Seemingly out of the blue on 
24 July 2003, the Department for Constitutional Affairs, the agency that would soon be rechristened the Ministry of Justice, made an announcement that marked one of the most significant interventions in the legal industry in recent memory.

It signalled the appointment of Prudential chairman David Clementi to lead a sweeping review of legal services regulation and kicked off more than eight years of upheaval in the profession that is not only still playing out but, in early 2012, looks about to reach a new level of intensity.

The launch of the Clementi review – coupled at the time with vocal Government support for legal deregulation aimed at increasing competition to aid consumers – almost immediately made it plain that major changes were on the way.

And unlike most such reviews, which often end up collecting dust on ministerial shelves or produce radical proposals that are watered down beyond recognition, the key reforms on the table were apparent well before Clementi issued his final report in December 2004: the Law Society and Bar Council to lose direct control of regulation; the creation of a new overarching Legal Services Board; and 'Tesco law' reforms to allow companies to provide legal services to the public and for lawyers to go more easily into business with non-lawyers.

The reforms all came to fruition remarkably smoothly with the passing of the Legal Services Act (LSA) 2007. True, the timeframe slipped – at one point the Government was talking of outside investment in law firms as soon as 2008 – yet the thrust of reform has remained essentially unaltered.

This curiously slow-moving dynamic has left the legal profession trapped in one of two camps – a smaller group anticipating exciting opportunities and a larger, more wary group wishing the whole thing would go away.

Yet the latter sentiment seems wholly unlikely, given the radical changes the Act has already triggered well before its implementation – not least via the creation of the Legal Services Board, the Solicitors Regulation Authority (SRA) and the Bar Standards Board.

And, of course, this month finally marks the effective launch of the most radical element of the Act, with the SRA opening its doors to consider licence applications for alternative business structures (ABSs) – the clunkily named model through which law firms can take outside capital and companies can provide legal services. The two models are often viewed as the most radical means to shake up the UK's £25bn legal services market (even though many focusing closely on the post-LSA world believe models that look little like traditional law firms or high street retailers could ultimately prove the real deal).

Just three weeks after the SRA began accepting applications on 3 January this year, the body says it has received no less than 80 ABS licence applications and, while it cannot unveil the names of applicants for confidentiality reasons, it speaks of a variety of applicant types, including major corporates, traditional law firms, accountants, insurers and claims management companies.

The rush of applications – not to mention the recent rise in the profile of 'non-conventional' legal brands like the Co-op and QualitySolicitors over the last two years – underpins the expectation that the LSA will spark a revolution in the retail legal services market in England and Wales – a hyper-fragmented sector worth around £10bn annually.

What is less clear is how dramatic its impact will be on the institutional market. Yet it seems unlikely that radical change in high street law can fail to have a substantial impact on the far more lucrative market for advising companies – especially with a range of sizeable law firms already considering moves to use ABSs.

True, many have doubts regarding the revolution. Taylor Wessing managing partner Tim Eyles (pictured) illustrates the view of many in his position with the comment: "I just don't think that anything has changed in our outlook from January 2011 to January 2012. We always keep an open mind to market developments but for us at the moment there is just no need for outside capital investment."

But even leaving the paid-up LSA cheerleaders to one side, the range of developments suggest the coming of 'Tesco law' cannot be easily dismissed. Legal technology adviser Richard Susskind comments: "This will take three to six years – not three to six months."

The view from the top 50

If plenty of sceptics talk down the impact of the LSA on major law firms, Irwin Mitchell certainly begs to differ. The firm last year became the first UK top 50 practice to explicitly signal its intention to become an ABS by announcing a shake-up of its structure to allow the firm to take outside capital.

This drive saw the firm last April appoint Espirito Santo Investment Bank and Norton Rose to advise on the creation of a new two-tier structure that splits the firm into its existing limited liability partnership and a new corporate vehicle, which has been created to act as its controlling member.

Irwin Mitchell is hoping to be one of the first law firms to gain an ABS licence when the first round is announced at the end of February, after having been in discussions with the SRA about the conversion for several months already. Chief executive John Pickering comments: "We have been interested in this space since the outset of the debate. We see external investment as the best strategy to grow our business and I expect that we will see significant activity in this space in the marketplace generally."

Irwin Mitchell is an intriguing and unusual pioneer in many respects. Despite its size, the firm is unusual in the top 50 as being a major force in advising claimants and standardised legal work such as personal injury and clinical negligence. As such, the firm is seen as having ample room to use outside investment and non-traditional structures to build a national consumer brand if it wishes.

In this context, Irwin Mitchell cites the progress made in Australia, the first jurisdiction to see public investment in a law firm with the 2007 float of personal injury specialist Slater & Gordon. The firm has since used the proceeds from the float to make a series of acquisitions in the personal injury space, and while the impact of outside investment has so far been less dramatic than many forecast in Australia, Slater & Gordon is still regarded to have blazed a successful trail.

However, Irwin Mitchell has shown at least as much interest in pushing in the other direction: using a capital injection to build a high-end commercial practice. In this context, many cite its headline-grabbing recruitment of a four-partner property team from SJ Berwin led by Jon Vivian, one of the City firm's leading partners. On this reading the lure of equity stakes is seen as a significant draw for lateral hires anticipating a payout during a sale to investors.

Irwin Mitchell has discussed alternatives for fundraising through capital injected by external investors but is also retaining an initial public offering (IPO) as an alternative route to raise funds.

Pickering comments: "An IPO is one of our possibilities. Is it on the radar? Yes. Are we definitely going to do it? No, we are not at that point yet. We have explored the funding routes. We know the steps we are taking."

The firm also has a range of ideas for how to use the capital. It already has a claims-handling subsidiary which it will be able to bring into the overall ABS structure, while it could also branch out to other service areas that clients could benefit from. It may also acquire other law firms or teams.

Pickering (pictured) says: "There could be M&A activity. We already are a multidisciplinary practice (MDP) in the sense that we have subsidiary businesses. The ABS would allow us to integrate and also possibly add new services. We want to take a more holistic approach to client needs and when you see it from that perspective, the possibilities really are endless."

Outside of the top 20, a few more firms are seriously sizing up the possibilities of the LSA. As Legal Week reported this month, Hill Dickinson and Kennedys are both intending to convert to ABSs, while a number of other major firms are assessing their options. Hill Dickinson is currently in talks with clients about potential joint ventures that could see it teaming up to provide non-legal services or enhance its existing practice through additional capital from clients. The northwest firm is planning to apply in 2012-13.

Meanwhile, DAC Beachcroft, which already has subsidiary businesses including Beachcroft Claims, is reviewing whether an ABS would be a better fit for some of its business activities.

Other sizeable law firms to have expressed an interest in an ABS launch include private client leader Withers, while Parabis Group, the innovative parent firm that has rapidly built up a £100m business housing insurance law firms Plexus and Cogent Law as well as several non-legal arms, has long declared its intention to quickly convert to an ABS.

Polling the top 50, it is clear that the majority of firms have no plans yet to convert to an ABS, but those expressing an openness to examine the ABS model in future include Eversheds, Simmons & Simmons, Berwin Leighton Paisner (BLP) and Pinsent Masons. Those explicitly ruling it out include Freshfields Bruckhaus Deringer, Hogan Lovells and Slaughter and May. Though it has yet to declare a commitment to the LSA, top 40 law firm Shoosmiths is seen as a potential player, having built up a separate consumer brand, dubbed Access Legal.

Some firms also look set to convert to an ABS due to having already adopted a legal disciplinary partnership (LDP) structure, one of the elements of the Act that has already been implemented, which allows a limited proportion of non-solicitors to join a law firm's partnership. Under the LSA, existing LDPs will either have to apply to become an ABS by October 2012 or remove non-solicitors from their partnership.

Kennedys, which became the first City LDP in 2009, is in the process of applying for its ABS licence. Wiggin also this week confirmed plans to move from an LDP to an ABS. Other major firms to have become LDPs include Dickinson Dees and Olswang.

Kennedys senior partner Nick Thomas says: "The move to ABSs is a positive one, allowing people to fund their business through external investment, but we understand our business and want to remain in charge of our own destiny, and as soon as you seek external investment, investors are quite rightly going to want to put checks and balances in place that you cannot necessarily control."

While it was always expected that the minimal need for capital among large law firms would hold back enthusiasm for the model within the top 50, there is also considerable interest among the next tier of firms. Russell Jones & Walker, for example, has expressed an interest in alternative legal models since acquiring the claims management company Claims Direct. Manchester's Pannone last April announced the launch of a 'white label' business, a division of its lawyers which would offer legal services through organisations such as retailers and insurers, a niche some expect to take off under the LSA. Pannone says it has 85 of its lawyers carrying out work for the new division, dubbed Affinity Solutions.

Top 100 UK law firm Keoghs, which is best known for its insurance practice, has also confirmed that it is in talks to take on outside capital, after having appointed Deloitte to advise. The firm described its initiative as at an "exploratory stage".

Notably, this week (24 January) also saw the announcement of the first bid by a listed company to acquire a law firm under the LSA, with software and outsourcing firm Quindell Portfolio unveiling a £19.3m cash and shares bid for the Liverpool personal injury specialist Silverbeck Rymer. The bid, which is subject to approval from the SRA before the end of 2012, is set to create a combined insurance claims and outsourcing operation.

The DLA effect

Also interesting to watch will be the development of LawVest, a much-touted venture set up to take advantage of the LSA. Crucially, the Wirral-based company, which is aiming to secure an ABS licence this year, is being backed by DLA Piper, one of the largest brands in commercial law, with DLA Piper managing partner Nigel Knowles acting as non-executive chairman. The exact shape of LawVest's 'market-disrupting brand, pricing and service delivery model' is still unclear, but it is expected to be aimed at smaller and medium-sized businesses rather than the retail market.

The stance of DLA Piper in the LSA world will be particularly interesting to watch, given its move to back LawVest with a minority stake. Senior DLA lawyers had voiced interest in outside investment after the Clementi review was announced, relishing perhaps the firm's image as a progressive outsider, but its interest appeared to have waned after its US merger in 2005. But there is little doubt that the firm's resources, profile and proven ability to challenge established rivals make DLA a hugely potent force if it ever sought to seriously back an alternative legal services model.

By the same token, Eversheds, which has recently launched its own consulting division and has shown a previous willingness to experiment with businesses outside the traditional legal model, could be a strong player. The creation of related but distinct businesses like BLP's much-touted 'virtual firm' Lawyers on Demand also suggest another possible model for major law firms to seek outside capital: to back new divisions rather than a core partnership (there has previously been discussion within BLP of attracting outside investment for Lawyers on Demand).

Taken as a whole, it seems apparent that the industry has already moved well beyond the theorising, with perhaps a dozen sizeable law firms moving in some form to utilise ABSs in anticipation of a major shake-up of the market. What have been largely absent so far are concrete signs of what could potentially be one of the most radical impacts of outside capital: being used by sizeable mid-tier law firms as part of an attempt to leapfrog up the market.

This is almost certainly because such a move is seen as a high-risk strategy for a law firm which could potentially super-charge its development and fund aggressive expansion through investment and lateral hiring. However, such a bid could easily destablise a partnership, itself triggering a round of departures if a firm failed to secure enough buy-in.

It could well be that it will take some obvious signs of successful investment in non-transactionally focused law firms before the lure of outside capital will be seen as worth the risk for a restless City practice.

If law firms are looking for some guidance on alternative structures, there is one example. With the SRA's application to become an ABS regulator delayed through Parliament, the first legal business to become an ABS in the UK was Premier Property Lawyers (PPL), which was granted its licence from the Council for Licensed Conveyancers (CLC) when the LSA came into force on 6 October 2011.

Kevin Smith, director of PPL and its umbrella business myhomemove, comments: "We had been planning a conversion for a long time as it fits in with our long-term business strategy. Being first through the gates puts us in a very good competitive position."

Since the conversion Smith says the firm has also seen a number of other unexpected benefits, including approaches for new business opportunities. In addition, he says, the rigorous application process through the CLC forced the firm to review internal structures, making sure it is at its most efficient.

Smith comments: "We wanted a corporate structure because we feel that this is the way that the post-LSA legal market is heading. The new entrants will be better funded than the current competition and we felt if we did not do this that we would be at a disadvantage in competing with those new entrants."

He adds: "I don't think that there will be a stampede of law firms converting to ABSs and seeking external capital, but I foresee that new entrants will be business-minded and succeed in shaking up the legal industry."

Meanwhile, outside 
law firm land…

If the level of pre-LSA activity happening at law firms suggests the market is heading for major upheaval, the number of outside businesses and interests targeting the retail and volume end of the legal sector even more strongly suggest real change is on the way.

The analysis backing this push into law is now familiar and still looks correct. The retail legal market is incredibly fragmented, being generally provided by very small legal firms with little in the way of economies of scale and with widely varying standards.

For generic, standardised legal services, such as mortgage work, personal injury, some family services and basic employment advice, there remains huge scope for a major retailer to use its brand, infrastructure and scale to swiftly become a force in the market.

So far, the Co-operative Group remains the poster boy for the Tesco law model. As one of the first companies to signal its commitment to enter the market, the retail giant, best known for its supermarket and banking business, set up its Co-operative Legal Services (CLS) division back in 2006. The division already has 400 staff members covering personal injury claims, will writing and employment law, and this month announced plans to recruit 150 new members as it ramps up. With the Co-op one of the initial ABS applicants, it is expected to greatly expand the range of legal services it currently offers once it converts to an ABS.

CLS, which has already built a legal business with revenues of around £25m, last year also hired three high-profile figures from family law firm TV Edwards ahead of its planned ABS conversion, with the law firm's managing partner Jenny Beck and partner Christina Blacklaws moving to develop CLS's family business alongside business development and strategy head Chris May. The majority of CLS's staff will be based in Bristol, though a new family law unit will work out of London.

According to the SRA, the Co-op is not the only well-known major brand among the initial applicants, although it says the other major brands to target a conversion may not have the same existing sizeable legal divisions.

Outside of retail, legal insurer DAS has become the first in its sector to confirm that it has applied for a licence to become an ABS. It is widely expected that insurance companies could aim to make huge strides in law as a logical tag on to their existing, entrepreneurial businesses, which could have a significant impact on City law firms that provide insurance law advice.

DAS says it is targeting a conversion in a bid to develop and deliver outside of its current insurance model. Among a number of options it is exploring, it cites the possibility of extending its current legal advice service to provide written advice, for example, via email.

Other firms often viewed as potential entrants to the market include membership services providers like the motor vehicle support firm RAC, which already provides some legal services in relation to personal injury, or Saga, the group that provides a wide range of services to more than 2.7 million customers over the age of 50.

It is also expected that personal injury claims companies will attempt to convert to ABSs in a bid to defend their businesses from the impact of the impending ban on referral fees, which is set to disrupt their business model of selling insurance claimants' details to personal injury law firms.

MDPs 2.0

The SRA also confirmed that there are accountancy firms among the applicants to become ABSs, suggesting the LSA may yet provide another opportunity for the accountancy profession to try its hand at law.

There is, of course, a lot of history here. Expectations that the major accountancy groups would aggressively move into law in the 1990s through MDPs helped spur much of the expansion seen among law firms during that period. Despite some reverses, Andersen and KPMG made substantial progress through their Andersen Legal and K-Legal networks. However, the fallout from the 2002 collapse of Enron, which led to the indictment and break-up of the US energy giant's auditor Andersen, ultimately halted the march of the accounting giants, first through the break-up of the largest legal network – Andersen Legal – and second through the creation of tougher audit standards, which made it more difficult for accountants to cross-sell legal services to their audit clients.

Despite such reverses, many wonder if the era of Tesco law will see accountants dust off their legal ambitions. PricewaterhouseCoopers (PwC) has confirmed that it is keeping the option of merging with its legal arm in an ABS under review. Ernst & Young – whose legal arm E&Y Law is still active – was also floated as a potential taker, but a spokesperson for the accountancy giant in the UK said there are no such plans at present. KPMG and Deloitte say that currently they have no plans regarding ABSs.

But even if the big four have lost interest in law, there remain clear expectations that mid-tier accountancy firms will look to move into legal services, at least in discrete areas such as tax law, where there is obvious cross-over (though it will be interesting to see if the turmoil currently engulfing RSM Tenon, a pioneering listed accounting firm which moved 
into the legal market with its takeover of Mayfair boutique Statham Gill Davies in 2001 – 
and later pulled out of the market – will damage accountants' credibility in the legal sector).

In the accountancy world, the regulator the Institute of Chartered Accountants in England and Wales (ICAEW), is also preparing to become an ABS regulator. Felicity Banks, business manager at the ICAEW, says: "A lot of our member firms are potentially going to be very interested in ABSs. Accountants are very anxious to give the best service to their clients."

The ABS model could also open up opportunities for law firms to tag on accountancy services. Lyceum Capital managing partner Jeremy Hand comments: "MDPs will be spawned, although I think generally accountants will be more open to tagging on legal services to their businesses than vice versa."

The competitor that doesn't look like you

While much of the attention has inevitably focused on the Tesco law model or law firm investment, many observers believe the most influential entrants will be those that explicitly avoid traditional legal models.

Under this analysis, online-based businesses, including companies working with sophisticated legal document assembly products, could easily move into providing legal services to clients rather than law firms. Much attention has been focused on two large US document operations, LegalZoom and the Google-backed Rocket Lawyer.

Many also see potential for large publishers like Thomson Reuters, Bloomberg or LexisNexis to move further from providing legal tools and research material into actual service delivery. Susskind (pictured) in particular sees this group as hugely significant, commenting: "There is a saying: 'The competitor that kills you doesn't look like you'."

There is also clear interest from outside investors in backing businesses focused on standardising legal services such as legal process outsourcing (LPO). A prominent example of this trend was seen this month in the acquisition of leading legal outsourcer CPA Global by buyout house Cinven for a reported valuation of $1.5bn (£964m).

There is also a wider point about the impact of the LSA that is now beyond doubt. The shake-up has already done much to support experimentation with new models of legal services provision than ventures strictly designed for the new regulatory framework.

As has been much commented on, the creation of the high-profile legal franchise QualitySolicitors was possible under the old rules (as were some forms of law firm acquisitions by companies), but it has taken the jolt of the LSA to encourage the legal industry and outside backers to take such concepts seriously. Many of the ideas and models that are now gaining ground had previously been abortively used in different forms but now look to be gaining a critical mass.

A key additional factor is the impact of a sustained period of economic turbulence, which has brought new pressure to deliver value on an industry that had become used to easy growth. By wide consent, there is mounting pressure from bluechip clients for City law firms to take steps to cut costs, including a willingness to break up their procurement to different kinds of providers.

Susskind argues that the impact of the LSA is in part an additional force encouraging this drive towards 'alternative sourcing', covering LPOs, offshoring, paralegals or imaginative use of technology – tactics which are often being deployed by law firms themselves.

Osborne Clarke managing partner Simon Beswick says: "We have seen quite a bit of change coming through anyway, as clients want more for less and have the leverage in their relationships with law firms. The new entrants will simply add fuel to the current trend of providing more for less, but it is important to note that they didn't start the trend. We, like our competitors, need to respond to our clients' changing requirements."

Concrete examples have seen leading firms such as Allen & Overy and Herbert Smith experiment with models borrowed from the LPO sector, with the creation of their own support arms in Belfast. This trend is already visibly changing the business model of law firms that have little or no need to secure outside capital to fund their expansion.

By definition, the more law firms move away from their traditional partnership model – underpinned as it is by the associate track, billable hours and a myriad of other structures – the more open they are to new business models.

End game

Making a final judgement on the LSA and the related shake-up in law remains difficult. The topic has frequently been the subject of hype and exaggeration. Yet looking at the pressure to modernise from many different directions, it is apparent that the Act looks not only certain to usher in fundamental change but its mere presence on the horizon has been enough to instigate substantial shifts in the profession's mindset over the last five years.

It may well be that law firm investment has been a red herring all along. It is hard to see much appeal in terms of raising capital for top 20 firms. The evidence from the handful of cases in which law firms have been sold is yet far from compelling. But even if other models come to dominate, there is already greater willingness among major law firms to experiment with new models and capital structures.

It is also hard to sustain some kind of artificial barrier between retail and institutional legal services. Many of the new entrants to the market are also interested in advising business clients, and outside investors are as interested in volume work – which often involves advising large companies – as they are in tackling high street law. And if only a small part of the potential to shake-up the provision of high street law is fulfilled, the pressure to move into the commercial legal market will quickly build.

This revolution has proved slower to take hold than many have predicted – and its impact will probably continue to lag behind the pace claimed by its more excitable supporters – but, in essence, many of the predictions regarding the brave new world of law have either already materialised or are demonstrably starting to.

Lyceum's Jeremy Hand, for one, is convinced that a major shift in the market is occurring: "Nothing happens quickly in the legal industry, but long term I think that this regulatory shift will make a significant structural change."

Irwin Mitchell's Pickering takes a similar view: [The City's top law firms] are established and I imagine well-funded, but my personal view is that they will eventually face competition from other new players with different funding structures."

One way or another, the revolution will soon be at the door of most and perhaps all of the major players in the UK legal market.

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A sound bet – financiers looking at the law

While there has been much (sometimes fanciful) discussion regarding the prospect of private equity houses and banks investing in the legal sector, only a few houses have yet to publicly signal their commitment.

Lyceum Capital was the first private equity firm to publicly confirm its intention to invest in legal services, with the mid-market buyout house appointing Jomati founder Tony Williams and technology consultant Richard Susskind to an advisory board in 2008 to help it identify opportunities to invest in law. Lyceum originally looked to invest in law firms with revenues in the £20m range that wanted to expand, and Lyceum managing partner Jeremy Hand (pictured) is credited with personally undertaking a detailed investigation of the legal industry as part of the buyout house's plans.

However, so far progress has been relatively slow, due in part to the ingrained conservatism among law firm partners about selling stakes to outside investors. Hand comments: "We are looking at quite a few opportunities at the moment. There are a good few things to happen in the short term but also a lot being cooked up for the future. We have been talking to quite a few law firms for several years now, so the dialogues we are now in are with firms that are actually interested in taking external capital."

Other buyout players with confirmed interest in legal services investment include Palamon Capital Partners, which is understood to be in talks with at least one law firm about an acquisition. Palamon already hit the headlines in October last year when it became a majority shareholder in high street legal franchise QualitySolicitors.

The undisclosed investment is believed to be for more than £10m but, rather than going directly into a law firm, it will go into the business backing the high-profile franchise of high street law firms, which already has 220 branches with combined revenues of around £300m. QualitySolicitors is intending to use the funds for operational purposes as part of its ambitious bid to build a 1,000-branch national network.

Other investment houses to show an interest in the legal profession include the bank Investec which, in late 2010, announced plans to back law firms looking to take advantage of the Legal Services Act (LSA), though it is not expecting to take equity stakes or have a say in management decisions. Other houses cited as likely to invest in law include Duke Street and LDC, which have respectively been linked to investments in insurance law firms Parabis Group and Keoghs.

On the advisory side, Espirito Santo Investment Bank raised its profile with its mandate to advise Irwin Mitchell on raising outside capital, while the broker Peel Hunt last year produced a widely read briefing on the implications of investing in law firms.

However, there is no doubt that the hurdles inherent in law firm investment – reconciling the competing interests of two different groups of shareholders, partners on one hand and outside investors on the other – have proved hard to overcome. Many see a fundamental tension between the desire of partners to control their business and the needs of investors. In addition, law firm investment raises difficulties in terms of structuring an effective exit.

While a firm would benefit from a huge motivational 'carrot' ahead of a public offering, many see difficulties in retaining senior lawyers after they had received such a windfall, while law firms having to pay profits to outside investors could struggle to compete with rivals retaining all their revenues.

But Hand says there are still a number of opportunities for exit routes: "It is possible to launch an initial public offering or flotation, and you could possibly do a secondary deal with a different private equity firm, or a trade sale or a partial sale. These are all possibilities."

Given that many large law firms have limited need for capital, many believe law firm investment will take a long time to make an impact. In addition, there is a view emerging that investors are more likely to invest in discrete projects, such as arms-length businesses of law firms rather than in the core practices, or in defined initiatives with a clear exit point – for example a law firm tapping investment to help pay for major investments. Many also expect financiers to ultimately show more interest in backing non-law firm structures like LPOs rather than put their money into partnerships in which they will struggle to control their investments.

"Private equity firms are interested in growth over the next five years," observes Susskind. "If you think of what they are looking for, it is already fairly clear that it is not traditional law firms."

But even if private equity and outside investment have yet to make the huge immediate impact some predicted, Susskind argues that the rigour and fresh thinking outside investors have brought to the legal market has already changed the profession.

He comments: "I was impressed with how much thought [Lyceum] put into the legal market and understanding it. Private equity houses are not slapdash, they are thorough. They don't come in with any sacred cows, they are not committed to anything."

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