The alternative view

No one wants a lawyer until they need one, but the provision of Alternative Business Structures (ABSs) is likely to change that while improving the profitability of practices without jeopardising what they already have.

The aim of ABSs is to enable law firms to explore new ways of organising their businesses to be more cost effective, permit different kinds of lawyers and non-lawyers to work together and allow for external investment. The Legal Services Board has confirmed that it intends to move quickly towards the new licensing scheme for ABSs. The caveat to that is, of course, in the regulations imposed on these new businesses, and these are still not clear and will have to be constantly monitored and reviewed.

It all started with the Legal Services Act, the first stage of which took effect from 1 April; this allows for Legal Disciplinary Practices (LDPs) to be formed, enabling barristers, legal executives and other legal professionals to take up to 25 per cent ownership of a law practice. At the time of writing this article, it seems only 14 have taken up the opportunity with a 'small number' of applications having apparently been rejected.

Yet this is just the beginning of a tsunami that is likely to surge through the legal profession when the Legal Services Act is fully implemented '“ probably in 2011.

Opportunity or threat?

To some traditional lawyers the admission of non-lawyers is an anathema, despite evidence from Australia that the 'mixed' practice model works well.

Here, allowing non-lawyers to take ownership of a practice has lovingly been dubbed 'Tesco Law', as banks, institutions and supermarkets could '“ and no doubt will '“ offer legal services. But what does this mean for the current crop of 9,000 plus law firms, over 80 per cent of which have five partners or less? Perhaps more significantly, what effect will this move have on the 5,000 or so high street sole practitioners?

With the inevitable consolidation of the profession, the vision of the future for some of these practices is very bleak. In 1988 we had about 55,000 lawyers producing two per cent of the UK's gross domestic product : in 2008 we had about 130,000 lawyers also producing two per cent of the GDP. What does that tell us? Too many lawyers, too many partners and too many practices across the UK; hence the consolidation.

How can the independent sole practitioner and smaller high street practice survive this sea change? The solution seems to be simple: get bigger, get niche or get out.

External investment: a lifeline

The introduction of private equity into a law firm could well be seen as a lifeline for many practices, particularly in the current economic environment. With 2011 looming, preparation for becoming an ABS and for external investment should be in the heart and mind of every firm that believes it can rise to the challenges that the profession is facing '“ and not just the larger firms '“ the admission of non-lawyer owners is also applicable in smaller practices. But what might these ABSs look like and how can a small practice compete with the new aggressive competitors now entering the market?

Many lawyers are seen as the 'trusted advisor' to their clients and smaller firms should consider the best way to develop that relationship. Wealth management is an obvious option for a large number of practices. Sole practitioners or smaller firms should not fear this opportunity, but should be thinking strategically about how they could use it to develop their practices.

Do the maths

Many firms have dabbled with financial services in the past and found the experience less than rewarding. But it could demonstrate a significant opportunity. For example, a private client family practice will have the opportunity to assist clients with investment, property and other areas following a divorce. Likewise law firms that are involved in wills, trusts and probate and personal injury are seeing significant increases in demand for advice on investment and other financial matters.

If structured the correct way '“ not just a one-way referral scheme with an IFA on the high street, but a formal joint venture with an IFA group that specialises in professional firms '“ such an arrangement could prove to be very profitable. It may well serve as the forerunner to a future ABS whereby the IFA invests in the practice. It is a logical step for lawyers to begin working closely with a professional IFA group '“ with an objective for even closer involvement following 2011.

Such opportunities are not restricted by the size of the law firm, but rather by the attitude of the current owners towards accepting and embracing change.

A closer working relationship with other professionals is another opportunity for the smaller practice; working with similar-sized, but forward-thinking accountants, for example, could have significant benefits. By sharing resources partners can reduce overheads. And accountancy clients will need legal advice from time to time, just as the law firm's clients will need accounting advice. Offering a series of non-legal services such as strategic planning or corporate finance for small- to medium-sized businesses (SMEs) will generate more work for accountant and lawyer alike. These services need not be delivered by fee-earners but can be handled by non-qualified personnel.

Building relationships

If you have a practice that has been involved with property, both domestic and commercial, surely it is time to begin discussions with architects, surveyors and other professional bodies that can work with lawyers in this new environment? Likewise, if your practice has the need for barristers on a regular basis then begin conversations with your chambers of choice now. Although the Bar Council has yet to approve such ventures, it is inevitable that barristers, legal executives and lawyers will work under one roof. It is essential to have these conversations sooner rather than later.

In addition, there are a number of private equity firms and venture capitalists already looking seriously at opportunities presented by the part (and eventually full) ownership of legal firms. But how many law firms are preparing for potential outside investment? If we think back to the days when estate agencies were snapped up by the banks and sold back a year or so later for virtually nothing, it would seem wise to prepare for such eventualities. The fact remains that if a law firm is not run efficiently and in a business-like manner then its partners are unlikely to be the beneficiaries of any such windfall.

Balancing concerns with benefits

There are some concerns about the future ownership of law firms being in the hands of non-lawyers and the regulation that would be required to ensure key issues are not compromised. There are questions over reduction in competition, less choice and increased costs. Many are concerned about a reduction in personal service from local law firms and the public will want assurances that quality will not be compromised for profit.

Despite these concerns, on balance there is more to be gained than lost by considering an ABS.

For a start, the delivery of non-legal services will encourage customers and clients to work more regularly with the law firm. In a MORI poll conducted in 2004, which reviewed responses to alternative business structures, 44 per cent of respondents said they would prefer to purchase services under a 'one-stop shop' banner. Moving away from the transactional services currently offered will mean more regular contact with customers and greater cross-selling opportunities.

Let's take this proposal one step further. If you engage practice management, marketing and finance professionals to do the job currently done by lawyers who lack specific training, experience and expertise, the quality of management of a law firm may be transformed for the better.

By being able to offer equity, legal practices will be able to attract better quality non-legal professionals than they do now, giving themselves the prospect of having their remaining equity increase in value by a lot more than that given up.

Presently some of the best professionals don't work for law firms because they can't have equity in them '“ they can do better elsewhere. Law firms have much to gain by the removal of that limitation.