The signs are legion that the Legal Services Act of 2007 (sometimes referred to herein as The Act)–which did not take effect until October, 2011– is evincing a major impact upon the UK legal market and beyond. Scores of firms have secured licensure as “Alternative Business Structures”, enabling them to raise capital as well as share profits with non-lawyers, engage in inter-disciplinary practice, and confer equity upon non-lawyers who are increasingly becoming key contributors. The Act has spawned a more client-centric approach to the delivery of legal services that extends from High Street (retail) firms to the Magic Circle. Most of all, the proliferation of new models and heightened competition has rendered legal service providers subject to the same expectations of efficiency, transparency, and value as other businesses.
The repercussions of the Act are being felt far beyond the UK domestic market. This blog has previously considered the forays of white-shoe law firm Cahill Gordon and IT/document powerhouse LegalZoom into ABS licensure (the former through its UK LLP). But the migration to the UK and the lure of operating in its re-regulated ABS environment has cast a far wider net than these two prominent US providers. Three of the BigFour accounting firms now have ABS licenses, and firms from around the globe including Australian-based Slaters– the first law firm in the world to launch an IPO (2007 in Australia) are operating there too.
The UK legal marketplace is swingin’ (though not in the same way that produced “The British Invasion” and Carnaby Street), in part because of the Act and also due to London’s emergence as the economic capital not only of the UK but also, arguably, the world. Is it any wonder then, that the UK has established itself as the epicenter of innovation in the legal marketplace as well as base camp for the globalization of legal services?
Three recent developments involving the Magic Circle, a mid-sized, provincial firm, and the retail segment underscore the dynamism of the UK market and its influence on the wave of globalization sweeping across the legal vertical. Let’s briefly examine each and weigh its impact on the legal industry.
Ta-Ta to Lockstep in the Magic Circle
“The Magic Circle” is a term used to describe five leading law firms headquartered in the UK, as well as four or five leading London-based commercial barristers’ chambers. The moniker has come to be synonymous with the UK’s corporate legal elite in terms of prestige, profit-per-partner, and client rosters. And its sway is not limited to the UK; four Magic Circle members ranked in the top ten of all firms globally based upon revenues. Historically, these firms have had a “lockstep” compensation model for partners wherein one’s points increased with years of service. Though the Magic Circle’s U.S. counterpart, the larger AmLaw 100, had largely abandoned lockstep during the past couple decades (with a few salient exceptions among its most elite ranks), the Brits clung to their “the firm first” approach. But that has changed recently. Though member firms Allen & Overy, Clifford Chance, and Linklaters have not abandoned lockstep, they have all recently adopted some form of “bonus pool” which enables them to reward those who make exception contributions to the firm (read: exceptional rainmakers) beyond the upper end of the lockstep formula. And this includes coveted laterals. What’s the big deal? It’s another example of a changing legal landscape and additional evidence that the UK stalwarts are fortifying themselves with ammunition they deem necessary to expand aggressively to new markets where they can now compete more successfully for “superstars.” And make no mistake about the global aspirations of Magic Circle firms, a large percentage of whose billings derive from cross-border and multi-border litigation and transactions. The Magic Circle firms are clearly focused on the globalization of legal services as well as leveraging their global brands and favorable regulatory environment.
IPO in the Middle-Market
Gatelely, a Birmingham based firm of about 450 lawyers just launched a successful IPO on the London Stock Exchange. The firm raised approximately $45M (all figures here are converted from pounds) in its first day of trading, driving the share price about 15% above the placing price. The firm, which has revenues in the $80M range, now has a market cap of approximately $160M. It plans to deploy the new infusion of capital to hire top lateral talent, acquire additional practice groups, and provide it with flexibility to tap into advantageous growth opportunities. Is this a big deal? Well, consider that Slater’s, which went public in 2007, now has a market cap in excess of $2B. Now imagine what the Magic Circle firms would be valued at with their global brands, multi-billion dollar revenues, blue chip client bases, and top tier talent– and the capital they could raise to fuel global expansion? Could their recent decision to supplant lockstep to retain superstars with a premium and lure new talent that same way be a precursor to even bolder steps such as going public? Stay tuned.
A Rollup in Retail
And the action is happening in the retail segment of the UK legal market as well. Metamorph has secured backing from legal business consultancy Assure Law and has announced that it intends to stage what amounts to a rollup of 60 High Street firms during the next 5 years. Metamorph will secure ABS licensure and expects that it will be able to reap solid returns by injecting streamlined operations including consolidation of back-office operations and enhanced IT integration to this struggling segment of the market. What does this portend? It suggests that legal practices, like medical ones before them, will be rolled up, streamlined, made more profitable, and, likely packaged for sale or IPO. What’s clear is that at all segments of the market, moves are being made to improve the efficiency of legal delivery and to scale it. In the case of the retail segment, such scaling might be nationwide, but in the corporate segment globalization is clearly the end game.
The UK legal market provides a view into law’s future. While ABS structures, IPO’s, and rollups may be anathema to some legal purists, they are clearly a part of today’s global legal landscape. Whether they align the interests of the various stakeholders in the legal ecosystem (law students/the Academy; legal providers; and legal consumers) and provide better outcomes for each remains to be seen. But one thing is certain: the UK is in the vanguard of innovation in legal delivery and will likely serve as the headquarters from which that change will proliferate around the globe.