In my regular interviews with law firm partners and clients as part of my service, one of my favourite questions is: “in terms of the delivery of legal service, do you think there is a ‘magic bullet’, that is to say do you think there is a way of delivering legal services that isn’t currently being done?”

The answer is invariably – and I mean invariably – “no”.

The Private Equity Toad (Bufo ABS-us)
The Private Equity Toad (Bufo ABS-us)
This set me thinking about the offering of potential Alternative Business Structures (ABS) that are currently causing serious worries among law firms according to a recent survey by City firm Fox Williams.

It strikes me that the potential threat from ABS comes down to three principal areas:

  1. The ‘how’ of service delivery
  2. The ‘what’ of service delivery
  3. Greater resources available to ABSs ie external capital

Let’s deal with them in turn.

Clearly, emphatically, neither private practice lawyers nor clients believe that there is any way of delivering legal services which does not already exist in some form or another. There are changes to methodology, certainly, for instance in IT-driven process, so-called ‘decomposition’ of tasks via Legal Process Outsourcing and mechanisms such as staged litigation which modify the ‘how’, but fundamentally, the lawyer is delivering advice to clients in a somewhat detailed and nuanced manner which tailors itself to the particular circumstances of the matter at hand. If it does not, it is not doing its job properly; cookie-cutters have their limits.

Weak areas of the market will fall to superior service delivery from outside the profession. Many consumer-facing law firms, for instance, are under threat from legal or quasi-legal providers, the so-called ‘Tesco Law’ wave. This comprises a spectrum of possibility, from self-assembly documents accessed online, to drawing up your will in a booth at the supermarket after you’ve bought your cornflakes.

But the idea that simply by dint of being outside the ‘archaic’ legal profession companies are necessarily better-placed to deliver legal services is difficult to evidence. We have all had to deal with appalling service from all manner of supposedly-sophisticated service providers in the non-legal world, from telecoms to energy to banking. Consumers know that legal services are among the most delicate and important purchases they will ever make. They will have to be very sure that the faceless monolith of a financial services company or service conglomerate purporting to offer a better service than a traditional law firm is going to be able to meet that challenge. It is a tall order, and easy to get wrong. Most sensible companies will, I think, decide it is more trouble than it’s worth.

Oddly, the logic may be sounder in the business arena where, after all, pretty much whoever you are in a corporate you’re only ever spending somebody else’s money. In-house lawyers, used to dealing with KPIs and ensuring consistent service standards, could be an ideal match for a mainstream non-legal service provider. But what sensible non-legal player is going to want to go up against the titans of the legal profession to try to wrest market share away from them? They’d have to be mad.

Of course, some of the titans of the legal profession are experimenting with ABS in the commercial sphere, but it remains to be seen whether they will create a new service paradigm which takes market share from competitors or simply cannibalise their own businesses.

Now to the ‘what’ of service delivery. This, again, is a tricky area. While the ‘one stop shop’ is the dream of marketers everywhere, clients are rightly suspicious. Sophisticated buyers generally prefer to get services from the expert in each service line, rather than buying multiple services from a brand, which may disguise inconsistency. Unless the benefits of having, say, surveyors or accountants as part of your overall service offering are manifest, what is the point? There are already many multi-profession organisations including accountants, surveyors and independent financial advisers, so it’s hardly a new concept. And lawyers are not that great all the time at cross-selling to other lawyers, never mind other professionals, most of whom, let’s face it, they consider to be beneath them. As to the pure legal service delivered, it is, once again, hard to imagine that a company coming in from outside the profession is going to be able to create a ‘magic bullet’, and reconfigure law in such a novel and exciting way that clients will flock to it; law firms have already been delivering legal product for hundreds of years, is there really anything new under the sun? It can’t be ruled out, on the basis of ‘you don’t know what you don’t know’, but from this remove, seems unlikely.

So if neither ‘how’ or ‘what’ are not likely to be game-changers, what else remains?

The one massive advantage that an outsider has is access to capital, and this is what has been keeping many lawyers up at night.

In the case of consumer-facing firms, it is easy to imagine an aggressive ABS using cash to build a major resource in an attempt to gain market share either by lower costs or greater efficiency or both. Build a massive barn in Milton Keynes, stuff it with lawyers, market the hell out of it and destroy the High Street. Simples. In the commercial sphere, this is less obvious.

Law firms are, as Dragons’ Den star James Caan, recently the first ‘outsider’ to invest in a commercial law firm, points out, cash businesses, in which most of the profit is distributed every year. From a mainstream business point of view, this is quite crazy; retaining investment capital is very necessary for most businesses to invest in new plant, marketing, recruitment and so on.

As Caan seems to acknowledge, law firms distribute most of their profit for one simple reason: the partners want it out, for income. And with that in mind it seems highly unlikely that a partner earning quite a decent amount would take a massive pay cut to build up investment capital. And investment in what, anyway? New plant? Um. Property? Well, law firms seem to do ok financing that already thanks very much. Marketing? That’s possible. Law firms spend a tiny proportion of fee income on marketing, certainly compared to other industries. But every pound spent on marketing comes out of income, and therefore the return on investment needs to be sound before huge amounts of money are poured into it; it would, again, be very easy to get wrong.

Personally it has always amused me when law firms talk about amassing a ‘war chest’ for investment, because my first thought is always: “oh yeah, what are you going to spend it on?”, and recruitment is almost always the answer. My own research shows that roughly 50% of lateral hires leave after four years, leaving aside all the people law firms take on who perform disappointingly. Law firms should perhaps remember that the original purpose of ‘war chests’ was to hire mercenaries; rootless, often amoral combatants who would fight until the war was over and then disappear, with a serious risk their fragile loyalty would desert at an inconvenient moment during the fighting.

A war chest also implies giving the firm the ability to pay more than it ordinarily would in order to attract higher quality people, but law is a business in which it is prize idiocy to overpay to hire talent, as the rotting bones of Dewey & LeBoeuf underline quite dramatically. As my further research has demonstrated, the Goldilocks principle – not too much, not too little – would seem to be the best method of lateral hiring, and that can usually be funded out of revenue, rather than capital, as it is at the moment.

The other use of capital is of course to buy other firms, to consolidate resource, potentially asset-strip and remove a competitor from the market all in one. Well, that’s already happening, and the great risk in the law is that everyone just leaves and takes their clients with them if they don’t like the shiny new environment. Again, effectively overpaying for a firm which essentially disintegrates rapidly on acquisition raises serious questions. Various studies show that in terms of increasing shareholder value, most corporate M&A can be shown as a ‘failure’, but at least in most businesses you are left with some kind of product, plant or database. Why anyone thinks the level of acquisition failure should be different in the law is a mystery I have yet to solve.

So, the idea that a household brand can simply steam into the legal market and take over, crushing the opposition thanks to the deployment of overwhelming volumes of leveraged capital is overstated. Private equity investors need an exit, floated law firms would make for highly volatile investments. The mathematics of law firm economics are fairly simple; it is practically impossible to conceive of a way that more profit can be squeezed out of the system in ways that are not already being acted upon.

So are the 50% of lawyers worried about the impact of ABS in the Fox Williams survey worrying for nothing?

I think the primary reason most existing law firm partners are looking at ABS is to provide them with a nice exit plan – a big cash payout. Conversely, I think the reason most assistants might be looking at ABS is that it seems to offer them a new horizon for promotion, abandoning the archaic, political and discretionary structure of law firms for a corporatised, meritocratic one which would have no place for hopeless, time-serving partners who act as a blockage to talented juniors.

But law firm partners will only get their cushy exits if they can convince someone to buy them out. That means, most likely, achieving ‘efficiencies’ to boost profitability ahead of a private sale or flotation. It will also mean conforming not to the often vague standards of law firm accounting, but the rigorous examination of the private investor. And it would mean convincing an investor that the client relationships are more than ephemeral.

As such, the omens on buying law firms are not good. As Stephen Mayson rightly says, “the real surprise would not be a firm wanting external capital, but rather the prospect of external capital falling for the mirage it would be investing in.”

As for assistants, they are truly living in fantasy-land if they convince themselves that companies outside the law, whether listed or not, are not just as partial, political and arcane as law firms. The involvement of external capital will certainly favour a few thrusting young ‘uns, those who work out how to play the new system to their best advantage; corporates, after all, have had years more practice at creating structures which allow ambitious and ruthless people to stamp on those around them in order to get on. But for the majority it will mean more hierarchy, not less, and hence fewer, not more, opportunities.

If I know lawyers, I suspect that if they are worrying about ABS, they are worrying that the gravy train will somehow pass them by, that their rival or former colleague will cash out and they will be left grinding away until retirement. I can empathise; I remember quite clearly the febrile, euphoric atmosphere at the time of the boom where everyone and their dog had an idea which would make them a multi-millionaire, and those of us who were in it, but not in it, felt dispirited and desperate as a result. When it all collapsed, I confess to having felt a mix of relief, schadenfreude and smug vindication. Quite an ugly, but very human, response I think.

Where I think law firms do need to worry about ABS is if the market as a whole becomes convinced that – or is unable to prevent a situation in which – fragmentation, volatility and ‘decomposition’ (to use Professor Richard Susskind’s wonderful term) become the norm.

The commercial market is littered with examples of industries which have been taken apart by the advent of new technology, methodology or capital-raising mechanisms, to the ultimate detriment of all in the final outcome. The ‘market’ is not a force for good, it is simply a force, and we are all paying the price for having allowed successive decades of rampant, unchained market forces in many industries. It says to me that we, as a species, are very bad at judging the systemic risks of certain behaviours and policies; either that, or very good at ignoring the inconvenient truths, at allowing a small number of aggressive entities to reconfigure markets to their own benefit and the detriment of the common good.

I like to use the example of the cane toad, introduced into Australia in the 1950s in order to control insect pests. It certainly fulfilled expectations, but far, far too well. It is an aggressive predator and breeds prodigiously, and has managed to outperform and thus destroy many native species and is now out of control. From being lauded as a saviour, it has become a plague.

ABS carries, to my mind, similar systemic risks. The advent of huge amounts of unthinking external capital into the fragile ecosystem of the legal profession could create many unforeseen and irreversible effects.

Instead of worrying about external influences via ABS, and reaching greedily for the phantom prospects of juicy exit plans, law firm partners need to stick to their knitting. They are the experts in the delivery of legal services, and need to be thinking constantly about how to improve the shape of their service and to deepen the client connection so that clients will not be tempted by a whizzy-looking new ABS company which may not end up being any better, and may in all likelihood be worse. Of course by the time everyone realises that, it may just be too late to do anything about it. With more than 70 ABS projects at second stage of the application process, now is the time to act.

Leave a Comment

Your email address will not be published. Marked fields are required.