The growing interest in ABS conversion

Headline findings from a new study reveal a profession in flux. Almost four out of 10 respondents (39 per cent) have already changed their management strategy as a result of the Legal Services Act 2007, according to the latest report by company Jures looking at the impact of the programme of deregulation, ‘ABSolutely fabulous: a study of alternative business structures in a changing legal services market’.

An earlier report, The Big Bang report published two year after the Act in September 2009, found that “so far, the legal profession has proved remarkably resistant to the forces of liberalisation”.

The new report draws on specially commissioned research with over 100 leading commercial law firms conducted between February and May 2012. The idea of the study was again to profile the legal profession responding to the potentially transformative changes of the Clementi reforms and, in particular, the introduction of alternative business structures (ABSs) introduced on October 6, 2011.

The research found that only a tiny minority (6 per cent) had not considered a change in management structure; almost two thirds of respondent firms (63 per cent) had contemplated - or not ruled out - changing their partnership structure; a significant minority (14 per cent) had actually changed their partnership structure; and half of respondent firms (50 per cent) were aware of their ‘business rivals’ considering applying for ABS status.

So those law firms that dismiss the intro-duction of competition under the ABS regime as of 6 October last year an anti-climatic ? more ‘damp squib’, than ‘big bang’ – might want to take note.

The study sought to reveal what was driving change: the structural reasons driving firms to adopt different forms of practice and those perceived to be barriers.

Reasons for conversion

Over half of respondents (54 per cent) described as either ‘compelling’ or ‘very compelling’ as a reason for ABS conversion accessing private equity (or other third-party investment) to finance their firm’s growth (see table 1 below).

More than one out of 10 respondents describe the possibility of raising funds on the stock exchange as either ‘compelling’ or ‘very compelling’.

The interest of private equity firms in the legal services market has markedly cooled since the Big Bang report. “We suddenly went into a downturn and most law firms in the last two years have been completely un-investable as a proposition

“Private equity was originally expected to take stakes in law firms, improve management and systems and to take an exit with capital,” reflects Baker Tilly’s head of professional George Bull. There is “a sort of feeling” that “possibly because there aren’t many big opportunities that they can take in non-professional service areas, they have money available” and “they are taking a bit of a punt.”

Bull argues there are two issues with direct investment into law firms. “Number one: the quality of the management and the inflexibility of partnership structures which make it quite difficult to follow the traditional private equity model. Number two is exits.”

“Now in 2012 the market has changed,” Bull continues. “It is not as easy to see how private equity could take an exit from the market three to five years after investment.”

Open to external investment

Whatever the realities of attracting investment, the profession (or a large part of it) is open to external investment (see table 2). Similarly, many firms accept the case for a collective response to the new challenges of increased competition presumably looking to the successes, perceived or otherwise, of QualitySolicitors.

More than six out of 10 respondents (62 per cent) cited allowing partners to retire with capital profit as an important or very important consideration for ABS conversion.

“It shows a huge naivety,” reflected Tina Williams, senior partner at Fox Williams LLP which commissioned the report. “If they believe that any private equity house is going to throw significant capital at partners and watch them ride off into the sunset, they need to reconsider.”

So what might be standing in the profession’s way to more wholeheartedly embracing change?

Over and above the cost, complexity and all the other practical hurdles of introducing structural reform, the greatest barrier to embracing ABS was loss of control (62 per cent). This was followed by resistance from partners (51 per cent), management time commitments (42 per cent), complexity of ownership structures (41 per cent) and the cost and burden of regulatory compliance (40 per cent). Tax consequences accounted for a low 4 per cent.

 

Table 1 - Most compelling reasons for ABS conversion

Raising funds on the stock exchange: 13%     Accessing private equity: 54%     Ownership by a recognised brand: almost 35%     Offering legal services in an innovative way: 56%     Partnership with other providers of legal services: 57%     Modernising the firm's management and business processes: 61%

 

 

 

 

 

 

Table 2 - Models most likely to adopt

Spinning off new legal services or nonlegal services: 33% Accessing external investment to fund growth (public listing, private equity investment...): 29% Creating a one stop shop ABS with accountants: 10% Creating a one-stop shop ABS with insurers: 5% Creating a one-stop shop with claims companies: 6% Creating a one-stop shop ABS with other professionals in a multidisciplinary partnership: 15% percent Forming a membership organisation with other firms to share common services as part of a network: 23% Forming an ABS with other firms to offer diverse services to be performed by the member firms (e.g.  Procureco): 7%