The legal sector facing its own ‘Big Bang’

The Sheffield-based outfit is expected to be one of the first operators to take advantage of the new Legal Services Act, which allows outside investors to take equity stakes in law firms for the first time.

The introduction of alternative business structures (ABS) threatens to wipe out many high street law firms, but is also expected to create major opportunities for entrepreneurial practices that use external equity to grow market share.

John Pickering, group chief executive of Irwin Mitchell, said the Act has the potential to be legal equivalent of the Big Bang that shook up the City of London 25 years ago and led to a massive expansion in UK financial services.

“When we can get through this present economic crisis phase and get ourselves lifted out of the gloom, I actually think this is a really good thing in terms of the business of law in this country and its contribution to the economy,” Mr Pickering told a round table debate on Friday.

He described the Act as a pioneering initiative and a global statement that has attracted the attention of international investors who are now looking at opportunities in the UK legal market.

Mr Pickering added: “It is not without significance that some American law firms are looking at setting up ABSs here so they can explore potential for revenue generation back in the United States.

“You have some firms from the Far East also engaged in that dialogue. Why is one of the leading Chinese firms looking at setting up business in this country?”

He said the dominance of English legal principles in international commerce is “a dynamic that’s hugely important for the economic well-being of our country”.

Irwin Mitchell, which has revenues of £171m, intends to bring in external investment and has hired Espirito Santo Investment Bank to advise on options ranging from an initial public offering to private equity.

Mr Pickering said: “It’s still a work in progress. There’s a whole series of factors still in play.

“We are already behind in our timetable because of what’s gone on with the regulators and of course market conditions are changing.”

Law firms have criticised regulators over a delay in issuing ABS licences. The Solicitors Regulation Authority was supposed to start issuing last month.

While Irwin Mitchell and others see the Act as an opportunity to compete for more business, the introduction of aggressive new players is likely to threaten the existence of many smaller high street firms, which make up 80 per cent the fragmented legal market.

Ajaz Ahmed, the co-founder of Freeserve, has set up a fixed-price online service called Legal365 with the established law firm Last Cawthra Feather LLP.

Speaking at the round table debate, Mr Ahmed said the majority of lawyers are in “complete denial” about the impact of the Act or have no idea of how to respond.

“The changes are going to happen much quicker than they think,” he said. “Small firms are not going to be able to cope. They are the ones that can’t react. They are the ones that don’t offer great value for money.”

He said that new entrants will “start from scratch” and offer new products and services much more efficiently at more competitive prices. Mr Ahmed added: “People don’t like paying by the hour, they don’t like the lack of transparency and they don’t like the perception they are going to get poor customer service.”

He said that technology will force change on the legal market, as it has done on other sectors.

“Disruption and innovation is happening and the agents of change are going to come from outside the industry,” he added.

Nick Bates, the head of Irwin Mitchell’s office in Leeds, said the hourly rate “if not dead, is dying” and innovative firms are now combining fixed-price commoditised services, but with a personal touch.

Justin Lister, director of Yorkshirelawyer.co.uk, a website that promotes the range of legal services in Yorkshire, said: “The lawyer involvement is always going to be key. It’s that right blend of the right technology, the right communication and the right products.”

But he warned that there are “probably are too many” law firms in towns and cities.

According to Mr Pickering, the commoditisation of law has quite a long way to go.

“When you actually look at a case, there’s a lot that’s capable of being reduced to an operational mechanism,” he said, adding that historically firms have had a financial imperative not to create more efficient, process-driven services.

The Yorkshire Post chaired the debate, which was sponsored by Irwin Mitchell.

The road to choose

If Irwin Mitchell does choose a public listing as its way of bringing in external investors to support its growth, it might be able to learn some lessons from the experience of RSM Tenon, the listed professional services firm.

Neil Sevitt, regional managing director for the North of England, said the firm would not have grown into a £250m business with 3,200 staff and 45 offices without external funding.

“It’s given us good market share,” he said. “It’s created a brand very quickly.”

The negatives inevitably involve the highly regulated environment and the constant glare of publicity that comes with a listing, added Mr Sevitt.