Alternative Business Structures: ABS Lifeline for small and medium sized Canadian Law Firms

2015-05-19 12:20:00

business.jpgAlternative Business Structures (ABS) is the latest alarm bell ringing in the corridors of the Canadian legal profession’s self-regulatory regimes. Opening the door for “non-lawyers” to take on equity and management roles in law firms was a key provision in the revolutionary Legal Services Act 2007 (LSA) enacted by the UK government. The hue and cry from the established legal profession about being consumed and potentially debased by a combination of big money capital and profit obsessed corporations resulted in the UK Solicitors Regulatory Authority (SRA) hemming and hawing through a number of studies and consultations for four years before the first ABS was approved for launch in March, 2012.

As the “winds of change” continue to wash ashore in the Canadian legal services market, the Law Society of Upper Canada (LSUC) has put the wheels in motion to look into the feasibility of permitting Ontario law firms to become “open for business. And they need to get on with it in light of the lessons learned in the UK about the benefits the ABS structure has brought to small and medium sized entrepreneurial (SME) law firm providers; arguably those most in need of reinvention who still make up the majority of practitioners.

Ironically, the first SRA approved ABS was a sole practitioner who wanted to grant joint ownership to his wife followed by a small law firm that created and ABS to make its non-lawyer practice manager a managing partner. There have been high profile investments by major professional services corporations and venture capitalists in the legal services marketplace in efforts to create large -scale legal services providers. However, Thomson Reuters reports that “the large majority of the 400 or so ABSs licensed by the SRA and Council for Licensed Conveyancers since have been SME practices, using their ability to move more swiftly than larger firms to take advantage of the freedom that ABSs provide to allow non-lawyer expertise and capital into the traditional structure”.[1]

Unlike “Big Law London’ the SMEs don’t have complex relationships with correspondingly “big clients” that create symbiotic entanglements with complex linkages. They’re much more vulnerable to client turnover from a client base that is dollar sensitive. Many of the emerging unbundled “e-legal services” are direct competition to their traditional service base. They’re also very easy targets for “edge” professional services providers. Divorce mediators are offering potential family law clients attractive and cost effective alternatives. Banks are reaching out to solid middle class account holders with wealth management programs that impinge on the traditional wills/trust/estate practices of SME law firms.

The LSA mission is to inject an element of competition into a self-regulated profession that’s in the public interest in so far as creating an architecture and framework for prescribed levels of services that are consumer focused. The mission has three components. One is to expand the number of licensed self-regulated legal professions to seven (and counting) to create a competitive legal services market. A second is to extend the reach of closely associated professions such as accounting into defined segments of the legal services market; in the case of accountants that being probate. The third is enable conventional law firms to add depth to their practice capability by permitting non-lawyers, whether they be individuals or corporations, to invest and take on management roles within ABS structured law firms so long as the key public interest attributes associated with the practice of law such as ethics, conflicts, attorney client privilege as well as voting control of the law firm remain under the control of a licensed lawyer.

The ABS is in effect tacit recognition that law is a professional services business that extends beyond the traditional confines of the “practice of law”. Law firms must take on business attributes to successfully compete with a growing range of related and/or alternative professional services providers. Bringing professionals with business acumen on board as partners is the primary driver in SME firms applying for ABS status. Professionals with the business acumen to make a significant contribution to law firm growth and profitability expect to be accorded equal voice partner status with corresponding authority on business management issues within the firm reporting structure and rewarded as partners.

One of the main advantages of the ABS structures has been the introduction of innovation into law firm strategy. Lawyers tend to look at doing more of the same thing to generate additional revenue or compensate for a downturn. Professionals with business/marketing expertise are motivated to look for new avenues for business or doing business differently to make them more attractive to existing and new clients.

One of the problems with the current legal education model is that it conditions lawyers to be compliant focused as the best way to meet ethical conduct rules. Rules of conduct become the driver for the service model. Business professionals have been disciplined to be customer/client centric first and then to ensure that service design and delivery is in conformance with regulations and rules of conduct. SME firms have discovered that bringing business acumen into the service model mix adds value to the client service package and increases client satisfaction.

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SME firms that embrace ABS also become less stuffy and down to earth. This is a feature that’s most attractive to clients who aren’t necessarily enamored by being told that the firm has state of the art practitioners who are leaders in the legal profession. The SME client base is not high court or precedent focused. They tend to want routine services delivered in a cost effective client friendly manner. If they’re in a “bet their business ”or livelihood” situation then they’ll seek out a high profile lawyer and proceed accordingly. In fact, an SME that acts as first call advisor and then refers clients in such situations is much valued and retained for ongoing routine business.

The LSUC forayed into multi-disciplinary practice (MDP) arena on the cusp of the 21st century and developed a convoluted model that ensured no law firm would seriously entertain becoming an MDP. More recently, it’s released an advisory and guidelines for law firms wanting to pursue an unbundled legal service model that’s got the profession all bundled up in knots. In short, it’s a money- losing proposition that I’ll comment on in and upcoming Future Law advisory.

Time is of the essence for the LSUC, the Federation of Canadian Law Societies (FLSC) and the Canadian Bar Association (CBA) to get this model right. The architecture and operational framework has been developed, tested and found to be “just what the doctor prescribed” to make SME firms healthy. Just follow the leader.

[1] Legal Futures, Innovation Nation How the SME Law FIRMS Are Changing the Way Law is Practised. February, 2015.