Nick Learoyd considers the forthcoming ABS regime, which is set to change the entire legal marketplace.
When the Legal Services Act came into force in late 2007, the expected timescale for the alternative business structures (ABS) changes afforded by the Act seemed a long way off and most firms added it to the agenda for future consideration.
Most firms, understandably, have been distracted from longer-term strategic planning over the last two years, having had to face the more immediate challenges of the recession. However, interest in the opportunities afforded by the Act is now increasing. With less than a year to go, the timescale for considering these issues is becoming intense.
Whether or not firms seek to take direct advantage of any of the opportunities will depend on their specific circumstances. What firms cannot afford to do is simply ignore the issue, as the implications of the Act will not only affect individual firms, but are likely to change the entire legal marketplace in which all firms operate.
A real alternative to funding
The relevance of the ABS changes to individual firms will vary enormously depending on their business strategies. For businesses seeking to expand, the reforms represent a real alternative to funding investment, where traditionally this could only be achieved internally or through bank debt.
Firms seeking external investment will need to consider that investors will only be looking to invest in well-managed businesses with a clear and credible strategy for growth. For many firms this will require substantial internal changes including reforming remuneration arrangements, introducing corporate governance structures and using professional management.
The natural conservatism of many firms will lead them to conclude that this sort of structural change is not for them, and clearly an expansionist strategy is not appropriate for every firm. However, this does not mean that the provisions of the Legal Services Act will be irrelevant. Converting a practice into an ABS may form part of a defensive strategy to ensure that a firm can retain its key fee earners in a changing marketplace and to provide incentives to attract new talent.
'Tesco Law' – the next stage
The introduction of the ABS regime in mid 2011, will allow non-lawyers, including commercial organisations such as banks and supermarkets, to own firms that provide legal services. The reforms will also allow lawyers to form multidisciplinary practices offering legal services in conjunction with non-legal services, such as lawyers working alongside other professionals to provide a one-stop shop for business advice.
An issue to consider
Although an ABS could be achieved either as a partnership, an LLP or a corporate, external investors are likely to favour the better-understood corporate model. This raises the contentious issue of how ownership of the business should be determined, not only at incorporation, but also on an ongoing basis in order to ensure that a firm can continue to attract and incentivise key staff.
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