Posted by Nigel Wallis, partner at Legal Futures Associate O’Connors
“Whatever life throws at us, our individual responses will be all the stronger for working together and sharing the load.” Queen Elizabeth II
Working with law firms over the last decade or so has taught us a lot about the power of the collective: how a group of individuals, working together with a view to profit, can create an impressively competitive force; how pooling resources and intellectual capital can bring out the best in a group; and how, by sharing risk, there can be genuine safety in numbers.
Such risks and rewards are now being brought into sharp focus for barristers as new methods of capturing clients and new models of conducting advocacy and litigation start to become a reality.
For all the accusations of central government meddling, it is the clients who are the main drivers of change as they demand direct access to expertise and online delivery.
Chambers have traditionally been associations of individually regulated self-employed practitioners, linked by a contractual obligation to contribute towards communal running costs and expenses. The concept of joint liability for business risks has generally been absent, as has a mechanism for genuine profit-sharing. This model has existed since records began and, perhaps until now, it has stood the test of time.
The relentless drive by central government to open up the legal sector to wider market competition, being implemented by the Solicitors Regulation Authority (SRA) and the Bar Standards Board (BSB), presents both threats and opportunities for the Bar. Whether you agree with the reforms or not, they are here to stay and, for those who fear them, the pace of change is likely only to get worse.
At present, the main option for a group of barristers wishing formally to collaborate and share profits is to form an SRA-regulated law firm or, if non-lawyer managers are involved, an SRA-regulated alternative business structure (ABS).
The impending introduction of entity regulation (and most likely ABSs) by the BSB will tip things on their head and create additional options for entrepreneurial barristers. This could be a ‘barrister-solicitor entity model’, a ‘barrister-only entity model’, an ‘ABS entity model’ or some completely novel innovation.
Certain sections of the Bar will no doubt feel immune from the impact of the changes and choose to sit tight – they may be right. For others, perhaps engaged in criminal or family work, the changes will offer a much-needed lifeline. For the remainder, they will create a new playing field full of opportunity and challenges.
So what structures are likely to prosper over the next few years and what if anything can ‘bar firms’ learn from the experiences of ‘law firms’?
Traditionally, law firms were structured as sole practitioners or non-limited partnerships. Over the last 10 years or so, this model has declined in popularity as the economic downturn has shone an increasingly harsh light on the concept of unlimited liability.
Limited liability partnerships (LLPs) and limited companies are rapidly taking their place and it is now very rare indeed to see a new law firm set up in any other form. So it is likely that the Bar will take the same approach and we will see Specialist Chambers LLP and Specialist Chambers Limited emerging as the primary trading entity styles.
As law firms have moved to introduce non-lawyers (mainly professional managers and private equity) into equity ownership or manager status, we have seen the growth of ABSs. Again, barristers are likely to follow suit, as and when the BSB’s ABS licensing powers are in place.
Top five tips
The establishment of new ‘bar firms’ will bring into play similar issues to the establishment of new ‘law firms’. So here are our top five tips for barristers when establishing such an entity:
Over the years, we have been approached by law firms for advice on many innovative commercial ventures. Very often, the proposed model is not achievable because of the constraints of regulation. It is usually possible to re-structure a business model to bring it within regulation and achieve similar outputs, but not always.
TIP ONE Take independent regulatory advice on your proposed business model from a legal sector specialist to avoid blind alleys and wasting money.
Different commercial models deliver different commercial returns. However exciting a model appears, it is essential to prepare at least three-year financial forecasts with ‘what if’ sensitivity analysis to understand its true financial impact.
If these forecasts are prepared internally, we would recommend they be thoroughly stress-tested by external accountants who are experienced in the legal sector and who are likely to have a good awareness of the special market forces impacting the models.
TIP TWO Know your numbers inside out before you take any irrevocable steps formally to engage with third parties.
Individual barristers within the same chambers will be very adept at managing conflicts of interest. Once barristers are working together and sharing profits as LLP members or co-shareholders, the issue of conflicts becomes even more complex and they need to be anticipated and considered very carefully as part of any entity project. The development and enforcement of sophisticated conflict management protocols will be essential.
TIP THREE Run exhaustive scenario tests to make sure future conflicts can be managed and will not hole your proposed entity below the waterline.
Just how far the introduction of entities and ABSs will impact the Bar Mutual and perhaps the wider professional indemnity insurance market remains to be seen. One thing is for sure, barristers working together under an umbrella business will start to share a risk profile. This will be alien to many and will require a change of mind-set on the part of the profession.
The Bar Mutual and the wider professional indemnity market will have to get their heads around some new risks and this is likely to take some years to settle down. Insurance brokers and underwriters will have lots of searching questions and it may take a long time to secure acceptable terms. The evolution of the market will show the value of engaging with a professional indemnity insurance broker that truly understands the legal sector.
TIP FOUR Don’t leave professional indemnity cover until the last minute and use a specialist insurance broker.
Unless all funding for a new entity venture is provided by the participating barristers themselves, it is very likely that some external funds will be required. This could be debt (from banks or other lenders) or equity (from private equity providers or business angels) or a mixture of both.
The key to getting funding right is to understand the drivers of the funders and how these will impact the structure of the entity and its ability to operate in the way the owners want it to.
TIP FIVE Be clear on what type of funding will be needed in the foreseeable future and try to align the interests of the entity owners with the drivers of the funders.