First Multi-Disciplinary ABS Approved

After a long wait, the SRA has approved the first multi-disciplinary alternative business structure (ABS), with London property company Crabtree Property Management receiving a licence to establish a fixed-fee property litigation firm.

Crabtree, which was established in 1983, currently manages in excess of 17,000 properties across London and the south of England, including residential properties, retail units and offices.

James Naylor, who has been the Crabtree's in-house lawyer for two years, will become head of legal practice and the firm's sole legal adviser, which is presumably indicative of the fact that the focus will be on servicing litigation arising from the company’s managed portfolio, rather than soliciting instructions from other property owners or managers.  Running a property management portfolio involves a reasonably regular incidence of low-level litigation to deal with tenancy issues and dilapidation disputes etc, and therefore there is a clear logic for a company which has a significant number of properties under management to be able to handle the litigation arising from it, avoiding a degree of duplication of effort and cost.

Maclay Murray & Spens revert to traditional roots with Law at Work sale

Law At Work (LAW), the fixed fee employment law and health & safety consultancy owned by Scottish law firm Maclay Murray & Spens (MMS) has been sold in a management buy-out.

The MBO was led by Magnus Swanson, who was the chief executive of MMS until June 2011, and who retired from the firm in May of this year.  He is LAW's chairman, and one of the three shareholders (the others being Chief Executive Jane Wright and director of legal services Donald McKinnon).

The acquisition price has not been disclosed, but it is understood that the MBO was backed by HSBC.

LAW employs 30 staff, and has a turnover just in excess of £1.5m, and it is not expected that there will be any job losses following the MBO.

LAW was one of the early trailblazers in the field of fixed fee employment law services for employers, having been established in 2001.  Although the concept of offering an all-inclusive fixed fee service at a price guaranteed for three years is now not so revolutionary, at the time it was a real departure for a law firm which had traditionally charged on a time spent basis.  However, it appears that MMS may be returning to its more traditional roots, as it is reported as saying that the sale of the business follows a comprehensive strategic review, following which is was decided to withdraw from commodity-based services.  MMS also sold its corporate advisory arm Regulatory Solutions to the IMS Group as a consequence of the strategic review.

Company formation leader Jordans to enter legal market

The UK’s leading company formation agent, Jordans Limited, has applied to convert to an alternative business structure (ABS) in a bid to “move up the food chain”. 

The company, which currently offers a range of services including company formation, company secretarial, accounting and company searches, now wishes to provide legal services to existing client companies and also to win outsourced work from City law firms.  It perceives these as being higher up the value chain than the relatively commoditised areas in which it currently operates, where costs have been relentlessly driven down through competition.

As a company competing effectively in an efficiency driven market, Jordans should be well placed to handle those parts of the law which are capable of benefiting from process discipline and technology, and it has the added benefit of an existing huge client list to whom the services can be marketed. 

However, it will need to balance carefully the desire to offer more valuable legal services with the need to avoid biting the hand that feeds it – much of Jordans’ current work is believed to come from referrals from City firms, and they will not wish to cut themselves off from this lucrative source of work.  So for the time being at least, it seems they are content to stick to relatively “plain vanilla” areas of non-contentious company and commercial legal work such as terms of business, share schemes, due diligence, debt collection and, potentially, intellectual property.  It is keen to make it clear that it is not planning to become heavily involved in transactional work.  The company is quoted as aiming to target companies with a turnover of between £5m and £500m. 

The Jordans group is 150 years old and its business is structured as three separate entities. Jordans Limited (the entity making the ABS application) is the corporate services arm with bases in Bristol, Edinburgh and London.   Jordan Publishing, the second arm of the business, publishes legal information, while the third, Jordans International, provides corporate services to international clients and has bases in a number of offshore jurisdictions.

The firm is currently recruiting for a leader for the ABS business and has 5 paralegals on the payroll thus far – hardly a market-shaking number, but a start.

The interesting issue will be whether UK law firms do turn increasingly to outsourcing work to third parties such as Jordans, or whether in fact they take the opportunity to start moving into the space currently occupied by Jordans.  I am aware of at least a handful of law firms who are considering the establishment of ancillary business in the fiduciary and BPO spheres, in moves which follow what many of the offshore law firms successfully did many years ago.

The SRA is currently reviewing the Bristol-headquartered company’s application for a licence.  Jordan’s hope the approval and launch will come by early next year, although that may be optimistic considering the length of the current backlog at the SRA.

Measuring Success in Law Firm Mergers

There seems to be no decrease in law firm enthusiasm for mergers, despite continuing turbulent times.  According to Hildebrandt Institute’s MergerWatch, law firm mergers jumped by 67 percent in 2011, and are expected to rise again in 2012.  Certainly activity in the first half of the year seems to point to another busy year.

However, it has always been difficult to get any hard evidence of how successful merger strategies are in practice.  My own informal study of publicly available information is that whilst mergers are often successful in assisting with the achievement of an over-arching strategic objective (such as the need to gain access to new geographical locations, or new service lines, or to raise the profile of a brand), it is much more difficult to demonstrate success on the bottom line and many firms seem to have a period of a few years where profits remain in the doldrums for a few years post-merger.  In many ways this is not entirely surprising, as it is in the nature of businesses which essentially sell professional time that scale does not necessarily equal greater profit.   If you accept David Maister’s well known formula, which says profit per partner (PEP) is a function of utilization X charge-out rate X leverage X margin, then none of these are likely to be significantly impacted by a merger.  Few mergers fundamentally change the ratio of partners to fee earners, or enable big hikes in charge-out rates.  It is true to say that there are a degree of cost synergy savings in some mergers with the elimination of back-office duplication, but these tend to be relatively modest and are often offset in the early years by the additional costs of the integration exercise itself.  The best mergers do lead to an increase in combined revenues, but turning it into an increase in PEP is a much greater challenge.

A good example of this is likely to be Clyde & Co¸ which has achieved the phenomenal achievement of a 36% hike in revenue (to £287 million) so far this year, following its merger with Barlow Lyde & Gilbert in November 2011.  This makes it currently the fastest revenue growing firm in the UK top 50, and even when the revenue contribution from Barlows is stripped out, like-for-like revenues at Clydes grew 17% - impressive growth by any standards.  It appears that a lot of the growth has come from the firm’s non-UK operations, which seems to suggest that the course of internationalisation that they have embarked upon is resulting in a rapidly increasing market share - so clearly Clydes’ strategy is working in that regard. 

However, there is likely to be a lull before that translates into increased partner earnings, if indeed it does so. Profits have not yet been announced by Clydes but whilst absolute profit is expected to have increased at the group, PEP is widely expected to have declined over the same period, perhaps by 10%.  This reflects the relatively high costs of opening new offices, and having to place a relatively high proportion of senior people there in advance of the work flows.  Despite this, Clydes certainly seem to be happy to stick with the expansionist plan - earlier this week they announced new office openings set to happen in Sydney and Perth, which is an indicator that they are happy to bear a short term dip in personal earnings to achieve a longer term strategic objective.

The prospects of Clydes recovering any temporary loss of PEP seem to me to be very good in the medium term, as newer international offices gain scale and the proportionate costs of supporting them and the integration effort reduces.  However, it would in my view be misguided to think that the PEP will ever increase at anything like the same rate as the revenue line, unless there is a fundamental rethink of the basic principles of running a law firm, so that Maister’s formula is truly challenged (perhaps for example, by following the bold steps of Riverview Law, and breaking the direct linkage between hours worked and the bill levied).

So by what measure should we measure the success of a law firm merger?  That is a long and complex question. There are, as I said, many things which can indeed by achieved by a merger – brand awareness, geographical footprint, sector expertise, and sometimes even just the protection of a market share which is likely to be eroded if a firm isn’t seem to be moving forwards and developing.  However, if the number one strategic aim of a merger is an increase in PEP, then that is quite a tough nut to crack.

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