Keoghs looking to raise capital from Bowmark

Keoghs, an ambitious law firm with head-quarters in Greater Manchester, is reported to be in exclusive talks with private equity firm Bowmark Capital about taking external investment, after seeking advice from Deloitte last month.

Keoghs is an insurance fraud specialist with 57 partners (16 of whom are believed to share in equity) and more than 900 staff, making it one of the largest regional players.  It  is estimated by The Lawyer UK200 to have had a turnover of £41m in 2010-11, with an average profit per equity partner of around £420,000.  Last month it announced plans to create up to 50 jobs in Bolton this year in its counter-fraud services arm.


City-based private Bowmark, formerly known as Sagitta Private Equity, specialises in mid-market investments in the business services sector as well as healthcare, leisure, media and IT and is believed to have beaten off competition from several rivals, including LDC, who also wanted to invest.


This development comes hot on the heels of Duke Street’s investment in the Parabis group and shows that there is considerable private equity interest in the sector.

Will lawyers rise to the online challenge?

Lawyers are by nature generally conservative beasts. I well recall a conversation amongst some law partner friends when e mail first really started to become widespread.  The discussion concerned whether law firms should permit the use of e mail as a method of communication at work, and the general consensus was that although e mail would undoubtedly revolutionise communications in social spheres, it was unlikely to catch on in the business world, and certainly not in law where confidentiality, formality and precision were paramount.  It seems ridiculous to take such a luddite view now, but law firms carry on making the same mistakes again and again, becoming late adopters rather than embracing the opportunities that technology can offer.  But now that the LSA is in force, the speed with which the competitive landscape changes is likely to increase, as new competitors who are less bound by the old ways of thinking enter the market, and law firms can ill-afford to take the laissez-faire approach that they have in the past.

In all other walks of life, consumers have got used to flexible service delivery.  They can do their Tesco shopping in the middle of the night, book flights from anywhere in the world using a smartphone App, and pay their bills online without worrying about bank opening hours. Why should we in the legal fraternity assume that our services are immune from these changes?

There are a handful of forward thinking businesses which identified the opportunities that technology could offer long ago, and used them to challenge the usual paradigms of how to do legal business. Epoq, for example, is a legal IT company which has an online service (started as far back as 2000) which underpins the offering of many of the new market entrants and some of the traditional law firms who are starting to challenge the usual legal service delivery model, such as claimant firm Russell Jones & Walker.

In a study commissioned by Epoq and undertaken by legal research firm Juris, which was published in January 2012 under the title “Brave new Worlds”, Epoq’s Graheme Cohen says “There are firms that fear online processes and see them as a cheapening of the law, marginalising the role of lawyers and replacing a carefully crafted bespoke service with an influx of “pile em high, sell em cheap” legal products. That is based upon a misunderstanding of the role of online legal services.”

Cohen argues that online legal services assist with easing three ‘points of friction’ between lawyers and clients: accessibility, convenience and price. He suggests that online services can be deployed to deal with those concerns by enabling websites to become an extension of the law firm’s office. For example, integrating online questionnaires into a law firm’s website, which present the client with the same questions a solicitor would ask during a face-to-face interview enable clients to instruct a solicitor at their own convenience. And, as pre-programmed intelligence within the online questionnaire automatically generates a detailed first draft legal document for the solicitor to review, the process addresses the demands of consumers for greater accessibility, speed and convenience.  It’s difficult to argue with his logic, particularly in fields such as wills and probate, which lend themselves to relatively standardised questionnaires and work-flow logic.  Indeed, in many ways it is easy to see advantages of gathering all the initial data online, as it is not uncommon for clients to turn up for a meeting at a lawyer’s office without all of the information they need to give proper instructions.  Taking the detail online means that the client can ensure that all the information is complete before the “Submit” button is pressed.

The report also records that according to a recent study (YouGov SixthSense), the availability of online legal services was found to be a positive influence by more than four out of 10 respondents (42%) when looking for a solicitor.

So are we likely to see a rapid expansion of online services in the UK legal market?  Well, it’s a well worn cliché, but nonetheless often true, that what happens in the USA comes to the UK eventually, so it is helpful to consider what has happened on the other side of the Pond.

Epoq’s report concludes that the development of online legal services has taken off on the other side of the Atlantic in the face of considerable opposition from the legal profession. The online legal document service LegalZoom was readying itself for an IPO after raising $66 million from two venture capital firms, Kleiner Perkins and Institutional Venture Partners bringing total funding to $100 million. According to the American Bar Association Journal, it has served more than one million customers online in 10 years.

It is difficult to see why the UK should not eventually follow suit.  The question is whether the traditional law firms will take that market, or whether the new entrants will beat them at their own game.

It is interesting to observe that as the Internet became more established, Epoq partnered mainly with non-law institutions seeking to build a presence in legal services, including MORE TH>N in 2002, (the first insurer to move into the consumer legal services market), and now HBOS, AA, Saga, NatWest, RBS, Barclays and Allianz, amongst many others.  These sectors were more open to embracing the Internet as a service delivery channel. Cohen believes that “The legal sector was and, to a large degree, still is, nervous about online and very reluctant to adopt it, mistakenly believing it will undermine the solicitor-client relationship.”

There is potentially a big prize out there for the firms willing to grasp the opportunity.  But what is not yet clear is who will emerge as the winner.

A full copy of Brave New Worlds can be found here: http://www.epoq.co.uk/press/2012-01-24_New_thinking_in_legal_services.pdf.

UK law firm launches family office services for HNWIs

Up until now, UK law firms have tended to focus squarely on the provision of their core business of legal services, save for some fairly low level company secretarial and trustee work where that was a necessary adjunct to client legal work. Many of the offshore law firms, by contrast, have developed extensive ancillary businesses to their legal practices, offering a full range of fiduciary and family office services, and these have in many cases proved to be very lucrative ventures, in some cases eventually dwarfing their law firm roots. There are now signs that UK firms may be starting to follow suit.

In 2010 Mishcon de Reya launched a global concierge service for its high net worth clients in conjunction with Quintessentially. It has now announced that it is to go a step further and launch a private client business for high-net-worth individuals, offering private bank relationship management advice and asset reporting in addition to tax and structuring advice. It is not yet clear to what extent this will also involve the firm in agreeing to take on fiduciary roles for client structures, but it is a clear attempt to move into the realms of family office services. It is believed that the initiative is targeted at the higher end of the market, focusing on individuals and families with assets of more than £50m.

Mishcons managing partner Kevin Gold said: “With so many high-net-worth clients that themselves constitute the equivalent of multinational companies, we can see a market to service them as such, with an offering that goes beyond their legal needs.”

It will be interesting to see whether Mischon’s next step is an alliance with one of the offshore law firms or fiduciary businesses, as it would seem to be a logical progression. A very significant proportion of the VHNWI population utilizes offshore structures in tax planning, and a family office offering is likely to be more coherent if the onshore and offshore advice and fiduciary elements could be combined

DLA Piper/Riverview - A brave step into the unknown

A couple of years ago I attended a conference hosted by one of the magic circle law firms, examining what the likely impact of the Legal Services Act would be.  There was a very clear consensus amongst most in the room – the view was that high street law practices and ambulance-chasers would undoubtedly be impacted, with some big name brands moving into these fields and investment spent on efficiencies at the commodity end of the market.  But there was a very clear opinion that the loftier realms of corporate law would remain almost untouched.   The larger firms took the view that they didn’t need cash from outside investors, that clients would always be happy to pay a premium price for a premium product, and therefore that life at this rarified end of the market would almost certainly carry on unscathed by the changes.   

It didn’t seem to occur to many that there would come a point when even the biggest corporate clients would begin to baulk at paying £250 per hour for someone to do photocopying.

Even before the LSA came into force, there were signs that the big law firms were naiive in their beliefs.  Clients in some cases started to force law firms to outsource some of their less complex work to cheaper, more efficient firms, (and firm such as CPA thrived on hoovering such work up), so we perhaps shouldn’t be surprised that someone is now looking at changing the way that corporate legal services are offered.

It has been public knowledge for some time that DLA Piper had invested in LawVest, a firm which was assembling a team of solicitors and barristers to handle high volume fixed-fee legal work for corporate clients, but it is only now that more detail is starting to emerge of how they see the model working.  The business, which will be branded as Riverview Law, proposes to offer a fixed-fee service with annual, all-encompassing contracts covering a range of legal matters including contracts, company law, data protection, disputes, employment, finance, insurance, intellectual property, IT and property. The fees will vary according to the size of the business but will allow businesses with up to 1,000 employees to buy annual contracts from £200 per month for all their day-to-day legal support – small companies with up to five employees will pay around £2,400 a year for their legal advice; firms with between 5 and 24 staff members will pay almost £4,000, and up to 50 employees it will be in the region of £6,000 per annum and so on.   Fees for services to larger companies will be quoted on a bespoke basis, with the larger corporates being encouraged to outsource their entire legal function to Riverview.

Fixed fees are nothing new – they have been around for many years and although less common in corporate work than in some other spheres, they are certainly not unheard of.  However, the Riverview offering is taking the concept a big leap further – essentially they are offering a fixed fee without knowing first what work they are being asked to do.   It doesn’t take a rocket scientist to work out that if even a 4 man business becomes embroiled in litigation during the course of the year then £2,400 would not make a dent in the costs associated with properly servicing such a case.   The business is not staffed exclusively by low cost legal executives in out of town locations – although the majority of its employees will be based in the Wirral, an area with an undoubtedly significantly lower cost base than London, the payroll includes successful barristers and QCs, some of whom will be employed exclusively by Riverview and some of whom will do work for Riverview whilst remaining members of their own Chambers.  Many of these individuals would normally charge more than the average annual fee being paid by the Riverview clients simply to open a brief, and therefore the proportion of Riverview clients requiring services at this level needs to be low to make the business profitable.  

Riverview will not know, when a company signs up for the service, what legal issues may arise during the course of the year, and therefore they are essentially taking an actuarial-type gamble that across their client basis as a whole the pricing mechanism will work.   This is similar to the way that insurance companies price their policies – they win some, they lose some, but across a base of hundreds of thousands of customers they take an informed gamble that it will work out.  If Riverview manage to get this type of scale, then the actuarial approach to pricing could work, but the risks will be high at the outset, when the business lacks the scale required to make such calculations statistically sound.  The other obvious difference between law firms and insurers is that insurers recoup some of their losses on individual clients by levying increased premia in the following years on those who have had to claim on their insurance, a key mechanism in helping to tip the risk/reward balance in favour of the insurer by ensuring that persistent claimants pay more – I have seen no suggestion that Riverview intend to do the same, and indeed it would be difficult to raise the annual charges too high, as in my experience clients inevitably take an overly-optimistic view of the likelihood of them becoming embroiled in expensive legal work (or the costs associated with it should it happen), and will therefore baulk at paying a higher up-front fee when they may not need to use the service at all. 

There are indicators which suggest that Riverview may indeed achieve the scale it requires to make an actuarial price model valid.  Protection from unexpected legal fees is something which is likely to be attractive to firms during a period of economic turmoil and it would be no great surprise to see many signing up at the attractive price levels being quoted by the firm.  However, the more successful the model is, the more competitors are likely to copy what Riverview are doing, and that is bound to result in downward pricing pressure and, perhaps, the emergence of entrants into the market who are less concerned about quality of service than profit.  This could result in an unfortunate price war, at the expense of quality.  I

However, one of the most intriguing aspects of the Riverview experiment is the relationship between Riverview and its major financial backer, the global firm DLA Piper.   There are 2 aspects to the arrangement that are quite fascinating – firstly, DLA have themselves said that they intend to refer some of the low-value volume work from their existing client base to Riverview – undoubtedly a great thing from a client cost perspective but surely something that will have an adverse impact on DLA’s own profits?  In taking this step, DLA appear to be tacitly conceding that despite the “head-in-the-sand” attitude taken by the magic circle firms at the conference I attended 2 years ago, clients are not going to carry on paying big-firm prices for routine work, and that if they didn’t do something like this, they would in all likelihood lose that business anyway.  After all, if DLA could continue to recoup premium rates for routine work, surely they would continue to do so?  They are a business, and not a charity, and I cannot for one minute imagine that they are doing this for any reason other than to establish themselves as the market leader by jumping before they are pushed.

The second fascinating issue is that DLA are not confining Riverview to the solely smallest end of the corporate market.  Their fixed pricing mechanism accommodates businesses up to 1,000 people, but they are still targeting business from larger organisations too, albeit on a bespoke pricing basis.  At this end of the market, it is hard to avoid the conclusion that DLA will be competing head-on with its own offspring. 

I am sure that many City firms will view Riverview as an interesting experiment but of little relevance to them.  In doing this I think they would be wrong.  They need to wake up to the fact that the LSA changes will not have an impact solely at the bottom end of the market, but are likely to make profound changes to the way that clients choose to buy legal services across the board.  DLA should be applauded for eschewing the head-in-the-sand attitude of some of its rivals and trying to do something to offer better value for money for clients through this initiative.  Whether it works, and if it does, what the long term impact on DLA itself will be, remains to be seen.  In the words of the inimitable Humphrey from Yes Minister “It’s a brave move, Minister”.

Gender Diversity - the view offshore

The Legal Services Act should have the effect of increasing the diversity of ownership of UK law firms in the future, but it appears that there remains much to be done in achieving gender diversity within existing partnerships.  Statistics are difficult to come by but in 2010 The Lawyer reported that less than 1 in 6 partners in UK law firms were women, despite the fact that they represent 60% of all newly qualified lawyers.  In its 2011 report, The Lawyer stated that of the major UK firms, the best ratio that could be found in any of the firms was 1 female partner to every 4 males, and that in some firms the percentage was declining rather than rising.

The Lawyer has now published an analysis of the world's largest offshore law firms (a full copy of which can be found at http://www.thelawyer.com/offshore-top-30/1011468.article ) from which it is possible to extrapolate some interesting statistics around the extent to which females are represented at the highest levels in these businesses (I have called them partners in this analysis, although as a number of the offshore firms have now adopted corporate structures, in many cases they now appoint directors rather than, or as well as, partners).  Although not UK law firms, most of these businesses are Anglo Saxon in origin and culture, and might be expected to follow similar patterns to their UK colleagues. In fact, on the face of it appears that many of them appear to be showing their UK counterparts the way, although there is a huge discrepancy between the top and the bottom of the list.

In the research, Thorp Alberga and AO Hall take the joint accolade for being the most female-friendly firms of the bunch, with a very healthy 50% of their partners being female (although both are relatively small firms, so the percentages have to be viewed in that context).  Meanwhile, the bottom 7 firms fail to rustle up a single female partner between them, which should at the very least raise some questions about why they have failed to identify or attract a single suitable candidate for partnership.

The table below summarises the position, but perhaps flatters some firms as the partner % includes both equity and salaried partners.  Although many firms refuse to give information on the equity partnership it is notable that of those that did, only 3 of Bedell's 18 female partners are equity partners, and only 1 of Maples' 14 female partners shares equity - perhaps a touch of window-dressing?

Doubtless many of the firms who fare badly on this list will complain that the lack of female partners is down to the fact that too many females drop out of the profession to raise families.  Whilst there must of course be some truth in that, it certainly does not explain the whole picture.  There are many very able female lawyers who do choose to continue with their careers, either instead of having a family, or who resume careers after a short break, but they still seem to be struggling to break through the glass ceiling in many cases.  Firms like Thorp Alberga and AO Hall may be small, but they should be applauded for showing some of the others that a thriving business and a healthy percentage of female partners can go hand in hand. 

Firm		HQ	% Female partners
Thorp Alberga		Cayman	50
AO Hall		Guernsey	50
O'Neale Webster		BVI	40
Marshall Diel & Myers		Bermuda	37.5
Solomon Harris		Cayman	33.3
Walkers		Cayman	29.8
Appleby		Bermuda	28
Harneys		BVI	26.9
AFR Advocates		Guernsey	25
Charles Adams		Cayman	25
Maples		Cayman	22.22
Conyers		Bermuda	21.2
Hassans		Gibraltar	20
Wakefield Quinn		Bermuda	16.7
Isolas		Gibraltar	14.2
Simcocks		IOM	14.2
Mourant Ozannes		Jersey	13.2
Collas Crill		Jersey	12.5
Mello Jones & Martin		Bermuda	12.5
Ogier		Jersey	11.9
Bedell		Jersey	10.3
Carey Olsen		Jersey	7.9
Cains		IOM	0
Triay & Triay		Gibraltar	0
Babbe		Guernsey	0
Campbell		Cayman	0
Cox Hallett Wilkinson		Bermuda	0
Doughty Quinn		IOM	0
Voisin		Jersey	0

BT throw their hat into the ring

BT has announced that it is entering the legal services market, as its claims management arm has applied to become an alternative business structure (ABS).
BT Claims was established in Sheffield in 2010 to service motor claims from BT's own fleet of 35,000 vehicles. It is now looking to leverage on the expertise it has built up in the field, by offering claims management to third party companies (corporates, insurance companies and brokers).  This will be possible if it receives, as expected, a licence from the Solicitors Regulation Authority.

The move is another example of strong household-name brands moving into the legal services market following the liberalisation of the market as a consequence of the Legal Services Act, although it is not expected that BT will look to offer retail consumer legal services.

Irwin Mitchell continue preparation for ABS

Irwin Mitchell have announced that it intends to appoint Mel Egglenton as a Non-Executive Director to its Board as the company continues with its preparations to become an Alternative Business Structure.Mr Egglenton, former UK Senior Independent Partner at accountants KPMG, will become the second Non-Executive Director appointment to the Board of Irwin Mitchell Holdings Ltd and will Chair the company’s Audit Committee, a position he also held with KPMG.
His appointment follows on from the recent appointment of former PricewaterhouseCoopers Vice Chairman Glyn Barker as Chairman Designate of Irwin Mitchell, which confirmed that it had become one of the first firms to begin the application process to become an ABS at the beginning of January.
The timing of Mr Egglenton’s appointment as a Non-Executive Director will be dependent on the approval of the firm’s ABS application and approval of his appointment by the SRA, as will also be the case with the appointment of Mr Barker, who will become the firm’s Chairman upon regulatory approval being received.
Commenting on the latest appointment to the Board, Irwin Mitchell’s Group Chief Executive John Pickering said: “This....is a move which again signals our clear intention to take advantage of the opportunities we think will arise from becoming an ABS."

Indeed, Irwin Mitchell have never hidden their ambitions in this regard, having announced in April 2010 that they intended to apply for ABS status as soon as the Legal Services Act permitted, and having put in place a corporate holding structure to facilitate the move.  There has also been speculation that one of the aims is to be the first British law firm to float on the Stock Exchange, although this is somewhat down-played by insiders at the firm, who say it is simply one of a range of options.  The firm are being advised by Espirito Santo Investment Bank.

Remuneration conundrums for law firms taking investment

One of the more taxing conundrums to address for firms wanting to avail themselves of outside investment (and particularly those who are adopting a corporate structure in order to do so), is the issue of how to manage remuneration.  Traditionally partnerships have stripped out all or the vast majority of their income each year, and distributed it to the partners.  Partners therefore enjoy very high levels of annual income, but often have little or no capital or deferred remuneration elements in their package.  The partnership income distribution model, of course, starts to unravel when outside investment is taken and is totally unsuited to businesses which may be looking to achieve a market flotation, as the value of a business is calculated by reference to its net profits, and these can only be readily ascertained by agreeing a base remuneration package which leaves a healthy net profit for shareholders.  

Typically, the changes needed to align law firm remuneration with a more corporate model will mean that for the first time lawyers will have both short term (salary and annual cash bonus) elements of their remuneration, and a much longer term component in the form of capital appreciation and/or long term incentive plans.  In theory, there is nothing wrong with this, and as long as they can get themselves comfortable with the idea of leaving profits within the business in order to achieve long term capital growth, then all should be well.  In my experience, however, the reality can be very different.  It can be extremely hard for people who have been used to high levels of regular income to adjust to much lower salaries (particularly when the inevitable – if erroneous - comparisons are made with the widely reported Profit-Per-Equity-Partner statistics from those firms which continue with the income-stripping model), and there seems to be a natural tendency for people to value the equity component of their remuneration far less highly than the short term cash element, because of fears over the long-term robustness of share valuations and the inherent uncertainties over achieving longer term targets.  The recent market volatility that has been experienced will have done nothing to allay such fears.

Another issue is the knotty problem of how to set base salaries.  This is not a simple thing to do in an industry which has not typically been salaried in the past, and therefore independent data are scarce. Private practice lawyers generally do not readily accept comparisons with in-house lawyer remuneration, as they see the roles as fundamentally different, and so although it is relatively easy to benchmark salaries with in-house roles, this is likely to prove somewhat contentious.  However, getting the base salary right is critically important.   If it is fixed too high, the net profit of the business (and therefore the share value) will be depressed and external investors will be unhappy.  A high base salary may also give lawyers too little incentive to perform and achieve the salary related elements of the job, and can encourage an “employee” as opposed to an “owner” mentality.  If fixed too low, it can make recruitment very difficult, and encourage an aggressive dog-eat-dog culture.  It can also lead to a situation where although bonuses may theoretically be discretionary, in practice they have to be paid in order to retain the best talent even in a downturn.   This dynamic was experienced by many of the investment banks which began using corporate as opposed to partnership remuneration models.  

These issues are not insoluble, but law firms who are seeking to take external investment need to have a very transparent debate about how remuneration will be structured, and to set expectations accordingly.   If they do not, then they are storing up inevitable problems for the future

For further information please contact me at np@mp-csl.com .

Duke Street annouce first UK leveraged buy-out of law firm

For the last few years, many law firms have been predicting that the Legal Services Act, which came into force on 6th October 2011, would be something of a damp squib and make little impact on the majority of law firms. However, early signs are that in the commodity end of the market at least, where personal injury insurance litigation is big business, there are some big changes coming to the competitive landscape, with the announcement of the first ever leveraged buy-out of a UK law firm.

Private equity house Duke Street has today announced that it has acquired a majority stake in the Parabis Group, the parent company of insurance litigation law firms Plexus Law and Cogent Law, in a deal which values the combined group at between £150m and £200m. Although EBITDA figures are not available, it is understood that revenues for Parabis are expected to be approximately £160 million in the current financial year.

Parabis provides personal injury litigation services via its Plexus and Cogent Law arms, and acts for a large number of insurers in the UK. But the firms have gone further than the provision of traditional legal services, as, like Jersey's CPA, they have a number of other non-legal service deivisions, which handle claims management outsourcing, rehabilitation, loss adjusting, health & safety assessment and audit work.

The combined Group has 60 partners, approximately 400 lawyers and 600 paralegals and is led by chief executive Tim Oliver and commercial director Tim Roberts. They will be joined by Paul Lester, former chief executive of VT Group, and Bob Scott, former group CEO of Aviva, who will be appointed as non-executive directors. Lester will become chairman of Parabis on the deal's completion, which is expected to be within 3 months, and is dependent on regulatory approval.

Duke Street, who follow a buy-and-build model, are expected to focus on extending the business process outsourcing elements of the business, and will be looking to acquire other complementary firms.

The annoucement by Duke Street follows on from Australia's Slater & Gordon, the world's first publicly listed law firm, having acquired UK personal injury specialist law firm Russell Jones & Walker, and the Liverpool-based personal injury law firm Silverbeck Rymer having been acquired by software and outsourcing firm Quindell Portfolio.

There will no doubt be a temptation for those working in other parts of the legal market to dismiss these developments as something which are unlikely to spread outside of the specialist work of personal injury, but to do so could be a dangerous misjudgement. The introduction of significant investment capital into providers of outsourced services for law firms is likely to have an impact on the wider legal sector, as clients become increasingly unwilling to pay top City rates for relatively low level work. Firms who ignore this dynamic do so at their peril.