LESSONS FROM THE ABS
EARLY ADOPTERS
It has been a slow start but some
interesting themes have emerged
from the Alternative Business
Structures that have been
licensed so far.
ADAM STRONACH, a director at
Chartered Accountants, Business
& Tax Advisers Harwood Hutton
Limited, analyses the different
strategies being adopted by ‘new
model’ law firms and considers
the four most important
questions law firm leads should
be asking before taking on
external capital to fund their growth
The Solicitors Regulation Authority was approved as a licensing
authority in December 2011, and started accepting Alternative
Business Structure applications on 3 January 2012.
A year on in January 2013, the SRA revealed 454 firms had started the application process,
117 firms had submitted all the required information, 74 licences had been granted and a
further 19 were close to completion.
The first reaction of many people to these statistics is that 454 applications in a twelve
month period is a drop in the ocean when there are just under 11,000 solicitors firms in
England & Wales. But this belies the change in the attitude of mind that many firms and
individual solicitors have adopted since the Legal Services Act 2007 came onto the statute
book.
Although there has not been a rush of ABS applications, firms up and down the country are
being affected by change in the legal services sector and have changed their working
practices.
The charts below show the number of licences granted by month and the cumulative
position.
Chart 1: ABS licences granted each month (from the SRA website)
Chart 2: Cumulative ABS licenses granted (from the SRA website)
The SRA made a slow start on the process of ABS licensing, although balanced against this
was the need to ensure their due diligence was robust. There were frustrations from the
market and alterations were made in June and October 2012 to speed up the approval
process, and this filtered through in the summer (July and August) and then again from
December onward. As at the date of drafting this paper (22 April 2013) there are 133
licensed ABS firms.
Who are becoming ABSs?
It is worth revisiting some of the early adopters because they provide a cross section of
the types of legal practice that now work under an ABS licence. The majority of
applications are from existing regulated entities i.e. new entrants to the legal services
market are in the minority.
Another theme from the statistics is that the personal injury market is a key area of
interest, driven by the changes it has either gone through or is currently facing e.g. cuts
to the Legal Aid Budget, and the ending of referral fee payments. ABS is seen as part of a
strategy to overcome some of the key changes faced by this segment of the market.
Why become an ABS?
The motivation for obtaining an ABS licence appears to be threefold:

To allow non-lawyers to have ‘partner’ status or its equivalent

As part of a strategy for tackling the market, through different business models and
to increase the services offered

To source external capital.
Non-lawyers becoming ‘partners’
John Welch & Stammers in Oxfordshire was one of the first three licensed ABS businesses.
In many respects this is a classical model for a general practice law firm. At the time it
was granted its licence the firm had seven fee earners and 11 support staff.
One of its solicitor-partners retired in December 2011, leaving two solicitor-partners at
the head of the firm together with its practice manager. The firm used the advent of ABS
licensing as the point at which to turn the practice manager into the managing partner,
and the language the firm itself uses on its website is noteworthy.
It says specifically that its managing partner “manages and runs all administrative
departments of JWS including Accounts, ICT, HR, Marketing and Compliance, allowing her
other partners to concentrate on their various aspects of the law so as to provide a more
efficient service to their clients”.
So this is a firm that is using ABS as model to drive change in the way it is managed and
organised so that it leaves lawyers to do what they do best i.e. concentrate on the law
and deliver client service.
Lawbridge Solicitors in Kent was another of the first three ABSs, and prima facie it has
used the new licensing regime to allow a non-lawyer to become a practice owner.
Lawbridge has a local client base and offers employment, litigation and corporate and
commercial law services. There was one fee-earning solicitor and his wife was the practice
manager.
With the firm gaining its ABS licence, the wife became a director and significant
shareholder. An unsurprising use of an ABS, perhaps, but it is the firm’s approach to the
market that is eye-catching.
It says that to provide accessible and affordable high quality legal services it has taken
advantage of the best in law firm technology and efficient legal practice, including online
practice management systems, enabling the firm to provide a high level of service and
excellent communication at all times, whilst dispensing with traditional overheads. Not
rocket science but more cutting edge than many similar practices up and down the
country.
What is also noteworthy is that Lawbridge is exploring other channels for getting its
message out to the market, such as webinars, and is offering free 30-minute consultations
at its twice-a-month business legal clinics.
Free advice and the use of social media is anathema to many solicitors but adopting such
tactics as part of a strategy for tackling the market will become more prevalent as
competition intensifies.
ABS as part of a market strategy
The final member of the ‘Gang of Three’ that received its ABS licences first is the Co-op.
Co-operative Legal Services is often cited as a new entrant ABS. Some are surprised,
therefore, to discover it was set up in 2006.
What is clear is that the Co-op plans to use the era of ABSs as a means to expand its
business substantially. At the time of being granted its licence, it had around 400 staff but
it plans to recruit 3,000 in the coming years. Prior to ABSs, the Co-op was limited to
personal injury work, will writing, probate and estates, conveyancing and employment.
ABS status has facilitated diversification into other areas e.g. family law.
But the Co-op’s is not just a story of broadening the services it provides. It is also about
how service delivery is marketed and packaged. The Co-op says it offers fixed fee pricing
for most services, and that initial advice is free (which chimes with Lawbridge’s market
positioning) with no obligation to use the Co-op’s services.
CUTTING TO THE CHASE
The issue: Too many legal firms are dithering over their response to the advent of
Alternative Business Structures
Possible outcomes: Without expert guidance, firms may choose to restructure on lines
that are inappropriate for their business or seek financing options on the wrong footing.
The solution: Harwood Hutton’s expert business advisers can help devise the business
strategy that will dictate the structure of the business, putting it in a position to
compete effectively and generate profits in the most tax-efficient manner.
Action: Contact Adam Stronach on 01494 739500 to arrange a complementary
consultation or email [email protected]
Perhaps most tellingly, the Co-op emphasises its ‘trusted’ brand, making a point of
mentioning its seven million members sharing in its profits and success rather than private
shareholders, and explaining it is committed to working in an ethical and responsible
manner.
In a world where there are few publicly recognisable brands, the Co-op’s message is clear
and has a national platform.
But this is not the be all and end all of the Co-op’s strategy. Be prepared for a multifaceted approach to the market in the coming years. The Co-op will recruit solicitors, nonsolicitors and, indeed, whole teams where it feels it can develop a competitive edge. It
was developing its strategy several years before ABS licensing became a reality, working
closely with the SRA on Outcomes Focused Regulation, ensuring the regulator was fully
appraised of the systems-led approach that large scale new entrants would want to use in
the control and delivery of legal services.
It will be organised internally so that non-lawyers deliver service using the systems and
procedures it has in place, supervised by solicitors. But it will also build local firm panels
as necessary for when Co-op customers request details of preferred suppliers for its legal
services.
In the right circumstances it will acquire practices, sometime outright, sometimes on a
piecemeal basis over time. In short, it will do all that is necessary to develop its strategy
and approach to the market.
Solicitors and barristers together: A model for the future?
Riverview is another new business model in the legal world. It is a young business, having
only been in operation for a year or so. Unlike many others, its focus is on B2B (businessto-business) in the legal sector, not on B2C (business-to-consumer).
Its strategy has been to secure fixed price annual contracts for unlimited legal advice for
corporate clients across the entire spectrum, from SMEs to FTSE 100 companies. Its
approach is to look at the commercial market for legal services from the bottom up i.e.
from the point of view of the customer, rather than top down i.e. from the lawyer’s
perspective where people costs, overheads and required profit margin are drivers behind
the hourly rates charged.
Its team is currently about 100-strong and comprises both solicitors and barristers –
including QCs – with plans to double headcount in the next year. DLA Piper is a strategic
investor, with a 21% stake in Riverview’s parent company, LawVest.
Some may say that even with 200 people, Riverview is a small player in the corporate
marketplace. But the model of solicitors and barristers delivering fixed price contracts to
corporate clients, large and small, appears to be gaining traction.
Rewriting the rules
Parabis Law specialises in claimant and defendant insurance work and offers
complementary non-law services to the insurance sector i.e. loss adjusting and claims
handling, risk assessments, health and safety assignments, rehabilitation, outsourced
claims solutions, case management systems and management consultancy.
The private equity firm Duke Street was looking for a highly automated and industrialised
service provider and took a substantial stake in Parabis, valuing it at between £150m and
£200m.
The point to appreciate about Parabis is that it is much more than a law firm. It plans to
transform the business from a professional services firm to a business process outsourcer.
Parabis may seem to be a world removed from the day-to-day experience of most
solicitors but it is firms like Parabis that represent the threat to traditional firms and the
way they have delivered legal services.
Many will be familiar with the QualitySolicitors model. Quality Solicitors is also backed by
private equity, with Palamon Capital Partners holding a controlling stake in the business.
The aim is to establish a dominant brand for individual and SME legal services, the
Specsavers of the legal world.
It is with that backing that QualitySolicitors could commit to spend £15m on an advertising
campaign designed by Team Saatchi. Having access to financial resources such as that will
undoubtedly mean that private equity is going to have a substantial impact on how legal
services are bought in the future.
IPOs and angels
Notwithstanding the experience of Slater & Gordon, which is quoted in Australia (and
which acquired Russell Jones & Walker in the UK), and the expectation that Irwin Mitchell
will eventually float on AIM, there is little appetite for law firm initial public offerings
(IPOs) currently. Irwin Mitchell has, however, brought in external corporate management
in readiness for a flotation and appears to be anticipating what surely must come at some
point in the future.
Very few firms will be right for private equity which will require a certain level of
profitability built around systems and procedures that can be scaled up and applied across
a number of similar businesses that can be consolidated together.
Fewer firms will ever be in the position to float even if they wanted to. But that is not to
say there isn’t a role for business angel finance. Subject to the SRA’s ABS approval
processes, there is no reason in principle why a law firm could not seek angel finance as a
means to help it with its plans and development for the future.
External finance is not always the answer
Regardless of the extent of a law firm’s ambitions or indeed problems, external finance is
NOT the automatic answer, and there are four vital questions that should first be asked at
partner meetings.
Question 1: Do you really need external finance?
The first step with external finance is assessing whether you need it. Assuming you have a
business strategy – and if you don’t then it is likely you are already on the back foot –
revisit it and your plans will guide you as to what you need and when you need it.
If you do need it, do not leave it too late to start scouring the market for external
investment. Never take funding on a knee-jerk basis. The worst time to do a deal around
finance, whether it is debt or equity, is when your back is against the wall and you have
few options open to you.
If you are running out of cash, at least work out WHY before you go to the market to ask
for more.
Similarly, do not take the first offer made to you. Even if it is the best offer, you will only
find that out by talking to other funders who might make competing offers.
Question 2: Where will the money come from?
As mentioned earlier, private equity houses are actually looking for quite large, quite
successful, well-run businesses. The businesses they invest into also have to be prepared
for the on-going robust financial and operational examination that private equity will
demand.
Also they will be looking for a strategy that allows them to exit at some stage. Does your
firm fit the bill? If not, then business angel finance may be the route for you.
Whoever you approach, you must have a clear strategic and financial plan as to how the
money will be used.
Question 3: Do we need to change our structure?
You should beware a change in structure for the sake of it. For example, just because all
your competitors have shifted from a general partnership structure to an LLP model
doesn’t necessarily mean you too want to be an LLP.
Ask first what needs to change in the context of the strategy that has been set for the
business, and do not become tempted to let the tax tail wag the commercial dog.
Should you, in fact, have a hybrid structure (e.g. the legal services provided by an LLP,
with a corporate member of the LLP which might shelter profits, and provide a means for
reinvestment into the LLP, and also a mechanism through which additional external
capital can be channelled)?
Question 4: What works best for everyone?
The ultimate choice of structure will not be solely in the gift of the existing partners, their
management team or even the clever advisers they might employ to look at their tax
exposures.
External stakeholders will have a view i.e. banks and regulators and, most important of
all, those who might be asked to provide external equity. The key here is to consult with
those external stakeholders long before you go down the path of changing your structure.
Equity investors will certainly have a view on how they want the business to be structured
and how this might fit into their existing business model.
The chances are they will also have thought about things as business people that you
haven’t, so consulting with them on their vision for the future, how it might apply to your
firm, and what structure needs to be in place as a consequence is all important.
The mantra for you and for investors will be ‘Let the strategy inform the structure, not
the other way round’.
ABOUT THE AUTHOR
ADAM STRONACH – Adam is a director-shareholder at Harwood Hutton Limited, a firm of
Chartered Accountants, Business & Tax Advisers. He read economics at Cambridge
University and then spent fourteen years with Deloitte in London. Adam is a Fellow of the
Institute of Chartered Accountants in England & Wales, and over two decades has worked
with small businesses, professional practices, major international clients and sovereign
governments. He is an auditor, leads Harwood Hutton’s corporate finance and expert
witness services, and advises the firm’s legal sector clients. Adam is also a non-executive
director of Buckinghamshire Business First, an organisation which links business with
economic development policy in Buckinghamshire.