The Impact Of Alternative Business Structures

Alternative business structures have had a transformational impact in delivering legal services. Discuss

Introduction

Alternative Business Structures (ABS) have had, and will continue to have, transformational implications in delivering legal services. ABSs entered the UK’s legal landscape through the Legal Services Act 2007 and officially began operating on 6 October 2011. In essence, ABSs have diluted ownership restrictions in favour of non-lawyers, allowing both non-lawyers and lawyers to manage the law firm business. This has similarly brought new entrants to the market and more external investment. This paper will critically assess the transformational impact ABSs have had in delivering legal services, examining both their positive and negative consequences. A case study will then be undertaken, with national law firm Irwin Mitchell’s decision to operate as an ABS discussed.

Time for change

As Nick Hood has noted:

“When the Legal Services Act 2007 was enacted, it’s doubtful that its sponsors could have foreseen a Cyprus-based construction consulting firm embracing the concept to enhance its international credibility. Nor would they have anticipated it bringing together Bucks County Council & the Bucks Fire Authority as law services providers.”^[1]

And indeed, it has been an era of considerable change. This transformation has seen businesses as diverse as trucking giant Stobarts entering the legal market, being licensed to set up a firm of solicitors under ‘One Legal Ltd’. For the Stobart Group, who actually already own a claims management company, an insurance broker and Stobart Barristers, this means they can effectively operate as a ‘one-stop shop’. As Legal Director of the Stobart Group noted:

“[Stobart] can broker the insurance, then handle the claim, deal with the litigation and provide an advocate”.^[2]

But of course, any evaluation of ABS’s must consider the underlying reason why they were introduced. A 2001 Office of Fair Trading (OFT) report entitled ‘Competition in Professions’ provides the answer.^[3] This report formed the basis for a subsequent White Paper entitled ‘The Future of Legal Services’,^[4] itself leading to the Legal Services Act 2007 mentioned earlier. The 2001 OFT report provided that:

“Markets generally work best for consumers when there is unrestricted competition between existing suppliers, and unrestricted potential competition from new suppliers and from new forms of supply.”^[5]

As such, the chief reason ABSs were introduced was to increase competition between existing ‘traditional’ law firm suppliers and encourage the introduction of new suppliers, both with the intention of benefiting consumers in the forms of a greater degree of choice, potentially a higher quality of service and potentially a lower cost. Further, with new entrants to the market has come much external investment, “such as private equity or venture capital, to be injected into legal businesses by outside investors”.^[6]

A well-publicised example of the colossal amounts of money being injected into legal businesses by outside investors is that of private equity firm Duke Street Capital and national professional services firm Parabis Group. Duke Street Capital, who already invested £200 million into Parabis Group, invested a further £13 million in December 2014 in order to help fund the Group’s development of its ABS models. Parabis Group’s ABSs include Plexus Law, Cogent Law, Acumen, Casus Legal and Greenwoods Solicitors.^[7]

Speaking of the impact of the numerous ABS licenses being issued and to the extremely wide range of recipient businesses, Stephen Mayson has provided that:

“To pretend that these developments don’t matter, or won’t make any difference to the buying of legal services, is plain nonsense… This is not the time to resist, deny or challenge; it is time to reinvent the delivery of legal services. Not just changing a few of the moving parts, but fundamentally re-thinking what lawyers and law firms do”

A word of warning

Evaluating Mayson’s comments, “undeniably, ABSs offer new ways of working for the lawyers who embrace them, and new ways of accessing legal advice for the clients who choose them”.^[8] However, it is important that such developments and quest for reinvention do not ride roughshod over professional ethics and principles. With non-lawyer owners and external investment comes the introduction of commercial norms, primarily the pursuit of profit above all else. Lord Neuberger has expressed concern over this issue, and speaking to the Association of Liberal Lawyers, stated that:

“Such a professional ethos cannot be assumed to be in the forefront of the minds of hard-nosed businessmen who want to maximise a return on their investment… An external investor in a legal business may well want the firm only to carry out the most remunerative work.”^[9]

There is merit in his Lordship’s concerns. Although it would be too naïve to suggest that commercial factors have not entered the law, they have been tempered by practitioners’ professional obligations, towards both clients and the court. However, one can readily envisage legal practitioners operating in an ABS being subjected to ethical challenges which play off the obligations mentioned above with their obligations towards their external owners. As an indicative example, in the motor claims insurance sector, RBS roughly retains around a 30% market share. If RBS had 40% ownership of one particular ABS, a client, pursuing an insurance claim, may well find their solicitor is being employed by the company who will have to ultimately pay out their claim.

As Lord Neuberger rightly, and further notes:

“The regulatory bodies will need to work hard to ensure that such pressures are minimised and neutralised. If they fail to do so, and allow a culture of conflict to arise and one where that conflict is quietly resolved in the investors’ favour, we run the risk of losing a properly robust and independent legal profession.”^[10]

However, opposing this view, one must also recognise the great benefits that a ruthless commerciality can bring the legal profession. Indeed, very recent research published by the Legal Services Board in July 2015 shows that solicitors practising in newly created ABS firms:

“[H]ave higher levels of innovative activity of all types than other Solicitors. This is consistent with ABS Solicitors’ higher level of investment, staff engagement and external involvement in innovation … ABS Solicitors are … more likely to introduce new legal services, with potential benefits for service users. They are also more likely to engage in strategic and organisational innovation.”^[11]

The findings of the research are perhaps not that astonishing given “the mood music [that ABSs] have created, encouraging innovation and change”.^[12] Asides from an innate commerciality and access capital to invest, from a real, practical perspective, ABSs also have the added advantage over their ‘traditional’ law firm competitors in being able to establish their own bespoke IT systems, often from scratch, rather than inheriting or having to make do with out-dated systems that are no longer fit for purpose. The advantages are obvious and numerous, including, for example, better communication between staff, improved service delivered to the customer and more effective case management. Additionally, not being confined to the “antediluvian working practices and petty partnership politics” which have sadly characterised many ‘traditional’ law firms results in opportunities for ABSs to develop attractive, novel alternatives; working patterns and remuneration packages developed in the commercial arena.

But, unfortunately, as Hood notes:

“[O]ne inescapable downside of bringing hard-headed commercial business attitudes and financial discipline to the cosy, coddled legal world is that investors will walk away from failing ventures without a trace of sentiment.”^[13]

Case study – Irwin Mitchell

Irwin Mitchell was one of the first law firms to be licensed by the SRA as an ABS. It has multiple licences which cover a wide range of its business operations and indeed, most recently, has entered into a joint venture with insurer esure and will form an ABS accordingly.^[14] Below, the reasons why Irwin Mitchell decided to apply for ABS status are discussed, and the transformational impact it has had in delivering its legal services considered. This will ultimately explain why, as one of Irwin Mitchell’s practitioners has exclaimed, “becoming an ABS was right”.^[15]

As Irwin Mitchell’s Chief Executive John Pickering has provided:

“We decided that we wanted to become an alternative business structure because it would better suit our ability to grow our business and if need be and if we wanted to to bring in external investment. It would also help fit with the development of our legal and related services,”^[16]

Two chief factors can be derived from Pickering’s comments, business growth and external investment. Focusing on the first factor, business growth, how have Irwin Mitchell used the ABS model, in order to achieve business growth, and how has this transformed their delivery of legal services?

According to Pickering, Irwin Mitchell sought “to restructure the business completely”.^[17] Achieving this, they eradicated strict delineations between practice areas, this being a defining feature of many ‘traditional’ law firms, and now operate through two practices, business legal services and personal legal services. Each division is headed by a separate chief executive. This move, Pickering notes, was made “so as to be very client focused and client facing in terms of how we run the business”. This bold decision, it is suggested, reflects commercial instinct; an instinct to stream-line, drive down costs and simplify.

Additionally, Irwin Mitchell took advantage of the diluted ownership restrictions to place non-lawyers in senior positions of ownership. Glyn Barker, former Vice-Chairman of PWC, and Mel Egglenton, Senior Partner at KPMG, were made a chairman-designate and a Non-Executive Director, respectively. Accordingly, Irwin Mitchell were able to acquire the commercial insight and invaluable management expertise of two extremely experienced individuals who were operating at the upper echelons of the ‘Big Four’. Vitally, they were able to put them in positions of real control and influence. In Pickering’s own words, such hires reflect Irwin Mitchell’s “clear intention to take advantage of the opportunities we think will arise from becoming an ABS”.^[18] Moreover, it is interesting to note that accountancy firms, KPMG and PWC themselves being perfect examples, have gone through transformations from small, standalone accountancy practices to fully-fledged, diverse professional services organisations, offering many business services. The recruiting of Barker and Egglenton by Irwin Mitchell, therefore, arguably reflects “an envious nod to the success of accounting firms in becoming proper businesses”.^[19]

Ultimately, as a result of the changes Irwin Mitchell have made since becoming an ABS, and of course not being confined to the traditional legal model, has resulted in what Pickering has provided is:

“a much more cohesive way of delivering our business. The management structure which underpins this, the divisional structure with all of its machinations behind that, enables us to run the business in a much more efficient and organised way.”^[20]

Conclusion

In conclusion, ABSs have had a transformational impact in delivering legal services. Their introduction through the Legal Services Act 2007 and operation commencing 2011 has created much furore over how legal services are to be offered to consumers. This paper has examined the impact ABSs have had in this regard. The change they have occasioned the legal profession has been discussed, with the example of the Stobart Group being put forward along with the vast amounts of external investment which have poured in. In this respect, the role private equity houses are having cannot be understated, financing, in large part, businesses wishing to offer legal provision under an ABS licence. The various positives and negatives of ABSs’ introduction was then examined. Whilst commercial practice must not curtail solicitors professional obligations and principles, devaluing the legal profession in the process, the benefits such a commercial mentality can bring were put forward, primarily increased innovation which can benefit the consumer. Last, a case study was undertaken on Irwin Mitchell, the first top-20 UK law firm to operate as an ABS. This posited the reasons why its decision to become an ABS has transformed the way it delivers its legal services, most notably, its significant restructuring of its practices into two clear divisions. In all, whilst there are rightly “no cookie-cutter ABSs”,^[21] as the Legal Services Board has conclusively found, ABSs have higher levels of innovation than their ‘traditional’ law firm counterparts and, in turn, have had a related transformational impact in how legal services are delivered in the UK.

Footnotes

^[1] Nick Hood, ‘Where is the Alternative Business Structures revolution heading?’ (2014) LexisNexis, Future of Law, available at Click here to read the full article accessed 08 October 2015

^[2] Trevor Howarth, quoted in ‘SRA grants ABS licence to Eddie Stobart firm’ (2013) Law Careers.Net, News, available at Click here to read the full article accessed 08 October 2015

^[3] Office of Fair Trading, ‘Competition in Professions’ (2001) available at Click here to read the full article accessed 08 October 2015

^[4] Department for Constitutional Affairs, ‘The Future of Legal Services: Putting Consumers First’ (2005) available at Click here to read the full article

^[5] n.3 supra at page 2

^[6] Richard Susskind, ‘Tomorrow’s Lawyers: An Introduction to Your Future’ (Oxford University Press 2013) part 1

^[7] See John Hyde, ‘Parabis gets £13m private equity injection’ (2014) The Law Society Gazette available at Click here to read the full article accessed 08 October 2015

^[8] LawCareers.Net, ‘What’s the alternative’ (2013) available at Click here to read the full article accessed 08 October 2015

^[9] Lord Neuberger, quoted in Legal Futures, ‘Neuberger warns against risk of profits before principles in the ABS world’ (2013) available at Click here to read the full article accessed 08 October 2015

^[10] Ibid

^[11] Legal Services Board (Enterprise Research Centre), ‘Innovation in Legal Services’ (2015) at page 71 available at Click here to read the full article accessed 08 October 2015

^[12] Neil Rose, ‘Future of law: big brands and alternative business structures’ (2012) The Guardian available at Click here to read the full article accessed 08 October 2015

^[13] n.1 supra

^[14] See Irwin Mitchell, ‘Irwin Mitchell Launches ABS With Esure’ (2014) available at Click here to read the full article accessed 08 October 2015 and The Law Society Gazette, ‘Irwin Mitchell joins insurer in new ABS’ (2014) available at Click here to read the full article accessed 08 October 2015

^[15] Jennifer Palmer-Violet, ‘Becoming an ABS was right’ (2014) 19 Private Client Adviser 9

^[16] John Pickering, quoted in Manju Manglani, ‘John Pickering: Why the revolution at Irwin Mitchell is far from over’ (2013) Managing Partner available at Click here to read the full article accessed 08 October 2015

^[17] Ibid

^[18] Legal Futures, ‘Irwin Mitchell ramps up ABS preparations by naming senior PwC partner as chairman-designate’ (2012) available at Click here to read the full article accessed 08 October 2015

^[19] n.1 supra

^[20] n.16 supra

^[21] Stuart Bushell, ‘There are no cookie-cutter ABSs’ (2015) 159 Solicitors Journal 15