Investec: large firms to use Legal Services Act as catalyst for structural change

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By Legal Futures

8 June 2010


Key to the vault: Act opens up greater access to finance for structural changes

Nearly half of large law firms are planning to become alternative business structures (ABSs), Investec Specialist Private Bank has reported.

A poll of 30 managing partners at an Investec event held last month revealed that 45% are considering establishing an ABS, 36% are contemplating becoming a multi-disciplinary practice and 18% are looking into becoming a legal disciplinary practice (LDP). Some 36% have already made structural changes to their firms. Investec has been one of the leading names pushing the possibility of external investment in law firms.

A panel of commentators at the event agreed that the changes introduced by the Legal Services Act 2007 would result in increased commoditisation, consolidation and above all, greater competition. The Act is likely to drive much needed specialisation in medium-sized firms and panellists said the process of considering a potential structural change will in itself benefit the business over the longer term.

On the panel were Tina Williams, senior partner of Fox Williams, Neville Eisenberg, managing partner of Berwin Leighton Paisner, Keith Wood, CEO of SJ Berwin, Michael Roch, founder and executive partner of Kerma Partners, and Peter Gamson, head of Grant Thornton’s national professional practices group.

While 55% of managing partners expect their business to grow organically over the next 24 months, 36% intend to acquire smaller firms, with the remainder expecting to diversify their existing business model or to grow through lateral hires.

Typically, managing partners expect that they will require anything from £1 million to £10 million in order to finance their growth plans. There was agreement that firms need to use possible structural changes and external finance to change existing business practices.

However, panellists warned against a rush to raise finance, especially by selling equity in the firm. The principal concerns are the cost of equity, the risk that firms may rush to raise finance without a clearly defined business strategy and how this financing will be effectively used to deliver this strategy. This could result in firms potentially ceding control to outside investors.

Attendees agreed that there would be an increasing ‘corporatisation’ of law firm strategies as firms shifted from LLPs to company structures or a combination of the two.

Partners will need to be better educated in the cultural changes required and to take a longer-term view of the business. There was also agreement that partners will need to consider outsourcing or multi-sourcing of services, re-evaluating partner remuneration and placing greater emphasis on succession planning.

Investec’s Jonathan Harvey said: “It is crucial that before any firm goes in search of finance, partners need to be absolutely clear as to what they are trying to achieve as a business. Firms are no longer just looking for funding from a bank but a financial partner who will be able to assist the firm with their future growth strategies; and how the planned finance should be used to deliver better value for clients and improve the business model, both financial and even culturally.”



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