker Tilly UK Group LLP, all rights reserved. This communication is designed for the information of readers. Whilst every effort has been made to ensure accuracy, information contained in this communication may not be comprehensive and recipients should not act upon it without seeking professional advice.

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