Is the Legal Services Board expecting a slow start to ABSs?

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The Legal Services Board published a research paper last week outlining its ‘latest thinking’ on the impact of alternative business structures.

The paper seems to be preparing the ground for a slow start, with bigger developments later on.

It predicts that the ‘first wave’ of ABSs, which will be permissible under the Legal Services Act from October, will be existing law firms or businesses, some of which will be new to offering reserved legal activities. Small law firms will be the first to feel the impact, either by exiting the market or being bought up by others seeking to expand.

But as firms watch their competitors gaining advantage from becoming an ABS, the LSB says there may be a ‘snowball effect’, with more and more seeking external investment.

Once this gathers pace, bigger changes will be seen in the market, it claims.

On the high street, the LSB suggests that the need for greater economies of scale and brand recognition will drive firms to form networks and franchise arrangements (and it cites QualitySolicitors as an early example of this).

It says high street firms may seek to save money by sharing ‘sunk costs’ such as back office functions.

But notably, it adds that high street firms that ‘cannot adapt to the changed retail landscape’ may ‘exit the market’.

In the City, once ABSs start hotting up, the LSB expects to see second-tier firms taking up private equity investment, and using this to increase in size and move into new areas of expertise. The LSB gives no mention of the biggest City practices, which are generally thought to be nonplussed about the concept of external investment as they are already swimming in cash.

The LSB notes that, as the number of ABSs increases over time, large retail providers such as supermarkets and banks may enter the market. But the inference seems to be that we should not expect this immediately.

As well as giving the predictions above, the LSB paper also sets out some ‘factors’ which appear to be a list of what market liberalisation will achieve.

It lists them as follows:

Increased competitive market for legal services in England and Wales;
Increased quality and diversity of services provided;
Increase in choice of legal services;
Lower costs for some services;
Greater innovation and alternative service delivery;
Greater scope for commoditisation of legal products and investment in achieving economies of scale and scope;
Greater capital investment;
More confident consumers with better information leading to them making better choices with lower transaction costs;
New approaches to the management of law firms;
Exit by small firms that are unable to adapt to competition and/or some market consolidation;
Falling unit cost of legal service products;
Increased product differentiation allowing greater scope to compete for niche providers and across specific product ranges.