A year ago today, on May 21, 2007, Australian personal injury specialists Slater & Gordon became the first fully listed law firm in the world. The listing was closely monitored by law firms in the UK, which, at the time, had one eye on the Legal Services Bill as it progressed through the legislative process. One year on, with the Bill having become law, what is there to learn from the Slater & Gordon experience?

Slater & Gordon raised A$35 million (£14.6 million) by floating 35 million shares at A$1 each. The shares began trading at a significant premium and rose to a high of just under A$2 in September 2007. Since then the shares have fallen back to A$1.35 but while this decline looks severe it closely follows the fall in the ASX200 average, which fell by a similar amount over the same period.

The fact that the share price has tracked the overall market suggests something that some lawyers may or may not want to hear: the market views a legal business in the same way as any other listed business.

Indeed, the presentation the firm gave to the markets on its half-year results does not look dissimilar to what one might see from any other business with financial highlights that focus on the growth in income, EBIT, net profit after tax and earnings-per-share.

Slater & Gordon’s business is heavily focused on personal injury work. Its strategy was clearly set out in its half-year results presentation:

1) To lead consolidation of national personal injury markets;

2) To exploit the power of its brand; and

3) To build efficient scaleable systems and processes to support the growing business.

So what does this suggest will happen in the UK once the regulatory structures are put in place that would allow a UK law firm to float?

There is little doubt that we will, in due course, see a floated UK law firm. The experience of Slater & Gordon suggests that it is viable. Furthermore, the wide range of UK listed professional service businesses — management consultants, patent attorneys, architects and chartered surveyors — suggests there is no reason why lawyers too should not have their day.

However, the market would likely only support a relatively small number of such firms since a significant amount of the additional value would be derived from economies of scale.

But flotation is only the tip of the iceberg. It may be the most visible illustration of outside ownership but it is likely that the greatest impact on the legal services market will be below the waterline, with outside ownership leading to trends in the legal services market that will be felt by the majority of legal businesses.

The first trend will be the increasing distinction between commoditised and “specialist” legal providers. The former predominate in the consumer market where high street practitioners provide high-volume, less complex services. The specialist services providers are those focused on business to business offerings.

In the case of commoditised legal services, competition will largely be driven by price. Economies of scale will make it difficult for all but the largest to compete. The highly fragmented market will change beyond recognition with the number of small law firms likely to decrease exponentially. The current firms in the market will need to adapt quickly if they are to compete in the new landscape. They will need to look hard at their existing business and operating models and establish quickly how they will compete against both the possibility of significant incoming players and the larger existing players who take advantage of outside funding. Those firms that don’t adapt won’t disappear overnight, but they will wither away and relatively quickly too.

What of those who provide specialist legal services? Until quite recently, conventional wisdom was that these firms would remain relatively untouched by the opportunities arising from the Legal Services Act. However, market sentiment is changing.

It has been reported recently that investors have been knocking on the doors of some of the 100 largest law firms, putting forward investment proposals to them. With the intoxicating cocktail of willing sellers, willing buyers and smart lawyers some deals will surely be struck.

While the regime that will allow the “Alternative Business Structures” set out in the Legal Services Act is not expected to be in place until 2011 or 2012 it is unlikely that firms will wait for the new legislation before taking any action, with a variety of interim options already being considered by players in the market.

Jeremy Black is an associate partner in the professional practices group at Deloitte

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