Fresh start - new entrant or existing player?

One of the things I keep reading about at the moment is the advantage that new entrants to the legal market have in terms of starting from scratch.  The argument goes that existing firms, with their clumsy decision-making structures, established ways of doing things, entrenched office politics, and so on, do not have the vision or agility to take the bold and adventurous decisions necessary to be sufficiently innovative and move their businesses forward in the new competitive market place. 

For someone starting afresh, however, with a blank sheet of paper, it will be much easier to think strategically about what their business will be, and then set up all the necessary elements accordingly.  This includes the business structure, marketing strategy, internal make-up, use of technology, and so on.  By way of example, we all know the difficulties of building up and adding on bits of IT over time – a new business can (finance depending) ensure that it has the required, up to date, technology from the word go, with all the various elements co-ordinating together nicely. 

However, I think an important element to add to this debate is knowledge of the legal world, and most specifically knowledge of what the client wants.  Those who have been practising for a while, especially those who have also been involved in the running of their own practice, will have an important insight into lawyers, the legal market, and how clients interact with lawyers and view them. 

For this reason, talk of ‘blank canvases’ and so on should I think distinguish between those coming into the market for the first time, and existing market participants making a fresh start.  It is the latter category that excites me the most – and the one where I think there is most potential for successful growth in the new legal world.  Lawyers who have entrepreneurial tendencies, who are able to assess the market in a strategic and rational way, but who have the knowledge and contacts/clients that they have built up over their time working in the sector.  Many of these lawyers may well be feeling frustrated in their existing practices (I have certainly met more than my fair share over the last year or so). If they cannot convince their practices to take the new challenges seriously and consider change where necessary, moving on and setting up afresh might be their best option for a successful future in the law.  However, this is obviously something that is easier said than done – starting up a practice takes a certain type of person and no matter how good the business plan, more risk than most lawyers are accustomed to taking. 

There are options emerging in some of the franchise models that we are reading about increasingly in the legal press.  Aside from these, I am fascinated to see how many new, smallish firms are set up by disgruntled associates/junior partners who have a clear idea about the way forward for the future, but a firm unwilling or unable to move in that direction.  All the talk is of the Legal Services Act leading to a loss of 3,000 firms, but it is quite likely that there may be at least some movement in the opposite direction. 

Partners v Business Experts - who should run firms?

The issue of the suitability of partners to run a business is one that has been debated for a long time.  It has been brought into sharper focus by the Legal Services Act - indeed one of the 'threats' of the market shake-up often highlighted for traditional law firms is the new competition from businesses run in more efficient and effective ways. 

Traditionally, a trainee qualified, was hopefully taken on by his or her firm, slowly worked their way through their years' PQE, until they had enough years under their belt to be considered for partnership.  Although this is a significant generalisation, if an assistant/associate was good at the job of 'lawyering', they would get accepted into the partnership.  Business acumen, and indeed the basic ability to run a business, were not necessarily factors. 

Things have changed now, in that business development, networking, people-skills and so on are much more relevant in firms both large and small when considering who to take into the partnership.  However, there is no doubt that there are still many law firm partners out there who, though very good at their 'day job' are not naturally suited to running a business (and indeed often would prefer not to). 

This is something that the SRA has recognised and decided to deal with.  The introduction of principle number eight in the new Code of Conduct, which states that that firms and solicitors must: "run [their] business or carry out [their] role in the business effectively and in accordance with proper governance and sound financial and risk management principles", is a significant departure.   This is backed up to an extent by the Chapter 7 outcomes and indicative behaviours on management of the business.  However, there is no doubt that for many law firms there is still a long way to go in terms of running the firm as well as possible.

So, what's the answer?  The last ten years or so (probably extended to 20 years for the larger firms) have seen the rise of the 'Business Director' (or similarly named role) - an external, non-lawyer brought in to run the business.  However, for many firms this hasn't been as successful as hoped, and I think that much of this is down to lawyers' natural assumption that they are more than capable of running the business on their own, and perhaps a little bit of professional snobbery (who are you to tell us how to run our business.....).  For the outsiders'/consultants' view on this, there is an interesting linked-in discussion thread http://www.linkedin.com/groupItem?view=&gid=3572215&type=member&item=54725293&qid=18a5fad3-5aca-4cb2-b665-4b3933127566&trk=group_most_popular-0-b-ttl&goback=%2Egmp_3572215

Jeremy Hand, who set up private equity firm Lyceum Capital in 2008 specifically to look into investment into the legal sector, stated at a conference around that time that law firms have unbelievable profit margins but cannot run themselves.  At the time one got the sense that he was rubbing his hands with glee at the prospect of the money that could be made out of the legal sector. Of course, Lyceum has since directed its focus towards legal process outsourcing, and other private equity houses have been targeting the legal publishing market.  How much of this is down to the difficulties encountered when actively considering investing into a law firm run by lawyers? 

Of course there are many firms that are run fantastically well by their managing partners/governing board/whatever partnership management structure is in place.  This applies across the country and across all size of firm.  However, there is no doubt that the opening up of the market puts this issue into sharper focus and it will be interesting to see how the debate develops and what happens in practice. 

Why wait until October?

What is interesting about recent moves such as the creation of In-Deed and the launch of Panone's stand alone white label division, Affinity Solutions, is that these have all happened before 6th October 2011 - in other words before the 'Big Bang' date for legal services.   

A year ago all the talk was about who would be the first-movers in the ABS market.  What the last year has shown is that it has been possible to come up with innovative ideas and structures within the existing regulatory environment, without having to wait for the new, more flexible regime.  Of course some of the recent developments have taken place in anticipation of the changes, in that they wll be looking to take advantage of the opportunities under the Legal Services Act once ABSs are authorised.  This includes In-Deed, the new online conveyancing service launched by the founder of property website Rightmove, which has stated that some of the money it raises from its intended AIM float could be used to help panel firms that need to invest in training, technology and customer service.  Other recent developments have taken place in response to the changes provided for the in the Legal Services Act - I would include in this Quality Solicitors, with its emphasis on the quality and professionalism that clients (or should that be consumers) will be getting. 

In fact there has been so much activity in the market that one almost wonders why the profession needed the Legal Services Act to galvanise it into action.  An even more interesting question is the extent to which these moves are motivated by the upcoming regulatory changes, as opposed to the other market pressures which are so widely commented on, for example: the pressure on fees stemming from the strained economic environment; the rise of legal process outsourcers and legal publishers; the increased demands for improved client service and online capabilities from the younger generations; and so on.  Whatever the case, when you distil down what has been happening, it's quite an eye-opener.  Look at this brief list of what new themes have been emerging:

• national networks, both non-branded (such as GetSolicitors) and branded (such as Quality Solicitors);
• online legal advice portals (such as Expert Answers);
• referral services (such as Bid4Fees);
• find a lawyer websites; and
• the comparison websites (such as Wigster, LegalCompare.com).

Whatever your views might be on these developments, there is no doubting that the last year or so has seen significant moves in the industry.