Savvy firms will use ABSs as a tool to achieve competitive advantage

By Michael Roch, Partner, Kerma Partners

As of 6 October 2011, the first alternative business structure-licensed legal service provider will be up and running. The effect of ownership deregulation in the UK legal profession will be profound. Many firms, however, have not yet thought through the potential impact of ABSs on their business.

Without doubt, some courageous firms will use ABSs to their advantage, much as they did with limited liability partnerships, which also had a slow adoption rate initially but today are the standard way of doing business as a law partnership.

Many mid-market/full-service(-ish) firms (sitting in the UK top 30-75) have either not yet fully decided whether to use an ABS to their competitive advantage or have not thought about the issue sufficiently deeply.

Sometimes the debate is too heavily focused on tax structuring rather than on competitive advantage, sometimes there is fear of doing anything without a suitable precedent. And sometimes firms are governed by the fear of the unknown or lack sufficient entrepreneurial creativity to think through how an ABS may help them to compete.

However, the first couple of ABS-related restructurings are presently taking place, so it is high time for law firms to decide how they will use ABSs as a strategic tool. Two examples illustrate how to do so.

First, it is clear that ABSs will show their most significant and immediate impact on the volume end of the work, where clients’ pressures in favour of cost reduction and process are already raging. 

However, the second biggest impact will be felt by the mid-tier firms. It is here where margin pressures for ‘resource work’ is being captured by non-law firm legal service providers (NLF-LSPs) and legal process outsourcing providers.

Even the most traditional of partnerships face clients demanding a new definition of performance (price vs value), and this will cause a further shift in attitude from ‘law firm partnership’ to a somewhat more corporate ‘legal service provider’.

By, for example, building up or taking an ownership interest in an NLF-LSP structured as an ABS to take on some of the resource work that clients demand be done more cheaply, some mid-tier firms will be able to compete better on price without diluting their value proposition for work which is truly ‘high value’.

Second, an ABS also allows for full-service firms to simplify their business models, as they often find it difficult to accommodate practices with different capital requirements. Spinning out a department into an ABS may relieve pressure on the firm’s capital structure (and lending arrangements), allowing bespoke financing for the outlier – without the firm losing the upside from the outlier’s profitability.

The sooner full-service firms in particular decide whether and how they will deploy ABSs, the more successful they will be over the next three years.

michael.roch@kermapartners.com