ABS – What have you done to prepare yourself for the future?

ABS – What have you done to prepare yourself for the future?

November, 2011

The Legal Services Act 2007 has led to much speculation about the future of the legal profession. Some predict that there will be little change while others see the law changing beyond all recognition; with the speed and scope of any such transformation also under debate.

In the face of this uncertainty it seems that some law firms have their heads very firmly in the sand.

“Change will be slow” said a partner respondent at a silver circle firm. “I suspect that the future will be less dramatic than we think” wrote an associate at a city firm. In contrast, one City partner admitted that “Partners need to wake up and help their associates with the inevitable transition. So many are pinning their hopes on these changes taking the 10-15 years remaining on their own partnerships, they’re not engaged with the commercial restructuring required to sustain competitiveness in the new marketplace”.

Should law firm leaders embrace the wisdom that it is better to be over rather than under-prepared?

Debate also rages over whether those active in the law actually understand the full extent of the changes that will take place over the next five years. In October 2011 licences for alternative business structures (ABS) will be granted, allowing external investors and others a major influence on changes within the law. Changes to the law will no longer be within the exclusive control of the legal profession itself, but the Legal Services Board and ABS.

Key changes on the horizon are:

• alternative business structures
• lockstep versus merit based pay
• alternative fee structures
• legal process outsourcing
• skills gaps
• over-specialisation of associates
• increase in proportion paralegal staff within practices, and
• globalisation

Alternative business structures (ABS) are likely to have the biggest impact, although unanswered questions remain, for example, on the level of equity that should be passed to external investors – and others. How will a practice attract external investors? What influence will external investors have over law firm management? What about conflicts of interest between investors and law firms?

It’s been widely reported that a number of investors such as Lyceum Capital, Lloyds Development Capital and Investec have made no secret of their interest in investing in law firms. With such high levels of interest, there’s little doubt that new business structures will emerge.

Some firms may look to fine tune a small number of specialist practice areas to offer exceptional value-added services at a premium. Others will seek to automate low level transactional legal processes to provide a sleek, efficient low cost alternative. As one partner at a national firm prophesised: “Law firms will shy away from fixed overheads. Partners will be performance paid and will draft in associates and niche experts from a pool of internal or external resources”.

As for associate lockstep, most lawyers recognise the need to change but few seem to be actually implementing alternatives. Many firms have discovered that lockstep does not offer the flexibility needed to operate in a fluctuating economy with one partner admitting that “We need to accept a rebalancing of pay expectations….most law firms will be less profitable in five years’ time”.

Much has been said in the media about alternative fee structures. Solutions offered include reduced hourly rates with a bonus element, fixed or flat fees, conditional or contingent fees, lump sums, capped fees or even equity. Whichever option is discussed with clients “it is essential to understand the market in which you operate to deliver the service … in a cost effective and competitive manner rather than delivering the service that the lawyer wishes to provide at a price determined by the lawyer” as a partner at a top 100 firm summed up.

Returns on investment by external investors will require improved efficiency. This could lead to increased investment in technology to automate processes, particularly in more standard, low value areas. Legal process outsourcing will help drive costs down with work sent to offshore legal centres such as those in India, to specialist low cost centres or to new organisations consisting of former practice solicitors.

An associate speculated: “there was a clear move towards smaller start up organisations that leverage IT to offer an international and broad service (working with other experts on a freelance basis) with top access to information and knowledge, but with none of the outdated and unnecessary overheads of existing top firms”.

It is fairly widely documented that firms continue to struggle in their efforts to retain high quality newly qualified lawyers. This, together with the Law Society’s campaign to warn students to think twice about starting a career in law (August 2009), is likely to lead to a skills shortage. Other factors such as the number of training contracts available, the cost of completing the LPC and the number of trainees retained by firms are further fuelling an ever widening skills gap.

A top 100 associate suggested that “it is vitally important that partners in law firms ensure that junior staff are being developed through training and suitable work experience rather than hogging work for themselves and cutting training budgets.”

During the course of the recession great swathes of associates were made redundant as work in their practice areas dried up. This calls into question whether some associates in highly niche practice areas are too specialist. The Future Lawyers research demonstrates that partners would prefer to have associates specialise in more than one practice area rather than make teams redundant and yet there seem to be two schools of thought on the topic of specialisation vs. generalisation.

One predicts that the law will become two tier with highly specialist niche firms focusing on one or two practice areas and other low cost firms handling high volume low cost work. The other envisages that not much change will happen to the professions’ infrastructure but highly specialist associates may diversify to gain expertise in other practice areas allowing more adaptability. A partner at a regional firm advised that firms should “specialise narrowly but do it excellently, work with other specialists when you need to but don’t carry the overhead for them.”

The growing proportion of paralegals in law firms is likely to continue at a pace, fuelled further by investors’ drive for greater returns. But most lawyers don’t see that it necessarily affects the profession. This may be short-sighted.

For example, who will manage the paralegals? With managerial skills ranking a lowly seventh as an attribute to develop fully rounded associates for 2015, this question remains unanswered. Paralegals will need to be managed well in order to generate efficiencies and higher profits. As one partner at a city firm concluded: “gearing up for paralegals is vital; monitoring them the next crucial hurdle.”

In 2000 there was much debate about globalisation when Clifford Chance merged with Rogers & Wells, a US law firm. Yet 10 years later, few truly global firms exist. Firms seem to have regionalised rather than globalised with few firms having an office in every major international market. Without a doubt some external investors will want law firms they invest in to get a footing in emerging and international markets in a quest for greater returns, and to diversify their risk.

All of the issues facing the law as a result of the Legal Services Act could have significant ramifications in terms of how law firms are structured, managed, on their culture and how they are perceived by all their stakeholders, both inside the firm and out. Rather than staying practice focussed, could we see the law moving to more of a client facing/back office structure where lawyers will be either business developers with commercial skills or niche technical lawyers in more of a support role?

Partners will need to consider which factors will affect their firm and prepare accordingly. What skills and attributes will they need to resource their firm irrespective of how it is structured or financed? A niche specialist firm is more likely to need associates with exceptional niche technical ability compared to firms dealing in lower level transactional law which will mostly need associates with commercial, managerial, financial management, interpersonal skills together with higher levels of IT literacy and generalist legal knowledge.

Good commercial and business development skills will be needed to generate creative alternative fee structures. Management, commercial and IT skills will be needed to outsource legal processes or handle larger teams of paralegals. Key to retaining the best talent through any change will be communicating any alterations effectively and engaging employeesso as to maintain good morale. Partners need to work with their staff to identify clearly defined career paths and help associates achieve their own aims as well as those of the firm.

Associates should thoroughly research, investigate and identify what direction their firm will take and therefore how it might be structured in the future. If a skill that they anticipate will be in demand is currently lacking they should identify some training to redress any issues and engage the support of their line manager. Those at an early stage of their career would do well to consider whether their skills lie in business development and client management or whether they would do better in a legal support role.

David Hawley of Deloitte draws an interesting parallel between changes that took place in the advertising industry and in the management consulting sector 30 years ago with the shift currently underway in the legal profession (City AM April 2010). These industries were highly fragmented with a large number of small players and most thought that there would never be any truly large global players; yet the likes of WPP, IBM and McKinsey have proved theorists wrong. Hawley summarises that “Change is coming. Those who are best prepared will come out on top”.

Whatever your view, there are clearly concerns about the future of the law with one associate at a west end/boutique firm prophesising ominously that “it will finally cease to be a profession”.

One thing remains certain: partners and solicitors alike will continue to have strong views on the future of the law and how it should be structured. The debate is by no means over – continue to have your say atwww.future-lawyers.co.uk.

This article first appeared in a Legal Week supplement in April 2010. With the date for the granting of ABS licences just around the corner, it will be interesting to see how things play out in practice – will the law finally cease to be a profession? Have your say below….