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Alternative Business Structures – a case of tortoise v hare?

29 October 2012

by Eimear McCartan, Partnership Solicitor

It has now been twelve months since the formal introduction of Alternative Business Structures by the Legal Services Act 2007.

Prior to the reform being introduced, speculation about the effects such radical changes would have were rife. In particular, those pessimistic about the changes lamented the undermining of the legal profession via the introduction of so-called Tesco Law, combined with the ringing of the death knell for the high street firm as we currently know it.

For individual partners of the traditional partnership model, there were concerns that their hard-fought position would become increasingly redundant and outdated as a more fluid model was introduced. At present, the evidence suggests that for individual partners, the gloom predicted has yet to come to pass.

Recent assessment

Two pivotal pieces of research have been recently carried out which assesses the consequence the introduction of ABSs has had on the legal world since introduction. The consensus is the practical implications to date have been somewhat underwhelming.

In June 2012, research was carried out by Jures on behalf of law firm Fox Williams, which involved a major survey of 100 commercial law firms. The results are an interesting indication of the current mentality of partners in commercial law firms and suggest, at present, there is reluctance to medal with the status quo. Of those surveyed, 62% identified loss of control as the biggest barrier to change, whilst 51% identified resistance from partners as an obstacle to introduction of the ABS.

The findings of the second piece of research carried out by accountants, JW Fisher and Company, following a survey of 75 small-medium size firms in the South East, were equally cautious. 89% of those surveyed were not affected by the Legal Services Act 2007, with 52% expecting the Act not to affect them over the next 12 months.

In spite of the slow pace of change to date, some of the findings of the research carried out do demonstrate a potential willingness to embrace opportunities in the future. In the Jures research, over half of those surveyed found the prospect of private equity compelling or very compelling, and 39% have already changed their management strategy as a result of the implemented changes. Such findings suggest that whilst there is an initial reticence about evolving, the seeds of change are planting in the minds of many.

Thoughts for the future

The consequence for partners of this willingness to embrace change could be far reaching. The underpinning ethos behind the Legal Services Act 2007 helps to shed light on what the consequences for individual partners may be in future. The drive for introducing the ABS was to encourage law firms to become more streamlined and competitive by offering combined legal and non-legal services, with the opportunity for outsider investment.

For individual partners, the worrying word here is streamlined. This would suggest that those partners not quite fitting the bill, those under performing or those resisting the alternative structure, will be ousted. Partners need to be prepared for a de-cluttering of the traditional partnerships as lacklustre performers are replaced by non-lawyers with innovative skills, business acumen and commercial minds.

Obstacles partners may experience in future, or indeed may already be experiencing as more flexible legal structures are embraced and the traditional partnership model is chipped away, includes a loss of control of their firms as outsider investors takeover. Alternatively, lock-in clauses may be used to ensure high performing partners stay on after investment by a private funder. Others have bemoaned the likely loss of loyalty, commitment and trust between partners which will come with the move away from the trusted partnership model to a more modern and commercial legal environment.

The need for change

The changes implemented by the Legal Services Act 2007 to date can hardly be described as revolutionary; indeed they have been more sedate than sensational.

Despite this, the signs are emerging that changes are afoot and attitudes are shifting. What is very clear for partners is the need to adapt to these changes to survive in future. Already in today’s climate, partners are expected to be multi-disciplinary; they need to be lawyers, managers, marketers and business developers.

The introduction of the ABS reinforces the need for partners to broaden and hone their business skills, perhaps by undertaking further formal training. In this way they can add increased value to a more commercial business environment. In addition, a clear vision and plan for the firm, defined roles within the partnership and transparent processes will also help to ease partners into this new setting.

A word of warning at this stage; partners also need to be prepared to relinquish control to some extent in future if outsider investors are to play a role; a certain loss of independence is inevitable. For some partners, adjusting to this may be very difficult to accept.

Overall, the effect of the introduction of Alternative Business Structures is akin to the tale of the hare v the tortoise. Whilst the changes have been slow to impact the legal sector, ABSs are still likely to have their day; ultimately the tortoise will win out.

e: eimear.mccartan@ralli.co.uk, t: 0161 615 0691

On Twitter? Follow me @PartnershipLaw or @RalliSolicitors

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