Accountants aim to provide and regulate legal services

The Institute of Chartered Accountants (ICAEW) is announced that it is applying to the Legal Services Board (LSB) to become a licensing authority for Alternative Business Structures (ABS) and an approved regulator of the reserved legal service of probate.

ICAEW is currently consulting on its application, and the the deadline for responses is 7 September 2012.  The ICAEW hopes to be able to authorise firms and license ABSs within 12 months.

Based on a member survey, the ICAEW believes there is strong interest from the accountancy profession in multi disciplinary practices and ABS.

39% of UK law firms have already changed their management strategy as a consequence of the LSA

For commentators it has been quite difficult accurately to analyse what the impact of the LSA changes has been on the legal sector.  We know that only 7 ABS structures have been licensed by the SRA – hardly an avalanche – but we also know that there are many more applicants in the pipeline and that there are firms which are starting to do some fairly innovative things in the legal sphere, even if they do not need to avail themselves of an ABS structure (such as Riverview Law).  The suspicion has been that the timing of the latter is not coincidental, and that firms are starting to think more innovatively in anticipation of increased competition coming in the wake of the LSA.  But up to now, this has been mainly conjecture and supposition.

So it was with some interest that I attended a Fox Williams LLP seminar today, at which they issued a report commissioned by them entitled “ABSolutely Fabulous? A study of Alternative Business Structures and their role in a Changing Legal Market”.  The survey, which was undertaken by legal research firm Jures, posed 15 questions to 100 commercial law firms between February and May 2012.

The headline findings were that 39% of firms say they have already changed their management strategy as a consequence of the LSA, 63% of firms had contemplated, or not ruled out, changing their partnership structure, and 14% had already done so.  These statistics, emanating as they do from answers supplied by commercially focused law firms, may come as a surprise to those who have long held the belief that the LSA would only really impact the consumer end of the market.

33% of respondents were looking to spin off services through an ABS or alternatively looking to access external investment to fund growth, and it was clear from the survey that access to funds was a key motivation for firms.  A desire to be part of a multi-disciplinary firm scored pretty lowly as a motivation for considering ABS structures, with less than 15% considering themselves likely to follow that route.

Perhaps not surprisingly in a profession which is renowned for being conservative, “Loss of Control” was identified as the biggest barrier to ABS structures being utilised (62%) followed by “Resistance from Partners” (51%).  Essentially, these two categories can, I think, be viewed as much the same thing.

And on a somewhat controversial note in a week when much of the media has been obsessed with the morality of legally minimising one’s tax obligations, over 56% of respondents considered enhancing their tax structure to be either “very important” or “important”.

But the clear message from the eminent panel which was assembled by Fox Williams to discuss the report (including Neil Kinsella of Russell Jones and Walker, Anthony Bellau of August Equity and Adam Shutkever of Riverview Law) was that the ABS tail should not be allowed to wag the dog.  The key challenge for law firms is first to consider what their strategy should be (a formidable challenge at a time where the competitive landscape is changing faster than ever in terms of service offering and pricing) and then to consider whether an ABS structure would help or hinder that strategy. 

There was a concern expressed that some firms are perhaps considering jumping on the ABS bandwagon because it is currently the fashionable thing to do and is seen (wrongly in my view) to be an easy way to access cash, without having clearly articulated a robust strategy for growth.  Anthony Bellau made it fairly clear that these firms were unlikely to cut the mustard with private equity, however much they might like to, and both he and Steve Arundale from RBS agreed that firms who sought funding largely to buy out retiring partners were also likely to get a very cool reception.

The general consensus of opinion seemed to be that the LSA reforms would likely lead to a slow and steady flow of ABS in the early days, rather than a deluge, in much the same way as the LLP reforms took time to be embraced by most firms.  However, the competitive landscape is changing rapidly nevertheless, no doubt due in some measure to firms anticipating new entrants in the market, and this is leading to some real opportunity for those who are brave enough to take it.   

The limited space available in a blog posting precludes me from a more in-depth analysis of the findings, but the full report is well worth a read for anyone who is interested in law firm strategy and management.

SRA seek to "manage expectations" re ABS applications

Neil Rose, the Editor of Legal Futures, last week published an interesting interview with SRA executive director Samantha Barrass in an attempt to get to the bottom of why there have been only seven alternative business structures (ABS) authorised in more than five months, and whether the critics of the SRA are justified in pointing to this as a failure of process.  

Rose rightly points out that none of the applicants on the waiting list seem to want to put their heads above the parapet, for fear of retribution from the regulator – after all, who in their right mind would want to get on the wrong side of a body which is charged with making hugely important decisions regarding their future?  However, I have spoken to some of those business affected, and although they may prefer not to be publicly named, I can vouch for the frustration that they feel.  It was therefore with some interest that I read Ms Barrass’s comments.

In theory the application process is simple ­- there is an initial stage one expression of interest, and then a stage two application form. The SRA has six months (extendable by a further three months), to decide on an application.  So far, so good.  But what Ms Barrass confirmed in her interview with Rose (and a point I have made in previous blog postings) is that the clock does not start ticking at the point the form is submitted, but rather at the point that the SRA consider they have all of the information they need.  Given that there is not a “standard” set of documents or questions which apply to all cases, some applicants have found themselves on the end of a seemingly endless list of requests for additional information, some of which seem to the applicants to be irrelevant or entirely tangential.  The fact that the SRA has the discretion to decide when it has enough information, whilst understandable in one sense (particularly if the SRA is receiving poorly completed applications), means that in effect the published timetables are fairly meaningless. 

There has also been frustration amongst applicants over the length of time taken to consider whether individuals are suitable persons to be licensed, particularly where they are already licensed by another stringent regulatory body – such as the FSA.  The expectation of applicants is that if the FSA has already licensed someone, then any additional checks required by the SRA should be fairly minimal.  After all, it would be an odd situation if someone who was deemed to be an acceptable person to run an investment or banking business was unacceptable to be involved in a law firm. 

The gap in expectations and understanding of the process has, in Ms Barrass’s view, been one of the key lessons of the first few months, as has the fact that the SRA have received many more complex applications than they were expecting.  Next week the SRA will be publishing revised guidance so as to put more information about the application process in the public domain, in an attempt to close the expectation gap. That is undoubtedly a good thing, but surely the need for better guidance could have been foreseen at an earlier stage - after all, the enabling legislation was hardly through at the last minute.   

Whilst the closing of the expectation gap is surely a helpful step, I can’t help but thinking that there should be an equal amount of focus on actually speeding the process up, rather than simply managing expectations.  I am not for one minute suggesting that the SRA should compromise its standards by rushing applications through, but an application process of 9 months or more seems to me to be unnecessarily drawn-out and surely is susceptible to improvement?  Perhaps, for example, a “lighter touch” regime could be used for approving the involvement in an ABS of individual applicants already currently authorised elsewhere?

Rose points out that the length of time applications are taking is causing problems for companies who have arranged financing in anticipation of a licence. Ms Barrass was decidedly and clearly unapologetic about this in her interview – saying that it is a mistake to put in place financing before talking to the SRA about how long the application will take.  Others might argue that given the lack of any expectation-setting by the SRA at the outset, it was not unreasonable of applicants to have assumed that the 6-9 months specified in the guidance notes was indeed an accurate estimation, and therefore not assumed the need for any further clarification on the topic.  In addition, I have a sneaking suspicion that in practice, if asked, the SRA would not have been able to give a great deal more clarity about the timing in advance, given that it can’t say in advance exactly when it will be happy that the information provided will be sufficiently comprehensive, and it had no past experience by which to be guided.

In my view, the SRA needs to find away of standardising the process more than is currently the case.  This will enable applicants to be better prepared for the process, and for the SRA to be able to process them more efficiently.  I accept that at the beginning there will be a number of different scenarios which need to be accommodated, but it is not beyond the wit of man to cover those. So long as there are bespoke elements of each application and a dearth of guidance, then there is bound to be a lack of clarity around timetables and the prospects of an application succeeding.  The SRA appear to be trying to deal with the guidance issue, but they must also tackle to process efficiency.

There have so far been 230 stage 1 applications, 130 stage 2 and a further 25-30 that are now ‘complete’ – ie there are 25-30 where the clock is running.  Having predicted back in January when the first licences would be granted, and having received a deluge of criticism for then missing the date by a month, Ms Barrass was understandably reluctant to commit to when the next ABS will be approved, but did say that a few are “quite imminent”.

The full article can be read here: http://www.legalfutures.co.uk/legal-services-act/alternative-business-structures/everything-you-wanted-to-know-about-abs-applicatons-but-were-literally-afraid-to-ask

Addleshaws redundancies provoke debate

Law firms have traditionally trotted out the well-worn cliché that “our people are our most important assets”, but in recent months that is starting to ring increasingly hollow. 

Redundancies are a sad fact of life in difficult economic times, and many firms have found themselves in a position of having to let good people go in order to dig the firm out of a deteriorating financial situation.  It is sometimes undoubtedly the right thing to do in the interests of the firm as a whole, and whilst those impacted may feel aggrieved at losing their positions, by and large even they understand that the action is motivated by necessity. 

However, in the last couple of years we have seen redundancy programmes being put in place by firms whose profits are rising strongly, apparently with the sole motivation of maximising already healthy profits per equity partner (PEP).  And I can’t help but wonder whether firms will, in time, rue the day that they decided to do so.

It was reported this week that Addleshaw Goddard is to make around 24 senior (non-partner) fee-earners across its offices redundant to “rebalance the mix and skills and experience across each UK office” because their staff attrition, particularly at more senior levels, has been lower than they anticipated.   Of itself, this is not particularly remarkable, but it comes at the same time as the firm has posted a 5% rise in turnover for 2011/12, and a whopping 30% rise in profit.  Average PEP rose 37% from £328,000 to £450,000.

These figures are not as stellar as they might at first appear – they need to be read in the context that the rises come after a disappointing 2010/11, when profit fell by 17% and PEP dropped by 23%.  In response to the problems in 2010/11 the firm cut around 40 support staff jobs in May 2011 – in my view a reasonable and sensible response to the decline.  However, as an outsider looking in, whilst it seems to me that the measures taken in 2011 were proportionate and undoubtedly effective (the gains posted in 2011/12 have more than made up for any lost ground caused by the drop in the prior year), implementing a further round of redundancies now will be a bitter pill to swallow for people for those affected by the cuts and could cause long term damage to the morale of those who remain.   

Law firms are businesses, and as such the partners are entitled to try and make them very profitable.  I am not trying to espouse some socialist ethic whereby the spoils of business must be shared equally between the workers.  But to make someone redundant is a big step – particularly in a harsh economic climate such as this – and something which should be done only where really necessary.  Senior people may find it particularly difficult to secure new roles elsewhere, as firms tend to try to keep their bright young (and cheaper) talent, rather than hire senior (and therefore relatively expensive) lawyers from outside.  Staffing levels can be rebalanced over time through natural attrition, and redundancies should in my view be reserved for situations where there is insufficient time for this mechanism to work without damaging the economic health of the firm.

I personally would find it quite difficult to look someone in the eye and tell them that they are to lose their job when I had benefited from a 37% increase in my profits.  And I would also worry about the impact that it will have on those who remain.  It is a moot point whether we have reached a point in the legal business where the old days where there was a constant war for talent have gone.  Some would argue that there are now too many lawyers in the market, and that we are unlikely to return to the old days where the biggest head-ache that firms had was how to recruit and retain enough people.  Others think that once the economic situation has recovered, then we will be right back into the talent war.  I don’t know which view is right, but if indeed it does turn out to be the latter then those firms who chose to sacrifice the careers of good people even whilst PEP was rising steeply may live to regret the day they did so.  When people chose where to work money is a significant factor, but another is the culture of support and working together through hard times.  That will be a difficult story to spin for firms who have over-used the redundancy tool when times got tough.

I am perhaps being a little unfair in singling Addleshaws out here – they are certainly not the only firm who are taking similar steps to maximise PEP and in one sense you could commend them for not trying to bury the PEP statistics whilst they go through this process, or to hide the job cuts through compromise agreements with tight confidentiality clauses.  However, they are a very clear example from which to launch a debate about the right balance between profitability and a wider responsibility to employees.

Knights attract a Dragon

It would be true to say there has not been a flood of private equity houses seeking to back legal businesses in the wake of the Legal Services Act reforms, but there have been a small handful of deals done, and a number (such as Irwin Mitchell and Keoghs) are believed to be interested.

Today, Midlands-based commercial law firm Knights Solicitors, become the latest to attract PE investment, from Hamilton Bradshaw, a PE house headed up by ex-Dragons' Den star James Caan.  The deal is still subject to regulatory approval from the Solicitors Regulation Authority, and if the experience of others is anything to go by, then they can expect some significant delay before the green light is officially given to the deal.

Knights, which specialises in commercial and wealth management advice currently has 23 partners and 150 staff working across offices in Newcastle-under-Lyme, Cheltenham and Alderley Edge in Cheshire, but has ambitious growth plans, aiming to be in the top 100 of revenue earners within a 3 year time frame.  This would mean the firm needs to be generating revenues of roughly £22 million, a more than doubling of its current £9.2 million.

Entrepreneur Caan will join Knights' board as part of the deal, working alongside managing partner David Beech.  It will be interesting to see whether an person from a strong business/entrepreneurial background will thrive in a professional services environment – in my experience, the politics of getting things done in a law firm are very different than in many conventional businesses, and whilst many lawyers like to describe themselves as entrepreneurial, very few truly are.

Knights are following a path trodden by Parabis, who obtained investment from Duke Street earlier this year, in the first leveraged PE deal in the sector, by Quindell Portfolio’s acquisition of Silverbeck Rymer, and by QualitySolicitors, the High street law firm franchise, which secured investment from Palamon Capital Partners.  Knights seek to differentiate this deal on the basis that it is the first commercial, as opposed to consumer, focused PE investment – although Parabis for one would not be happy to be labelled as a consumer business.