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Forum Magazine

ABS models rise in the UK

Samantha Steer  Director, Large Law

Samantha Steer  Director, Large Law

Are traditional law firms finally feeling the pressure?

Given the massive changes in the UK’s legal profession over the past several years, it’s not surprising that much of the debate centers on whether the traditional legal partnership model will retain its crown – indeed, even be sustainable – in the current turbulent legal environment.

Where is this pressure coming from? The UK’s Legal Services Act of 2007 established Alternative Business Structures (ABSs) and allowed nonlawyers to hold professional, management or ownership roles in UK law firms for the first time. It’s a move that – depending on whom you ask – has shaken the staid roster of traditional law firms to its core or has only nipped around the edges of relevancy.

Forum Magazine discussed this topic and its impact with four legal leaders whose firms span the spectrum of the industry in the UK today: Peter Bennett, partnership executive officer for Bates Wells Braithwaite (BWB); Simon Goldhill, CEO of Metamorph Law; Michelle Peters, principal at The Business Instructor Ltd; and Colum Smith, CEO of MW Solicitors.

The four spoke together on a panel at Thomson Reuters Entrepreneurial Law Firm Conference, held in London earlier this year. The panel, “Exploring Business Models to Achieve Competitive Advantage,” sought to stand side by side the various law firm business models available and contrast their advantages and challenges.

An ABS is not an alternative business structure, it is a business structure! And if you look at every other market and industry outside of law, they all have a number of different business structures that you can operate under – sole tradesmen, partnership, LLP or corporate. But what an ABS does is open up the market to the best business ideas and concepts from outside.

BWB, a nearly 50-year-old London law firm with 85 lawyers, changed to an ABS three years ago, according to Bennett, primarily to allow the firm to expand its offerings to clients in areas such as corporate finance. Indeed, it was the desire to bring on board an accounting professional who was running a niche business in a fast-growing market that prompted the fi rm to move to the ABS model.

“That was the driver,” Bennett says. “We wanted him as a partner of BWB, and he wanted to be a partner of BWB, so we built the team around him because we thought that made sense for our clients.”

In the end, what pushed the decision was the desire for BWB to be entrepreneurial, and after some study, firm leaders decided an ABS was the way to go. “We are one of the few smaller firms competing against national and multinational law firms in this niche social finance space,” Bennett explains. “You have to ask, how do you get competitive advantage against larger players than yourself when currently the large firms will not follow the ABS one-stop-shop route?”

Peters says she had the unenviable job of taking the side of the traditional law firm model in this panel debate.

“What I do through The Business Instructor is work with law firms to find ways they can make the traditional model work harder for them, so they can be more profitable without the management or fee earners working more hours,” she explains. “The challenge is, of course, that in the traditional model you’re usually asking people who are great legal technicians to also do many of the other tasks that are needed to run a business, like business development, sales and billing activities,” she says. “Typically, no one person is good at all those things – it’s not a very good model.”

“You’re actually preventing your fee earners from making money for you by asking them to do all these other tasks, many of which they have not been trained to do,” Peters explains. “This reduces the profits they can generate for you, and that’s a fundamental problem with the traditional model.” You wouldn’t find argument from MW Solicitors’ Smith on that strategy. “The question is what can you do with an ABS in law? The answer is anything that any other business can do,” Smith says. “What law firms need to do is go back and have a look at their business – and for a minute, forget that they are a law firm.”

The ABS model also allows for other distinct advantages over the traditional partnership; for example, ABSs can buy traditional law firms or other ABSs while law firms can only buy other law firms. Today, most of the new legal entities in the UK are entering in the market as ABSs, which automatically prevents the larger law firms from acquiring them.

“If you are not an ABS, you’re restricted from offering certain attractive services to clients and your merger options are restricted as well,” Bennett says.

Metamorph Law’s Goldhill would tend to agree, but adds that the whole ABS debate is something of a red herring. “An ABS is not an alternative business structure, it is a business structure! And if you look at every other market and industry outside of law, they all have a number of different business structures that you can operate under – sole tradesmen, partnership, LLP or corporate. But what an ABS does is open up the market to the best business ideas and concepts from outside.”

To that end, Goldhill says, Metamorph Law has become an industry consolidator and is run on a corporate business model that uses its ABS status to attract outside investment and management teams. “One of the things that we’re looking to do at Metamorph is to take some things that have worked very, very well outside of the legal market and see whether we can get them to work well within the legal market,” he notes. Similarly, MW Solicitors is taking a page from that buy-and-grow book.

The firm is a rare beast in the UK legal ecosystem in that it is fully funded as an ABS by private equity, which allows for cash infusions to keep the fi rm “fuel-injected” and ready for rapid-fire acquisitions, Smith explains. MW Solicitors is engaged in rollup operations by buying smaller law shops and converting them to the firm’s big umbrella model. Think McDonald’s or H&R Block for law. The firm has bought and converted 15 new offices throughout London and surrounding areas since February 2015 when it became an ABS and started on this new path. It’s currently growing at 20 percent every year, Smith says. MW Solicitors existed for 31 years before becoming an ABS and being equity funded, and Smith was with the firm for 20 years of that time. The conversion to an ABS has changed the way Smith looks at the legal industry, he admits, and that is a good thing.

“Once you make that mental decision, the opportunities open up, particularly if you can have the cash to invest in technology and efficiency, which obviously takes a lot of the drudgery away,” he says. “It changes your whole attitude, you forget about having to do the day-to-day stuff, and you can concentrate a bit more on what’s interesting and exciting, providing you’re prepared to open your mind.” Bennett also believes ABSs will continue to change the market, including in areas that may not be as obvious, such as legal technology.

“I think the ABS model will make the technological changes happening in the marketplace happen even quicker,” Bennett says. “Because if you are interested in looking at more efficient ways of providing legal services, some of the technological solutions that are available will give those who adopt them early a very significant professional advantage.” And because some ABSs are, in fact, starting from scratch, they usually are first in seeing technology as a way of gaining that advantage, he says. Peters contends that if you’re going to stick with the traditional model, you need to work out how you can reduce the amount of time your fee earners spend on other activities and increase the results you get from those activities, so that you get better and less costly results in less time. And that means embracing efficiency, adopting technology and being more strategic in how you manage your time.

Goldhill agrees and hopes this panel spurs some deep discussions about innovation in the legal market, because he thinks the pace of it needs to accelerate. “It’s the old cliché,” he adds. “But it’s true – the legal industry is going to be very different in 10 years’ time. What it’s going to look like and how it’s going to get there, nobody really knows.” Since his Metamorph Law is a big pusher of market consolidation, it’s not surprising that Goldhill sees that as another force that will change the legal environment, especially in the UK. “I think we are at the cusp of starting to see some much more interesting change, and there are going to be lots of other business models that will take advantage of the liberalization in the rules and the opportunity to innovate.”

Of course, that sea change might not be easy for many traditional law firm leaders to accept, Smith suggests. “If you’ve been trained as a lawyer for 30 years to think a certain way – which the people at the top have – it’s very difficult to imagine not being like a normal law firm.”

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