Opening a closed shop
During a
downturn, thoughts inevitably turn to finance and funding. Law firms
have been feeling the pinch like everybody else, and there have been
some high profile casualties. Expansion plans have also been put on
hold and recruitment of new staff frozen as priorities shift from
building bigger firms to shoring up fundamental foundations.
As things stand, the options for firms requiring an injection of capital are limited, whether to stay afloat or to move business on to the next level. But this is all set to change with the implementation of the Legal Services Act in October 2011.
“The Act will open up the potential for external ownership,” confirms Christopher Clark, Corporate Finance partner at BDO. “Law firms may well find they’re currently restricted in their growth by what capital they can raise from their partners, the funding appetite of their bank or how much the partners are prepared to leave invested in the business, so in theory the Act could open the doors to some radical development in firms with a strong business plan.”
“It might be a question of completely overhauling IT systems or other technology to make processes more efficient or providing greater working capital to boost expansion. Some elements could work better outside the traditional law firm structure being delivered through call centres or centralising back office functions such as research, document processing and claims management. The main thing is for firms who want to develop to be able to articulate exactly what the cash would be used for, for it to be part of a solid plan, and then find the right investor.
“One effect of the new regulations is likely to be the acceleration of existing plans – where something might have taken three years to finance by traditional means, the new funding allowed by the Act will give scope to make the implementation much more rapid.”
The consequences are huge. Markets will change rapidly, competition will be transformed, and new business models will challenge orthodox ways of working. Even without the reality check provided by the recession, forward-thinking firms should be looking hard at their activities in operational and strategic terms.
Nevertheless, it’s important to remember that this is uncharted territory for everyone, and not just for the firms themselves. “There are plenty of investors out there looking at the possibility of getting into the market, but for the moment the angle they’re likely to take isn’t yet clear,” Christopher observes.
One of the main problems for investors to solve is ROI. “Typically investors would be looking for an annualised return of between 15 and 30 per cent on their money, so once they get in, how do they ultimately exit and realise this sort of return?”
However the practicalities turn out (the experience of adjacent markets which have already undergone similar transformations – surveying and accountancy, most obviously – may provide some clues), it’s certain that the Act will affect every law firm’s business. And firms that have no intention of opening themselves to private equity will still need to be on their toes as their markets are changed by the realities of outside ownership and increased competition.
“Firms need to be asking themselves where they see themselves going,” says Christopher. “The future is uncertain, but it’s very likely that your competitors today are not going to be the same as your competitors tomorrow. It’s essential that firms are prepared to think much more laterally if they want to remain viable in the new environment.”
