Will different regulation lead to more legal innovation?

I'm probably headed to the UK in Fall 2017 as Pepperdine Student at their London Campus.  

I'd love to work at innovative organizations.  The UK seems like a promising location for legal innovators because of the Legal Services Act of 2007 (LSA).   Relevant here is that the LSA altered the rules governing how firms that offer legal services can 1) be capitalized and 2) be managed.  Partnership is the dominant model for law firms, but partnerships exclude outside financing by requiring that the partners themselves capitalize the company, and legal partnerships generally forbid any non-lawyer from managing.  

The legal profession is exclusive in the sense of being difficult to enter - most states require a degree and Bar passage to practice.  It's also exclusive in the sense that mastering the law and becoming/staying licensed is incredibly challenging on its own, so law partners are unlikely to have highly sophisticated technological or management expertise in addition to their legal skillset.  This suggests that law firms will under-invest in technology and organizational innovations.   

Shouldn't lifting these restrictions lead to more innovation?  The LSA, by creating Alternative Business Structures, appears to lay the groundwork.  So is more innovation happening?

I first heard about the LSA in passing by reading Susskind's books, and re-encountered it in Remaking Law Firms, both of which are treated in my other posts ( 1 , 2).  Those materials are concerned with whether "Tesco Law", meaning mass-market legal (possibly productized and flat fee) services available to consumers in retail locations through well-known brands, will become prevalent if it's legally permitted.  To be clear, the ABS structure allows large UK corporations to apply for licensing to provide legal services.  If costs for providing legal services everyone needs could come down significantly, "Tesco Law" seems feasible.  A few firms dipped their toes in the water by registering ASB's as soon as they were available, but merely registering doesn't mean much. 

Stephen and Hadfield

I sought out deeper analysis analysis of the LSA and ASB's than what's detailed by Susskind and Remaking Law Firms (the second contains only 2 pages on the LSA).  So far I've found "Lawyers, Markets, and Regulation" by Frank H. Stephen, a Manchester School of Law Professor Emeritus, and "Access to Justice," plus "Legal Barriers," both by Gillian Hadfield, a Professor of Law at University of Southern California.   These materials analyze how regulation affects legal service providers, and therefore incentivizes or punishes innovation.  

Stephen (2013)

Stephen (see link above) predicted the LSA will lead to a technological revolution in lawyering. Here are his best points, which I hope flow logically for the most part:

  • UK has prioritized liberalization since the 80's. 
  • Clementi, one of the players who catalyzed the LSA 2007, suggested that allowing mergers would bring "fresh ideas" about how to do business in a consumer-friendly way to legal firms
  • Consumers who rarely use legal services might value/trust a well-known brand more than licensing by a regulatory body
  • The ASB model might break the circular definition of legal work (legal work is what a lawyer does for you) because by allowing lawyers to work together with those who possess other skillsets (ie. consumer products/branding versus commercial work).  Hadfield makes a similar point 2008 article which focused on the American definition of legal work.
  • In Hadfield's view, the best way for a firm to reliable create value by transferring its capacity to innovate is via merger, because other means invite opportunistic behavior by the transferee.  
  • To illustrate how this has played out in legal - Stephen cities to his earlier work (2002), which details that American law firms developed technology (in the organizational culture/process sense) because of the highly competitive landscape in the USA, and when given the opportunity, opted to transfer that knowledge to German firms, who lacked technology but possessed local knowledge, via merger.  The German firms received innovation, but to ensure the US firms received value in return, there was a merger.
  • As of 2013, major consumer brands hand't entered 'retail law' in Australia, but in Finland, banks offered legal services to their clients on non-adversarial matters at a 25% lower cost than Finnish lawyers.
  • "Consumer law" could be profitable, even serving 'low value' clients, i.e. in welfare law and affordable housing law, by providing specialized service and doing it more cheaply than than big firms.  A consumer brand could achieve economies of scale that are impossible for big law firms, improving access to justice.     
  • Australia has an analog to ISB - incorporated legal practices.  Slater & Gordon, an AU firm, went public in 2004, its stock price rose initially, and it acquired a UK personal injury firm.  (when I uncover the full story I'll update this post).  Today it is in financial trouble, which matters for our purposes because S&G acquired a one of the largest UK Personal Injury firms 

Hadfield (2008 + 2014)

In "Legal Barriers" (linked above, 2008), Hadfield cited American regulation as a barrier to innovation:

  • Section E on page 1714 is where the article begins detailing the American regulatory environment.
  • Pg 1715 outlines the corporate practice of law doctrine and its relation to the ABA commission on multidisciplinary practice.   
  • Legal advice given by law firms must be based on legal reasoning alone.
  • Therefore if a corporation wants to make decisions by taking anything else into account, the onus is on them to assemble the technicians/accounting/management talent who complement legal analysis IN HOUSE, since counsel can't do it for them.
  • Could this be why in-house departments are growing, and organizations like CLOC are becoming so popular?

"Access to Justice" (linked above, 2014), Hadfield detailed a few LSA success stories in support of her assertion that altered regulation in the USA can enhance rule of law.  

  • Footnote 47 links out to a tool that allows you to "Search for Firms" that've been licensed as ABS's.  It would be ideal to view the whole list, but for now you can check if major UK brands have registered and then do your own research.  - http://www.sra.org.uk/solicitors/firm-based-authorisation/abs/abs-search.page - wish it were a list!
  • Footnote 74 mentions a report which found 25% of firms introduced new legal products after becoming licensed ABS's and that the innovations were designed to "extend service range, improve quality, and attract new clients."  

Did Something Go Wrong with ABS's?

LegalGazette UK reports bad news about several of the ABS's.  The last line made me laugh out loud.  

Three questions: 

1) Is there an actual problem with the ABS concept itself, or are investor expectations the culprit?  Taking an analogy from the USA tech sector - in 2000 the tech bubble popped, but 2008-2016 were productive years because infrastructure matured, internet penetration rose, and the industry began addressing more substantial problems/markets.  

2) Was true innovation happening?  Slater and Gordon of Australia, which became the first publicly traded law firm, used ABS rules to make acquisitions in the UK, including an ill-advised purchase of Quindell (now renamed), which was described as "a provider of sector leading expertise in Software, Consulting and Technology Enabled Outsourcing in its key markets being Insurance, Telecommunications and their Related Sectorsin CrunchbaseA Sydney Morning Herald article which describes the S+G lifecycle is worth a read.  Looks like a charismatic founder worked his (unsustainable) magic with a public company in years 2007-2015--a helpful reminder that innovations often drive with a merger, but the opposite isn't necessarily true.  

3) How many of the ABS's made pioneering mistakes that the settlers can clean up later?  

Specific Firms mentioned in Stephen and/or Hadfield:

I would like to speak with these firms and discover whether they're interested in a student extern who legal writing and research skills and experience in innovation, internet entrepreneurship, and marketing. 


PS:  Here's the link to Pepperdine London

EDITED:  Upon reflection, retitled the post.  "Different regulation" is better because it's important for the legal profession to be regulated, the relevant concern is in what way.