The implications of the U.K.’s Legal Services Act of 2007–which lifted the legislative restrictions on external investment–on the legal profession and the wider repercussions on the legal outsourcing and offshoring industry are still under close scrutiny four years later. The Legal Services Act, much of which goes into effect this year, permits, through the formation of Alternative Business Structures, external investment in law firms.
The House of Commons website’s review of the key benefits of the Legal Services Act says Alternative Business Structures (ABSs) “enable lawyers and non-lawyers to work together on an equal footing to deliver legal and other services in ways that better meet the needs of consumers. External investment will be possible, and new business structures will give legal providers greater flexibility to respond to market demands.”
But this is a highly charged issue and will change the business model for law firms both in the U.S. and the U.K. Hence, the ongoing concern.
The Legal Services Act 2007is an Act of the Parliament of the United Kingdom that seeks to liberalize and regulate the market for legal services in England and Wales, to encourage more competition and to provide a new route for consumer complaints. It also makes provisions about the Legal Profession and Legal Aid (Scotland) Act 2007.
The Act allows alternative business structures (ABSs) with non-lawyers in professional, management or ownership roles. The Act creates a system whereby approved regulators can authorize licensed bodies to offer reserved legal services (ss.71-111).
As of March 2008, no date was fixed for the coming into force of these provisions and it has been suggested in the press that such structures are unlikely to be created until this year or 2012. Further, the extent to which the Bar Council will permit barristers to become involved in the full range of such structures has been unclear.
Experts have written that they have been convinced for a number of years that the profit margins routinely enjoyed by the world’s leading law firms would prove to be extremely enticing to the private equity market and that once restrictions on external investment were gone, it was inevitable what would follow.
Tony Jomati, former Clifford Chance managing partner, has written about a number of trends impacting on the U.K. legal profession.
His trend number 6 stated: “High Street legal services will be fundamentally transformed by the Legal Services Act. A number of major brands will dominate the provision of retail legal services. Will that be law firms, or outsiders such as supermarkets or banks? It is too soon to tell whether existing law firms will be able to develop strong enough retail brands.”
At trend number 7, he went on to say that, “If the Clementi reforms (the forerunner to the Legal Services Bill) are broadly successful, one can expect firms higher up the chain to take in outside capital and float on the market.”
The concept of external investment in law firms had remained firmly entrenched within the U.K.’s legal borders until the Law Society Gazette recently published an article entitled “New-Model Law Firms Face Barriers in the U.S.”
On the surface, the article appears to reaffirm the position that the U.S. has some distance to go before the concept of alternative business structures could ever take off over here. However, it was the first time that senior figures within the ABA (American Bar Association) publicly acknowledged the concept and its implications on the practice of law here in the U.S.
Tommy Wells, ABA president is quoted as saying that the concept of ABSs raises, “important regulatory and ethical issues that must be examined and addressed”.
The article goes on to state that if the ABA does not change its stance by the time ABSs are permitted in 2011 or 2012, U.K. law firms that choose to become ABSs will be barred from practicing in the U.S. From a practical perspective, this stance is clearly operationally unworkable for any of the U.K. magic and silver circle firms, with a U.S. presence, contemplating external investment.
The pace of change within the legal professions on both sides of the Atlantic has picked up dramatically over the last few years. The financial crisis acted as a further catalyst of change across numerous sectors of the profession. Clearly, if one reads between the lines, the U.K. Law Society believes that the ABA position is not a static, immovable one. Although the first step may be a modification of the relevant rules to permit U.K. firms with external investment to practice in the U.S., it is predicted that it is only a matter of time before external investment in U.S. law firms is also permitted. Once such investment is common place within both the U.K. and U.S. legal professions, this in turn will only spur the growth towards legal outsourcing and alternative and more efficient law-firm operating models.
The Legal Services Bill received Royal Assent on Oct. 30, 2007. The particular section of the Bill that is having the most far-reaching consequences on the legal profession and could provide a colossal boost to the growth of offshore legal outsourcing, is the provision allowing the formation of ABSs. The summary to the Bill at paragraph 15 states as follows:
“Alternative Business Structures (ABS) will enable lawyers and non-lawyers to work together on an equal footing to deliver legal and other services. External investment will be possible”.
Put simply, non-lawyers can own and invest in law firms. To all intents and purposes this opens the doors to banks, insurance companies, supermarkets and other corporate entities, both owning and investing in existing law firms, or alternatively, setting up their own firms and marketing legal services to the general public.
This legislation can be viewed as a major flattener in the provision of legal services globally. If you combine the impact of the Legal Services Bill with the fact that, finally, the legal profession has woken up to the concept of legal process outsourcing offshore, there is no doubt that over the next five years there will be a dramatic change in the delivery of legal services to the general public.
Some believe these are just scare tactics meant to slow the effect of the Legal Services Bill, the deregulation of the U.K. legal profession, and the impact this will have on the legal market as a whole.
An article in the TimesOnline referred to 10 trends that will shape the legal market:
At trend number 4 the author commented that: “Technology will enable projects to be “unbundled”. This may mean that parts of the project are outsourced to India and that they are done in a systemized manner. This could have a significant impact on the need for junior lawyers, particularly if they start to price themselves out of the market.”
Trend number 6 stated: “High Street legal services will be fundamentally transformed by the Legal Services Act. A number of major brands will dominate the provision of retail legal services. Will that be law firms, or outsiders such as supermarkets or banks? It is too soon to tell whether existing law firms will be able to develop strong enough retail brands.”
Finally, at trend number 7, the author went on to say that “If the Clementi reforms (the forerunner to the Legal Services Bill) are broadly successful, one can expect firms higher up the chain to take in outside capital and float on the market.”
The author was Tony Williams, a former managing partner at Clifford Chance, the world’s largest law firm. When a former Clifford Chance partner talks about supermarkets and banks offering legal services, major law firms floating on the stock market, and the offshoring of legal work to India, it’s time to take this line of thought seriously.
Let’s look at these potential scenarios in a little more detail and consider the impact that this will have on offshore legal process outsourcing.
- First, we have the acknowledgement that the technology is available to enable the breaking down of many legal functions into systemized routine tasks capable of being outsourced offshore. Junior associates currently demanding ludicrously high starting salaries and excessive hourly rates for this routine level legal work are clearly those most at risk.
- Second, Mr. Williams comments that although it is too soon to forecast what the impact of their entry will be, supermarkets, banks and other corporate entities will enter the legal services market, it is just a matter of when. These major corporate entities will come to dominate the provision of retail legal services. None of the corporations looking to enter the legal services market will be bound by the traditional and antiquated existing methods of legal services delivery. They will simply look for the most cost-effective method of providing legal services to the general public. These companies either already have offshore locations or the capability to scale up significantly quicker than even the world’s largest law firms, to provide legal support from offshore destinations.
- Mr. Williams’ final point on the Legal Services Bill, commenting on the potential floatation of some firms “higher up the chain”, only reinforces the belief that this will give the offshore legal outsourcing industry a huge boost. When major firms also have responsibility to their shareholders, as well as their clients, then the salaries that they pay their junior associates to perform relatively routine, off-shoreable level legal work, will raise more than a few eyebrows. When corporate clients increasingly demand that law firms provide an offshore solution in responses to Requests for Proposals, shareholders will not be happy if the firm is incapable of responding to these requests.
The face of the legal profession in the U.K. is changing dramatically, and these changes will have far-reaching, cross-Atlantic repercussions. The U.K. and U.S. legal markets are inextricably linked, with the many of the world’s leading law firms having offices on both sides of the pond. What happens in the U.K. does not stay in the U.K. but will soon be felt all around the Western legal world.