Why aren't firms becoming ABSs?

Smaller firms are still struggling to decide on the best way to secure their future, according to a new survey. They are largely turning away from new opportunities to merge with other professional service businesses or to create an alternative business structure (ABS).

The research by Kreston UK found that only 20 per cent of the independent UK firms questioned felt that an ABS was even a possibility. The results chime with anecdotal evidence that an ABS is not yet widely seen as a route to professional salvation. There were only 338 such arrangements registered by the Solicitors Regulation Authority at the end of last year, a small percentage of the 10,726 firms in the UK.

Firms are feeling more confident today than they have for some time about their revenues, which might partly explain the apparently low level of interest in questioning whether current extra fee income is merely a temporary reprieve in market conditions. It allows firms to focus on their core business rather than face changing their structure to an ABS or a multi-disciplinary practice (MDP).

Regulatory burden

Some certainly see an ABS not as a lifeboat but just as further expensive layers of compliance. This can weigh heavily on a smaller firm, and with no guarantee that a merger or MDP would ever amount to the sum of its parts. For instance, there would be the loss of referral work, upon which professional services rely. Firms of accountants are not likely to refer work to a law firm merged with a firm of accountants, for obvious reasons.

This means a very basic question must hang in the air when a merger is considered, regardless of the problems it may solve: will the two firms be able to grow the combined business from their own resources?

Not necessarily. Some people they work for probably prefer to have a separation between their legal and financial affairs. They are uncomfortable at the idea of them being managed under the same roof.

The whole process of creating an ABS is itself complex, and one without a quick route to approval. Larger firms are perhaps happier to absorb the delay and the myriad compliance requirements that are likely to flow in following the transition.

It is not hard, therefore, to see why the added regulatory burden alone might put some people off. The general requirements for compliance officers for legal practice and for finance and administration appear to be weighing heavily on smaller practices, just at the time when they are struggling to compete for clients.

The roles are exacting and can limit the amount of time partners in smaller practices are able to dedicate to fee earning. The demands required to satisfy regulatory objectives are certainly not lessening.

Practical benefit

The opportunity for outside investment that an ABS provides, while appealing to some practices, does not appear to have been of much practical benefit to many but the largest firms, not least because the sums involved are not high enough to attract sophisticated investors.

It is hard to see others buying a stake in a professional services partnership, particularly if the next generation of partners themselves are reluctant to do so.

Meanwhile, smaller practices are under threat. Big firms, especially in London, are soaking up law graduates and talent, leaving regional firms fighting to attract good recruits.

This is a growing issue, feeding into the whole question of succession and planning for the long term. There is no future for a firm as an asset in which partners have a saleable stake unless that asset can ensure its own survival. This requires having people of calibre coming through the ranks.

The question therefore remains: is an ABS attractive to a traditional firm for employees and future owners, be they lawyers or non-lawyers?

For many, the option to create one is viewed as no more than a fail-safe measure deployable in the event of a crisis. It is not being given regard as a key to survival and growth. Unless more big firms select the ABS route it is hard to see the idea taking hold.

The door is still open, as firms will continue to monitor the progress of the ABS and whether it is becoming an appealing option for them (or a necessity).

In the meantime, it seems that a personal professional service from a trusted adviser is likely to remain the most important factor for clients, rather than the convenience of all their professional needs being under one roof. SJ

Jennifer Williamson is a business services partner at accountancy firm Kreston Reeves

@KrestonReeves