Known unknowns

Every solicitor who is interested in the future of the profession, their own firm and more importantly their own income, should ensure they are well informed about the Legal Services Act. The Legal Services Board, a creation of that Act, seems determined to licence the first alternative business structures in October 2011 regardless of whether such arrangements will be sufficiently tested or robust.

Much has already been written on the subject, but there will be many more articles and advice in the next few years. I suspect much will be speculative and perhaps uninformed. How will this new type of business affect you and me? Will you be part of one or will the ABS be a revival or competitor?

Whether you think an ABS will be good or bad for your firm will depend on your point of view and your vision of the future. Some will be interested in the injection of capital perhaps to fund expansion, facilitate retirement or simply allow non-lawyer employees to own equity; others see it as a threat in an already crowded and competitive marketplace.

Outside investment

An accountant turned venture capital broker indicated to me recently that there were hundreds of millions of pounds waiting to be invested into the profession. It is heartening indeed to hear that investors, not best known for their acts of charity or social responsibility, see such a great future in the provision of legal advice. Do they know something that we don't?

Large corporations and those with access to big money don't always make the right decisions. Those that remember the headlong rush to buy estate agencies in the late eighties, may have a wry smile when they think about the amount of money lost by those who thought they knew the market but had failed to do their research.

Another big question relates to leverage. Where is the additional profit going to come from that makes this all worthwhile?

Speculative investors usually want quick returns. By contrast, most firms of solicitors have been around for many years. Many have business models that rely on extracting profit by using long-term goodwill coupled with a branding and awareness of their name which is inextricably linked with the trust of their clients. Venture capitalists may want access to that but it will not essentially change the nature of the advice given from solicitor to client, whether face to face, by letter, email or some other method. It is certainly true that many firms are not as well run as they might be, but those with a mind to can already buy in expertise so ownership by an outsider may bring short-term efficiency but at what long-term cost?

Our market has been very competitive for several years. Some sectors of work '“conveyancing and personal injury spring to mind '“ where the rush to volume has meant that overheads have been pushed to the lowest possible rate, and, in some instances, below cost, leading to firm failures. Common sense might indicate that new capital cannot reduce those overheads much further, and indeed may push them up if liabilities are correctly analysed.

Pricing the risk is something for which solicitors have not shown a talent. If we properly consider it, our transactional work carries a long liability; get the job wrong, and it may come back to bite you years later with the consequent reputational damage. This is quite different to retail sales. Once a loaf of bread or chocolate bar has been eaten, that's pretty much it. You only have to consider the cost of run off cover to know that the professional indemnity insurance industry has already thought about this. Perhaps venture capitalists (or supermarkets) will realise this when they look more closely and may see that where there is more risk to carry there may be less profit to be extracted.

For much of our profession service levels equals cost, although we may often pretend otherwise. Retailers usually compete on price but the same market forces will apply. How many fewer groceries will the punter purchase when discount conveyancing from the 'essentials' range doesn't line up to expectations?

Speculation

Some think that ABSs may want to put together teams of people to create specialist firms. Indeed they might but will that model be successful? If it were such a good idea, why does it not happen more often now? Many firms know that you can take a successful individual out of one firm and make them unsuccessful by putting them into another one. Clients have a habit of not behaving as you would like and sticking with the firm brand rather than any one individual.

Others speculate that the new entrants will run to purchase shares in volume outfits. That is a particular sector of the market that in good times may make a lot of money but in poor times may lose a lot very quickly. Those firms often do not spread their risk or conduct any counter-cyclical work. Spreading the risk dilutes short-term profitability.

Referral fees could well have an impact on this position. If volume can be attracted by the payment of referral fees, if, or when, such fees were banned or curtailed, the opposite is likely to be true. Will that mean external capital is less likely to be attracted in a non-referral fee world?

Perhaps the best description is to paraphrase Donald Rumsfeld. The risks to, or benefits for, our practices are 'known unknowns'. We know ABSs are coming, but can only speculate about how the market will play out. So, keep yourself fully informed;listen to the enthusiasts and the doomsayers but make up your own mind and plan your business model accordingly '“ just don't leave it too long before you start.

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