Event report: Facing up to the future

The impending Legal Services Act is set to dramatically change the current legal landscape in the UK, heralding an increase in competition and new opportunities arising from the possibility of external ownership. But how will individual firms decide the best approach to take? Richard Brent attended Ark Group’s ‘Future of Legal Services’ conference to gauge the current mood.

There can’t be many issues more pressing to the management of today’s law firms than how those firms are actually structured. So it was with considerable interest that I turned up at London’s Thistle Victoria Hotel to hear a wide range of presentations and frank, informal discussions about how law firms could choose to react to the impending change in legislation that will be the Legal Services Act.

While the impressive array of speakers at our conference set out their views and experiences with great clarity, the main message was not so much to adopt a specific solution as to remain flexible in the face of uncertainty. As Lord David Hunt MBE, chairman of the draft Legal Services Bill’s joint committee, made clear in his opening speech, “caution” is very much the watchword. Firms should be aware of the changes, monitor developments closely, but also ensure they “don’t jump the gun”.

One thing is for sure, though: the possible impact of the changes should not be underestimated. Indeed, the UK is the first country in the world to embark on a change of this nature and the rest of the global legal community is watching with serious interest. It is a process five years in the evolving, and it still has some way to go. From the Office of Fair Trading’s initial ‘Competition in Professions’ report, through to the input from the Department of Constitutional Affairs (DCA) and the report of Sir David Clementi, the government is still to respond to the latest evaluation from Lord Hunt’s joint committee. The DCA is actually due to give its views by 26 September 2006. Any resultant Bill will then face the usual daunting process of making its way through the various parliamentary stages in both Houses of Parliament before finally becoming law.

Alternative business structures

Aiming to improve the service for consumers, the verdict of the Clementi Review was wide-ranging, calling for better regulation in the form of a new Legal Services Board (LSB) and better handling of client complaints through an official Office of Legal Complaints (OLC). However, one of the most significant areas for firms themselves is the prospect of the alternative business structure (ABS), initially legal disciplinary practices (LDPs) but with the possibility of externally owned, multi-disciplinary practices (MDPs) further down the line. The difference is that LDPs will be confined to the legal profession itself: partnerships between solicitors and barristers that don't need a specific licence. The possibilities would be much greater for MDPs, encompassing other professional services such as financial advice and property services, and allowing for ownership by non-lawyers.

LDPs also allow for outside ownership of firms, although, the government has just agreed that this is not essential. But the prospect of external investment is something that could certainly be very attractive to some already practising. As many speakers showed, the challenge of the increase in competition post-Clementi, could well be turned into an opportunity for a firm to really make its mark. But adopting a more corporate strategy and structure frequently requires much stronger management, and not a little cultural change. It is not just the partnership model that could need to be changed, but also, some suggested, the behaviour and attitudes of the partners themselves.

Of course, change for the sake of change is never a good thing. Particularly a change of such a magnitude as how a firm is financed and run. Lord Hunt suggested that the problem with the idea of the ABS is that the legal profession is notably diverse, composed of large corporations and much smaller local firms. What is good for one will not necessarily be good for another, so just as the Clementi recommendations call for a “step-by-step” implementation of reform, the best approach is likely to be cautious and considered.

In his review of the possibility of any ABS, Mark Dawkins, managing partner at Simmons & Simmons, identified “a lot of hype” surrounding the subject, not least from the media.There are a number of more practical considerations, he said. For instance, the draft Bill requires the management of such companies to have at least one non-lawyer in the mix, as well as new specific regulatory posts such as the head of legal practice (HoLP). How will partners respond to managers being injected into their structures over and above them? And while existing equity partners may see the benefit of the investment, how, with many shareholders demanding a three to five-year exit strategy, will individual partners respond to greater financial focus and possible lower remuneration? Nevertheless, smaller firms might favour an ABS for attracting top management talent, while more commoditised practices could invest the capital in the cutting-edge technology they need to truly thrive.

Firm success stories

Over the course of the two days many firms set out how they had successfully embraced a more corporate culture and structure. Alistair Morris, managing partner of Scottish firm Pagan Osborne, explained how his MDP benefited from the experience of non-legal partners in areas such as HR and finance. With property and financial advisers in addition to the legal team, clients had access to a wider pool of contacts, as well as the convenience of what he called a “one stop shop” offering. Lawyers may have been forced to sacrifice some control, but this cultural shift was more than justified in terms of business development.

David Lewis, managing partner at Weightmans, then took us through the nuts and bolts of integrating non-lawyers into the partnership structure, outlining the benefits a diverse workforce can bring to a firm’s culture and image, as well as suggesting ways to attract top non-lawyer talent. For example, he encouraged firms to consider what a salary offer says about how high a person is valued – and pointed to the possibility of profit-sharing stakes for HR, finance and marketing professionals, as well as partners. Businesses thrive best when everyone has an interest in their success.

Firm-wide ‘buy in’ was also a priority for the Jersey-based firm Mourant when deciding to go down the corporate route. As a multi-disciplinary financial-services partnership, 70 per cent of revenues had previously come from non-legal services, but the whole show was still being run by the lawyers. Mourant was worried it wouldn’t be able to go on attracting the best people without offering an equity stake, and as they were also looking to expand internationally, the firm made the move to a limited liability partnership (LLP) in 2003.

Some partners were predictably unimpressed. They had to swallow the prospect of more management and less control, as well as a possible reduction in take-home pay and more frequent performance appraisals. Still, chief executive Nicola Davies saw through the incorporation without a loss of partners. A former lawyer herself, she was able to persuade them of the benefits of an equity stake, with a short-term incentive plan that allowed partners to make up to twice their basic salary as a shareholder. Buy-in was achieved in spite of the obstacles and a performance culture was created. Employee engagement was also monitored and found to rise in line with profits.

External investment options

On day two of the conference, talks and discussions focused more attention on the actual investors, and what they would be looking for in a law firm to back. The options for a firm looking to attract external investment are private equity or an initial public offering (IPO); both have their own advantages and drawbacks. Julian Hirst, joint managing partner of Tri-Artisan Partners, identified visionary leadership, excellent management and strong brand value as priorities for any investor. Roger Zair, head of professional practices at Grant Thornton, agreed they were looking for more than just profit, and he too saw excellent management as a key differentiator. Both speakers agreed that an IPO on the Alternative Investment Market (AIM) would be the likely preferred route, but there was an interesting divergence of opinion as to exactly which firms would lead the way. Hirst predicted we would see a so-called ‘Silver Circle’ of law firms, with revenues over ₤75m, taking the plunge first. Zair thought that smaller firms would prove a more compelling proposition, having a stronger hunger for growth. Regardless of size, though, firms weighing up the idea of flotation will need to accept the inevitable public scrutiny that comes with the kudos.

Clearly every firm won’t be rushing at once, but it is not just those that seek external investment that have
a decision to make. As Zair said, those that don’t will need to respond to the competitive advantage gained by those that do.

Building better brands

But it was probably event sponsor Destiny Legal Services that provided the main talking point, urging firms to really get under their clients’ skins and think about what makes consumers tick. Among the predicted trends, commercial director Peter Simpson singled out greater consumer segmentation, calling on firms to focus more energy on tailoring products to client needs. Increasingly time-poor consumers will mean even more demand for commoditisation, or packaging of services, in the legal market. The internet will also play an ever greater role as a consumer channel, likely to extend to legal services as everywhere else.

But the biggest bombshell came when talk turned to the marketing trend of building strong brands to capture and retain clients. To the question, ‘how many law firm brands could we think of?’, delegates agreed, ‘maybe three’. Clearly there is still some way for law firms to go to really penetrate the mindsets of the consumers whose interests the draft Bill demands they serve.

Certainly, with leadership, people management, partner personality, investment options and integration all coming under the microscope, this demanding two days provided much food for thought. 