Into the front line
A survey of the significant recent developments in legal services reform in England & Wales, and their likely impact in Scotland
It was always anticipated that the Legal Services Act 2007 would result in significant change south of the border. However the reality has already seen more profound and unexpected changes than predicted.
There have been two principal initial results of the creation of alternative business structures (“ABS”) in England & Wales: a significant investment of new capital, either from private equity or listed organisations; and the development of new forms of service delivery.
The changes so far fall into six broad categories:
• private equity investment;
• investment by listed organisations;
• new financial services/retail led brands;
• new formats and structures from existing law firms;
• new market entrants from outside the traditional legal sector;
• the creation of national networks and franchises.
We look at each in turn before considering the likely impact in Scotland.
One of the first deals to be announced early in 2012 was a £50 million investment by private equity house Duke Street in the Parabis Group. Parabis comprises a number of different businesses including Cogent Law, a firm that started life as a claimant RTA practice; Plexus Law, which is primarily a defendant firm; and related non-legal businesses. The investment gave Duke Street just over 50% of Parabis and is to be used to fund at least four acquisitions, including law firms aiming at the insurance market. The deal valued Parabis at £150-160 million.
Another major private equity investment was of Palamon Capital Partners into Quality Solicitors. The amount invested was not disclosed; however it was believed to be in the range of £10-80 million.
One of the most interesting early announcements was the acquisition for £53.8 million of personal injury firm Russell Jones & Walker (“RJW”) by Australian listed firm Slater & Gordon (“S&G”).
S&G is the world’s first listed law firm. With 1,000 staff and operating from 50 offices across Australia, the firm specialises in insurance claims, commercial, family, and asbestos related law. RJW has 10 offices and 400 staff across the UK, including an office in Edinburgh. It also owns the Claims Direct brand. The purchase price was £36.4 million in cash and £17.4 million in Slater & Gordon shares. £8.8 million of the cash will be deferred for up to two years subject to performance targets, and £10.3 million will be used to pay off RJW bank debt.
This will be the first foreign owned ABS, and S&G has incorporated a wholly owned UK subsidiary company, Slater & Gordon UK Ltd, to manage its operations here. The move is likely to be the first of several acquisitions in the UK. Indeed, RJW managing partner and head of S&G UK, Neil Kinsella has commented: “This is an exciting new chapter in our history and is an important step towards us achieving our ambition of becoming the largest and most trusted brand for personal legal services in the UK.”
Another early announcement was the £19.3 million purchase of Liverpool based personal injury firm Silverbeck Rymer by AIM listed Quindell Group. Quindell is interesting because it is essentially a technology and outsourcing business that had identified an opportunity in the legal market. It launched on the AIM market in May 2011 and, in December of that year, acquired the Mobile Doctors Group, bringing its projected fees (or “2012 run-rate revenue” as it is described on its website) to £50 million. The acquisition in April 2012 of Ai Claims Solutions plc increased projected run-rate revenues to over £150 million. The acquisition of Silverbeck Rymer, due to be completed on 1 July 2012 subject only to SRA approval, increased run-rate revenues to greater than £200 million, and staff levels, including those offshore, to around 1,250.
Interestingly, in June Quindell announced the acquisition of Intelligent Claims Management Network (ICM), a virtual network of claims management companies that generates business for solicitors, credit hire companies and medical agents. ICM reported turnover of £12 million in 2011. The attraction of an acquisition such as ICM is that ABS that encompass both law firms and claims management companies are likely to fall outside the scope of any referral fee ban south of the border. Few traditional law firms would have the capital to fund the acquisitions Quindell has made.
Whilst legal services reform has traditionally been dubbed “Tesco law”, Tesco itself has not shown any intention to enter the legal sector, whereas Co-operative Legal Services has always been very clear that its aim is to be a leading UK law firm. For the Co-op, which already has a wide range of interests in professional services, it is a natural extension. Its services already include banking, insurance, pharmacy and funerals, and in May it announced plans to create 3,000 jobs in its legal division. Currently with 450 legally trained and support staff based in Bristol, it plans five additional regional hubs across England & Wales.
The Co-op is setting up a new family law operation in London led by expert family practitioners, Jenny Beck and Christina Blacklaws, who have joined from leading legal aid firm TV Edwards. The Co-op also plans to extend its initial trial of legal and funeral services through 30 branches of the Co-operative Bank and Britannia Building Society, to encompass all 330 high street branches. As well as family law, the Co-op will offer a wide range of consumer services – will writing; probate and estate administration; conveyancing; personal injury claims; and employment law. Clients will even receive loyalty points!
New structures from existing firms
This option is perhaps the easiest to foresee, having been the subject of debate and comment in Scotland since multi-disciplinary partnerships were originally debated and the ABS format was discussed.
Two out of the first three ABSs licensed in England were existing law firms wanting to widen and deepen the range of expertise they were able to attract and retain within their business. Many firms have had non-lawyers working as chief executives and finance, HR and marketing directors for many years, allowing the partners to get on with providing legal services, so it seems likely, given increasing commercial pressures, that this choice will be seen as a welcome opportunity to extend their depth of operational management experience.
Whilst most of the initial focus and discussion had been on consumer services, the spotlight swung to commercial work with the launch of Riverview Law – part owned by DLA and with DLA joint CEO Sir Nigel Knowles as non-executive chair.
Riverview Law is primarily aimed at the SME commercial market, in particular through offering fixed fees. Interestingly, it comprises teams of solicitors and barristers, operating through Riverview Solicitors and Riverview Chambers respectively. Curiously, it also offers divorce and family services, although perhaps this will be followed by further services aimed at high net worth individuals. It has also launched an office in New York.
Another unexpected new entrant was BT, which announced in February that it was planning a move into the legal services market with the news that its claims management arm had applied to become an ABS. BT Claims had previously provided a motor claims management service to its 35,000 corporate fleet vehicles. It handles around 4,000 accident damage and personal injury claims and around 3,000 non-fault loss-recovery claims each year. In applying for an ABS, BT’s plan was to offer these services to other businesses.
Perhaps the most unexpected new market entrant was Eddie Stobart – traditionally known as a haulage business – which launched Stobart Barristers in May 2012. This is not an ABS; it aims to link members of the public and businesses to barristers without having to use a solicitor. The concept offers access to a network of specialist barristers for any area of law, using a pricing model under which clients agree and pay a fixed fee through a “pay as you go” model during the litigation process.
Research for Stobart Barristers found that just 14% of the public were aware of direct public access, and only 22% said they would know how to engage with a barrister without using a solicitor. It also found that 55% of UK adults said they would not pursue legal action due to uncertainty over the cost. Stobart believes its fixed fee structure halves the cost of using a barrister.
As an indication of the way customer service is moving in the legal market, the Stobart Barristers switchboard is open 8.00am to 10.00pm, seven days a week.
Riverview, BT and Stobart are perhaps the most unexpected new entrants, but they are being closely followed by a raft of internet based businesses such as Legal Zoom, one of the largest providers of online wills in the US.
Networks and franchises
One of the responses for traditional firms to the current threats and uncertainty has been to join a network or franchise. Several have been launched, including Quality Solicitors (QS), face2face solicitors, and High Street Lawyer. The highest profile network to date has been QS, with 350 members around England & Wales and, as indicated earlier, substantial private equity funding. It has just spent £15m on a TV campaign aiming to reposition its marketing towards a John Lewis customer base. The focus of these networks has to a large extent been consumers, with much of the marketing orientated towards attracting such work.
Impact in Scotland?
It was perhaps to be expected that a major change south of the border would have a direct impact on firms in Scotland. The UK legal services market is big – valued at approximately £24 billion – and profitable compared to other sectors. It is hugely attractive to investors. Although the Legal Services (Scotland) Act 2010 has yet to be fully implemented, the developments in England & Wales seem to have influenced the spate of cross border mergers that have occurred in recent months. Among other deals, in February McGrigors announced its merger with Pinsent Masons, in early June Biggart Baillie announced it was to merge with DWF, and in late June Archibald Campbell & Harley announced they were to merge with Shoosmiths.
The legal market is viewed by business analysts as being highly fragmented with few brands, as is considered ripe for development. The market in Scotland is likely to evolve differently to that in England & Wales due to the restrictions on ownership agreed by the Government. However it will be affected in similar ways. The areas of work likely to be under most threat are those that volume providers can undertake at lower cost, such as conveyancing and personal injury. For many firms the areas to develop will be the better quality work – executries and private client, as well as commercial advice. Because the overall volume of work available to traditional firms will fall, the number of firms the market will support will inevitably fall, and as a result there are likely to be more mergers.
Looking at the options employed in England, an easy solution might be to amalgamate or join a network, but it is important to be wary of joining an organisation that does not share your values and beliefs. Also be very careful of giving up your brand and name for one that you cannot control. If you do decide to become dependent on and tied to a brand you do not own, you have to be sure that you trust their senior people with all aspects of your business and professional reputation.
There is now the opportunity to provide people with finance, marketing and HR expertise with a share in the profits of your business, as well as bringing in other professionals, such as accountants, surveyors and architects, to expand the range of services you offer. Niche practices will benefit from being able to deepen their specialism, through, for example, investment analysts, medical experts or counsellors. The overheads of such a structure and the complexities of managing a wider group of professionals are significant. However, if the targeted work is of high value and difficult to replicate, this option has the potential to produce significant returns and longer term viability.
The law of unintended consequences is playing out at the moment, so it is well nigh impossible to say with certainty what the legal services marketplace will look like five years from now. What is more certain is that clients will always need lawyers who care about their problems and want to help them find cost-effective solutions. The key as always is to focus on your firm’s strengths and develop services that are difficult to replicate. The starting point is a very well thought through business strategy – one that deals with the threats, identifies the opportunities, and recognises what your firm does and will continue to do well.
Andrew Otterburn and Fiona Westwood are founding members of the Law Consultancy Network (www.lawconsultancynetwork.co.uk)