Editor's blog | The debatable value of disruption

Just when law firms are beginning to show interest in converting into alternative business structures comes the cold response from private equity that investors have lost their appetite for the legal services sector.

Little has happened since the initial bangs on the ABS scene. As predicted in Solicitors Journal last year the Co-op and a small firm – plus a sole practitioner – were first off the ABS starting blocks. They were followed by a few others to take the number of SRA-regulated ABSs to eight, but the 130 or so organisations at stage two of the application process appear to be stuck in the pipeline.

The report published last week by legal research company Jures for law firm Fox Williams shines a different light on a more contrasted picture.

Just over 50 per cent of 100 respondents who took part in the survey (54 per cent) said access to private equity was a ‘compelling’ or ‘very compelling’ reason to convert to ABS. Quite what firms would do with private money however isn’t so clear cut. The purpose of the investment would be to ‘fund growth’ but there is little enthusiasm for merging with other professionals such as accountants. The issue, highlighted elsewhere in the report, appears to be one of lack of control. The owner-manager approach behind the partnership structure remains a defining feature of law firms – and a possible obstacle to growth.

Conversely, the message from private equity has become more subdued. Pre-recession interest has waned and PE is now focusing on ‘disruptive’ models. The adjective has been used noticeably by DLA-backed Riverview Law, although the extent of the disruption may not be as great as the brand’s founders claim.

Of the new big names, QualitySolicitors once appeared to be revolutionary but remains fundamentally a franchise operation, more defensive than disruptive. Investment from Palamon should help grow the brand but unless law firms become shareholders rather than franchisees, this won’t change the nature of the operation.

Duke Street’s investment in Parabis is closer to the notion of disruption, although in this case much of the strategy (end-to-end services for the personal injury insurance sector) has been visibly in place for at least a couple of years.

So high street firms hoping they could be bought out by PE white knights will instead be left to ponder this comment by Sovereign Capital investment manager Nick Miller: “What doesn’t interest us is non-specialist, mid-market firms.” That’s the biggest chunk of the profession in investment limbo.

But to define disruption you have, of course, to consider what the norm is. What do law firms do, is there any point in becoming professional services supermarkets, how do they price and charge for their services?

ABSs have been touted as the game changer in a sector whose structure has remained unchanged for generations. As a new corporate model it will help non-lawyer owned organisations come into this market – the Co-op being so far the only example of this.

Only seeing the delivery of legal services through the prism of ABSs would be forcing the market into just another one-size-fits-all delivery channel. There is no reason why well-managed firms, who look after their clients, grow their people and plan their own development as businesses, shouldn’t keep their space in the market. Skilled lawyers, efficient systems and clever sales methods – not disruption – is what will allow these firms to thrive.