The traditional law firm model faces increasing scrutiny as pressure mounts on in-house legal budgets due to continuing economic uncertainty. With the last recession’s cost-cutting dictates still in place, law firms are looking to innovate, stay competitive and ultimately better serve their clients.
As a result, many UK law firms are listing or moving to an alternative business structure (ABS). Notably, AmLaw 50 law firm Reed Smith recently converted its UK operation to an ABS—making history as the first international firm to do so.
An even larger number of law firms are turning to legal finance as a way to differentiate themselves from their competitors: The recent 2019 Legal Finance Report reveals that 74.8% of UK lawyers report increased use of legal finance in the last two years by their organization.
Given the current economic climate, UK law firms must innovate to avoid being left behind.
Limits of the law firm partnership model
Despite its prevalence, there are inherent flaws in the law firm partnership model.
Because their stake in the firm is ceded upon retirement, equity partners—who have built their businesses up incrementally over many years—have no incentive to invest in growth that may not happen until after their retirement. As a result, they may resist investing present partner profits in client resources that will mature over the long term. They may resist transferring key client relationships to more junior lawyers within the firm. And they may bill as many hours as possible regardless of efficiency or client value.
This short term focus interferes with long term growth and doesn’t serve clients well.
Clients demand innovation
Nearly three-quarters (74.1%) of all finance professionals surveyed in the 2019 Managing Legal Risk Report agree that more innovation is needed from outside counsel to help their companies manage legal costs. Even the most well-capitalized clients are demanding that firms abandon the inefficient hourly fee model and offer alternative fee arrangements.
Companies are demanding more for their money than ever before. With over 12,000 law firms practicing in the UK, competition is stiff and there is growing pressure on law firms to address these client demands.
The rise of the ABS
Since 2011, law firms have been able to issue public equity in the UK. This has provided firms the opportunity to take advantage of new ownership structures. Although only a handful of UK law firms to date have issued IPOs, nearly 1,300 law firms now operate as alternative business structures (ABS) which allow for non-lawyer ownership.
ABS permits greater flexibility and helps firms to move away from the short termism that has historically limited law firm investment in new business growth and client offerings. Presumably, Reed Smith moved to an ABS model for these reasons, and in order to provide the innovation that clients are looking for from their external counsel.
We anticipate that others will soon follow suit.
Legal finance as a tool for innovation
Legal finance also provides law firms the means to invest in long term growth and thus to meet client demands for innovation. Its rise over the last decade or so can be attributed, in part, to the 2008 global financial crisis and clients’ urgent need for cost management and alterative fees. Law firms are now using legal finance proactively as a marketing tool to help win new clients and build business.
Access to capital enables firms to invest more in their people and their business to the benefit of clients. These firms can be more flexible in offering clients alternative billing arrangements that can complement or replace the hourly billing model.
Law firms must evolve to remain relevant. Clients expect it, and in the face of a possible downturn and with new tools and models available, innovation is a certainty—and indeed, a prerequisite to survival.