This article was written for and first featured in The Lawyer.
At the launch of a recent study of alternative business structures (ABSs) and their role in a changing legal market by Fox Williams, my partner Tina Williams questioned whether law firms were exhibiting panic or paranoia in their reaction to ABSs.
The response that prompted that observation was that 50 per cent of respondents are aware their competitors are considering becoming, or applying to become, an ABS. Latest information from the SRA is that there are around 70 stage two applications for ABS. The number of respondents was 50 so it would be a coincidence if they had these stage two applicants in mind.
That was not the only surprising result of the survey. As a result of the availability of ABSs, almost 40 per cent of respondents had changed their strategy and one-third had reviewed their management strategy in the past six months.
A common perception is that firms are taking a ‘wait and see’ approach to ABS and that these may be for the few and not the many. It is clear from the survey that firms are considering seriously their response to the threat of new models in the market – whether perceived or actual.
According to the survey, one main reason why a firm might convert to ABS is to obtain private equity or other third-party investment finance. This is considered either a ‘compelling’ or ‘very compelling’ reason by over half of the respondents.
This response is in line with experience. From the ABSs already authorised by the SRA a number have been reported as having access to substantial third-party funds.
Around 30 per cent of respondents are not considering an ABS and of those that are, spinning off new legal services or non-legal services is the likely purpose of the ABS. When ABSs were introduced the consensus view from commentators was that they would be used to raise capital for growth and particular projects. A few years on we can see that firms are looking to use the ABS opportunity to innovate and not just to achieve a bigger ‘business as usual’.
More than 60 per cent of the respondents say allowing partners to retire with a capital profit would be an ‘important’ or ‘very important’ financial consideration in converting to ABS. This demonstrates the divergence of opinion as to the effect of the ABS regime. Whether a firm needs to convert to ABS is determined by its business model. Will third-party investors be willing to take a stake in a firm in order to finance the retirement of partners with a capital profit? It is a question hardly worth asking. A listed law firm might offer these advantages, but these are in short supply and will remain so for the foreseeable future.
ABSs are acting as a catalyst for change – business arrangements such as Quality Solicitors and Riverview Law could have been put in place prior to the ABS regime. They are part of a legal market undergoing structural change, but it is the availability of ABSs that is the influencing factor.
So, maybe not a panic, but there is a sense of paranoia in that firms are concerned that their rivals are taking advantage of the ABS regime in a way that they have not thought about.