Is this the end of 'Tesco law'?

Co-operative Legal Services’ 2013 loss of £22m looks relatively insignificant next to its parent company’s overall losses of £2.5bn during the same period. What happened? And does it have any wider implications for alternative business structures?

CLS was one of the first three ABSs to be licensed by the
SRA, in March 2012, and was perceived at that point as the forerunner for other retail
giants taking the plunge
into the brave new world of liberalised legal services.

Two years on, it looks like
the Co-op is almost in free fall, and observers are querying
the repercussions.

An immediate consequence was the departure of CLS director Christina Blacklaws, who joined in November 2011 to lead its development in general and, in particular, to launch its family law service. It was a move that surprised many and was seen as a major coup. At that point,
CLS employed about 450 staff and was already in the top-100 law firms.

In May 2012, the Co-op confidently announced major expansion plans for CLS, with 3,000 new jobs in the legal sector and CLS set to become the largest ‘consumer’ law firm in
the UK. It also confirmed that it would extend its trial of legal
and funeral services from
30 branches of the Co-operative Bank and Britannia to encompass all the group’s
330 high-street branches.

Group contagion

By the time CLS launched
the first phase of its television advertising campaign, in
June 2013, its optimism
was beginning to look questionable. The group’s financial performance was known to be poor and it had been obliged to pull out of a much-heralded move to buy
632 branches of Lloyds Bank.

However, CLS strenuously denied that group performance would have any impact on its growth strategy.

At the same time, the SRA published its concerns on ABSs in large companies in Catching
a chill; law firms and the risk of group contagion. The main scenario it identified was that of group losses or events affecting a regulated legal firm in that group, which in turn may have an impact on the SRA’s regulatory objectives.

CLS 2013 figures show that its revenues were flat at £33m, with an operating loss of £9.1m, but that after ‘goodwill impairment’ had been taken into account, that loss increased to £22m, compared with £2m the previous year.

Staff numbers had grown
to 560, despite redundancies in its personal injuries department. Nevertheless, growth and profitability clearly did not indicate that 2012 expansion plans were on track.

Bad parenting

There is no suggestion, as yet, that CLS will be sold off or by its parent, as per its pharmacy and financial services businesses.
CLS has clearly overestimated the magnitude of the challenge that it had set itself and is already committed to restructure in response to the Jackson report, which it identified as having presented a major problem.

However, it is equally clear
that the major issue has been
the absence of corporate governance in its parent company, which may have infected its subsidiary. Management has never been
a strength for solicitors.

Few solicitors will shed a tear over the problems that have beset CLS, and some may be hoping that other would-be retail entrants to the legal services market may be deterred by CLS’ experience.

But the Co-op Group’s issues are probably unique because its corporate structure is. In some ways, CLS had already introduced some welcome innovation to the legal market, particularly in its approach to commoditisation and marketing, and there are helpful lessons
to be learnt.

So the SRA’s concerns about the risk of collateral damage in composite organisations have been vindicated. Although, it may well be argued that the regulator should have been more diligent in its own ABS vetting process, given what is now common knowledge
about the shambolic Co-op Group management. SJ

Stuart Bushell is managing director of SIFA