UK Law Firms Face a Sea Change that May Impact US Firms

As reported in this recent article in American Lawyer, in less than a year, “the UK’s legal landscape will change forever.”   This sea change is taking place given the third and final stage of the UK’s Legal Services Act comes into effect in October 2011 — allowing for UK law firms to accept outside equity investments for the first time.   Specifically,  Alternative Business Structure (ABS) will be allowed to have both lawyer and non-lawyer ownership and management.   These entities will be able to solely provide legal services or provide legal services in combination with non-legal services such as financial services. 

Not surprisingly, UK law firms are busy preparing for this change — a change that will likely reshape the legal profession in the UK and beyond.   Unlike law firms in most parts of the world — including the United States — UK law firms will no longer have an ethical bar prohibiting them from taking on non-lawyer equity owners or managers.  The ethical prohibitions barring non-lawyer equity ownership of US law firms were discussed earlier this year in a post that challenged the status quo.

Come next October, the UK legal community will no longer have several significant barriers to growth and in so doing will reap an immediate advantage compared to US peers.  UK firms will see an influx of capital that mimics what happened after financial services firms first went public years ago.  Coupled with this new capital infusion and partner equity bonanza will be demands from investors for improved processes tied to a reduction in expense.   That’s where the new managers will come in to improve the bottom line.  These changes will likely lead to competitive advantages and a rapid increase in revenue.   US firms will be at a marked disadvantage for years to come on those legal services that can more easily be commoditized and outsourced.   ABS entities may find that success higher up the legal food chain will be more difficult to achieve and will take more time to address.  That is where traditonal firms may be able to obtain an advantage.

In other words, in the short-term, there may actually be some good news for US-based firms competing with ABS entities.  Complex corporate and litigation work may eventually increase — not only will firms be wary of using a hybrid law firm that may sometimes have a perceived conflict of interest, these process/outsource driven firms may not be perceived sophisticated enough to handle high-end business.  Moreover, the “professional touch” found in a traditional firm may also be perceived to be missing from these new UK hybrid firms.  This is obviously all speculation at this point given ABS entities may be part of a yet-unknown corporate structure that takes into account the above potential weaknesses.

All in all, the change that will take place next year in the UK will likely eventually lead to greater billing transparency and stronger competition.   Maybe having such competition will cease $60 empty emails and law firms charging for  nice window views.  It may also prod US state bars to recognize there can be no expanding “business of law” until law firms are allowed to conduct business more like other businesses — which may or may not entail the seismic changes taking place in the UK.   It would be nice, however, if those changes were at least discussed.