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BGL, best known for being the owner of comparethemarket.com but also the owner of motor and bicycle insurance businesses, has acquired Minster Law.

Minster Law was established in 2006 and since its early days has worked closely with BGL, growing to a staff of 800 and revenues exceeding £100 million p.a.  It specialises in personal injury claims (particularly motor traffic accidents) and is therefore a natural match for a motor insurance firm. Since the banning of referral fees between insurance and law firms, a number of other insurance companies have made moves into the legal market - most notably Admiral Insurance and Ageas - and many have voiced doubts about the financial viability of small independent PI specialist firms.

These acquisitions have been made possible by the Legal Services Act, which has enabled non-lawyers to own law firm businesses, with SRA approval.

All of the 800 Minster Law staff, based in York and Wakefield, are expected to be retained post acquisition.

Parabis nudging towards Top 20 slot with latest merger

Plexus Law, part of the Parabis Group backed by PE firm Duke Street, is merging with insurance dispute  firm Greenwoods. The merger will create a £90 million defendant insurance litigation business. 

 Parabis also owns Cogent Law and the three businesses in aggregate will be turning over in the region of £150 million, meaning Parabis will be nudging a coveted top 20 UK law firm slot.

The deal is expected to complete this month and the Greenwoods brand will be retained alongside that of Plexus.

Hogan Lovells spat puts the spotlight on remuneration for law firm management teams

Law firm remuneration is always a controversial topic. 

For the firms which have stuck with pure lock-step arrangements there are often complaints that the system does not reward high performers well enough, or penalise those who rest on their laurels at the top of the lock-step. 

For firms which have introduced performance related pay, there are often fierce arguments regarding what type of contributions should be most highly rewarded (Is personal billing more important than nurturing a good pyramid of associates?  Is winning a new client for another part of the business more important than one’s own fee earning performance?  How do you deal with a star biller who won’t collaborate?).  But always up there amongst the hottest topics tends to be how to remunerate non-fee-earning roles, and particularly the senior management positions.

Most of the wrangling, though, tends to stay behind closed doors; lawyers are notoriously tight-lipped about money and don’t like to air their dirty laundry in public.  That is why it is somewhat surprising to have seen a relatively public spat within Hogan Lovells, whose new bonus system has provoked some quite public criticism from partners that the process is not sufficiently independent, that it over-rewards the international management committee (IMC) members, and that it has led to fee earners “hogging” client relationships and a consequent diminishing of the collegiate atmosphere within the firm. 

A number of partners (and ex-partners) have expressed dissatisfaction about bonuses complaining that only a small number of fee earning partners have been well remunerated.  This is hotly denied by the firm, who say that there is already an independent three-member compensation committee led by the Chairman, that IMC members are not involved in deciding their own bonuses, and that the allegation that it is IMC members who have received the largest bonuses are simply incorrect.   Whoever is right and wrong, this is not good publicity for the firm.

In boom times, of course, such unedifying squabbling is less common.  When there is plenty of largesse to distribute and most partners are seeing their total remuneration rise, then rebellion tends to be somewhat muted.  But Hogan Lovells, like many other firms in tough times, is facing decline in global revenues for 2012 of 1.9% and a 6% drop in average profits per equity partner.  That means of course that as a simple mathematical consequence the majority of partners are likely to see their total remuneration package decline, unless there is a cull in their numbers.   So when the spoils are more meagre, the jostling for position becomes much more noticeable, and in particular the contribution made by “the management” is (rightly) subject to more scrutiny.

Until relatively recently, law firms tended to have a very flat structure, and the managing partners were also expected to be fee earners. It was quite common to see them maintaining a significant client role, even in large firms, as the role of management was not seen as one which was particularly onerous.  Furthermore, those elected to senior roles were often drawn from the ranks of the star billing performers, and so their overall contribution to the success of the firm tended not to be questioned, despite the fact that the management role itself was not necessarily very highly valued.   As law firms have grown, often into multi-national businesses, then the management roles have in most cases become full time tasks, meaning that fee earning roles usually have to be relinquished.  But the esteem with which law firm management is held is still patchy.  Whilst those occupying have a tendency to view their roles as meriting higher remuneration that fee earners, as they are superior in the hierarchy, there are others who still see them as little more than glorified administrators.  Those who are pulling in the big fees in the here and now will often argue that it is they who are the life blood of firms, and they should be the most richly rewarded. 

So who is right and who is wrong?  There is no one simple answer to this, as no firm is exactly the same as another.  But I am always wary of remuneration systems which continue to reward management teams very richly when profits are falling.  A good management team can make a huge difference to the financial performance of a firm, even in a recession, by trimming resources to fit, or by ensuring that leverage is at its optimum, for example; whereas individual fee earners can make less impact.   To my mind, this means that the senior managers should be amongst the most highly rewarded when times are good, but should take the pain if profits are falling.  Fee earners, on the other hand, I would argue, should see less volatility in their total remuneration.

Having structurally high remuneration for senior management roles regardless of the overall profit performance of the firm leads to an unhealthy situation where star fee earners may be driven towards those roles in order to maximise personal reward.  Quite apart from the fact that there is little proven correlation between the ability to earn fees and the ability to undertake a complex management role, this remuneration situation is likely to lead to a draining of a firm’s best talent away from the vital task of fee earning.  Having a high degree of variability in management remuneration, on the other hand, will ensure that only those with a genuine talent for the role are likely to want to put themselves forward.

Axiom Fund failure claims another law firm victim

The Axiom Legal Financing Fund scandal continues to cause a ripple effect in the legal industry.

Not long after Axiom was placed into receivership by the Cayman court following serious allegations of mismanagement and malpractice, Tandem Law put its entire workforce on notice that they were at risk of redundancy.  Now we see Ashton Fox, the Preston based law firm, has been acquired by a rival in a pre-pack deal following its own collapse into administration.

Both law firms were recipients of significant funding from Axiom to finance client group action litigation, and were plunged into crisis following the Fund’s sudden closure.

Parabis off to a flying start as an ABS

Parabis, the parent company of Plexus Law and Cogent Law, has turned in an impressive first year of trading as an ABS entity, seeing its revenues rise 8% to £108m and its profits rise a whopping 41.4% to £18.4 million.

The business was launched in 2000 as an LLP by Tim Oliver (formerly partner of Berrymans Lace Mawer), and provides a range of legal and claims-handling services for the insurance sector.  It has been something of a trail-blazer in the post-Legal Services Act world, being the first PE-backed ABS structure, following a £50m investment by Duke Street.

Since then the firm has been expanding rapidly. In November it launched a Scottish office in Glasgow and has followed up 6 months later with the establishment of an Edinburgh office, to be staffed by a partner-led team poached from Brodies.

There has been much discussion on whether law firms and PE houses make easy bed-fellows, but the early signs for this particular marriage appear good.

Insurance giants shake up the legal services market

Insurance companies are making their anticipated moves into the legal services market following the Jackson reforms which came into effect on 1^st April, banning the payment of personal injury referral fees. Referral fees became notorious in recent years for having spawned an unwelcome compensation culture in the UK, with personal injury claims relating to motor accidents and whiplash injuries being particularly prevalent.

The RAC has agreed a 5 year commercial deal whereby Quindell Portfolio, the AIM-listed ABS firm, will manage all before-the-event (BTE) legal expenses work generated by RAC’s huge motor book, which accounts for some 7 million customers and approximately 10% of the UK market.  In a highly innovative deal, instead of paying a referral fee for claims as it would have done in the past, Quindell issued warrants for more than 250 million shares to RAC valued at 13p each, the equivalent of a £32.5m shareholding. If the warrants are exercised, they would give the RAC a significant financial interest in Quindell. The deal as structured gives Quindell a significant cash-flow benefit and means it will not need to draw down the £80m funding it raised to support its working capital requirements.  

Quindell will provide a comprehensive service for all RAC customer personal injury claims, including medical reporting, rehabilitation and auto accident repair. The agreement follows a successful pilot of the scheme which is claimed to have reduced claims costs by 20 per cent.

Admiral, the insurance giant, has also decided that a strategic move into the legal services market is warranted, and has chosen to effect this through two separate joint ventures with existing law firms.

The first joint venture, to be known as Admiral Law, is with Bristol law firm Lyons Davidson and will cover Admiral’s main book of business. 

The second, to be known as BDE Law, will be with Cardiff based Cordner Lewis, and will cover 3 subsidiary motor claims businesses owned by Admiral – Bell, Diamond and elephant.co.uk.

The SRA has granted alternative ABS licences for the two ventures, effective 1^st May 2013.

It seems that Admiral are not expecting the moves to be a major profit contributor, but believe  they will improve customer service by being able to handle claims in house

Finally, insurance giant Ageas has announced a partnership with personal injury law firm NewLaw Solicitors after completing its ABS conversion, to be called Ageas Law.  The firm will provide legal services for customers making non-fault personal injury claims sustained after a motor accident.

One might speculate which is the bigger driver for these changes – the Legal Services Act or the Jackson reforms – but whatever the answer it is clear that there are huge changes sweeping the personal injury and allied insurance industries.  It seems that smaller independent PI firms are going to have a very tough time in the future, unless they are one of the firms swallowed up by the major insurers.

Are law firms getting cold feet on outsourcing?

There has been something of a trend towards outsourcing in the legal profession in recent years, mostly in relation to back office functions but sometimes also in relation to client work.  It is interesting therefore to see that two firms which have gone down that route, Osborne Clarke (“OC”) and CMS Cameron McKenna (“CMS”) have both decided to scale back part of their outsourcing agreements with Integreon.

OC set up its arrangements with Integreon in 2009, transferring a number of its back office staff to the outsourcer.  65 of those former OC employees will return to OC from Integreon following the changes to the outsourcing arrangements 4 years into the 7 year contract.  OC will bring back in-house client relationship management, IT, and events management.   OC is not cutting all ties with Integreon, which will continue a number of functions including information services and business intelligence.  It is not yet clear how many jobs will be lost in the process, but it is expected to be only a small number.

CMS, who have used Integreon since 2010 after agreeing one of the largest outsourcing contracts the legal market has ever seen (rumoured to be worth £600 million), have announced that they are looking for a different third-party provider to take over one element of the services currently provided by the outsourcer. They did not announce publicly which service this was.

So what should be deduce from all of this?  Is it a sign that law firms are having second thoughts about the outsourcing model?  Or is it that there are problems at Integreon which are unlikely to affect other providers?

OC are bringing a team of people back in house, but are also moving an element of their outsourced services to an alternative provider, Mitie, whereas CMS are simply looking for an alternative outsourcing provider.  This would seem to suggest that both firms still believe that outsourcing can be an effective solution, but that they are not happy with all of the elements currently serviced by Integreon.  It is clear that neither of the firms have lost faith in Integreon entirely – both were keen to stress that they would continue to work with the company, and indeed it appears that CMS are expanding the amount of legal process outsourcing that Integreon carries out on its behalf, so Integreon would seem to be getting something right.

What I suspect that is going on here is that firms are learning that outsourcing a huge range of functions, both back office and in some cases client facing work, to a single provider is a big ask.  There are very different skills sets required to provide an outsourced human resources function, or an IT help-desk, than to have teams of legal researchers.  Just because a business can run a top class out-sourced office management function, does that necessarily mean it is also well equipped to undertake client facing “KYC” requirements or document support?  Whilst it might be tempting to take the easy route of putting all out-sourcing requirements with one single provider, perhaps the experience of CMS and OC is showing us that firms need to be cautious about doing this if the range of services being out-sourced is particularly broad.