This opinion piece adds to the Oxford Project discussion by focusing on developments in the legal services marketplace in New South Wales and how regulation has been tailored to respond to such developments. The regulatory response, which focuses on entrenching professionalism, integrity and ethics, encourages individuals to embrace the concept of the ethical gatekeeper by adopting and maintaining their own ethical infrastructure that allows profit and ethics to peacefully co-exist. Part 1 of this Opinion looks at the commercialisation (including commoditisation) of law and how the legal services marketplace has changed over time. Part 2 of this Opinion will then look at how regulators of the legal profession have responded to the change.

The Commercialisation of Legal Practice

Over the last few decades we have witnessed a remarkable change in the way legal services have been and continue to be structured and delivered globally. This change we are witnessing has been facilitated by three important factors – regulation, technology and cost. Legislation enabling law firms to change their traditional partnership structure has allowed practices flexibility to create novel structures to suit market needs. The impact of legislation has been augmented by developments in technology that have made it easier for law firms to operate virtually, using customised software or standardised web 2.0 tools like Skype and online file management applications. Thirdly, the change has also been facilitated by the rising cost of legal services and the attempts of some corporate law firms to mirror their corporate clients in terms of structure, drive for growth and service delivery.

Over the past decade, the legal profession in New South Wales has undergone a formidable change in both size and structure. Traditionally, solicitors in NSW, like many other common law jurisdictions, practiced as sole practitioners, or in partnership with other lawyers and this remained the dominant legal structure for many years. However, since 1999, there has been a notable move away from this structure toward more innovative alternative business structures (ABS), including incorporated legal practices (ILPs), multidisciplinary practices (MDPs) and publicly listed law firms. The move was sparked by the introduction of legislation in NSW permitting incorporation and public ownership of law firms. Adoption of alternative business structures has also been driven by a growing perception that the traditional structure of law firms no longer meets the needs of many practitioners and clients.

This perception is not confined to New South Wales or, indeed, Australia. Similar sentiments have been – and continue to be – expressed by commercial clients, the legal profession, and the accounting profession in the United Kingdom, the United States and Canada. As a result, there is global recognition that legal practice and the regulation of the legal profession must evolve in order to keep up with the changing demands of the market. 

In NSW today there are over twelve hundred ILPs (including MDPs) in the legal services marketplace (representing 30% of legal practices). There are a number of reasons as to why incorporation has become so popular. Firstly, ILPs offer limited liability for their partners (limited to their investment in the practice), as those partners become shareholders. Secondly, there are a number of financial benefits in a corporate structure, including tax advantages, favourable superannuation and redundancy arrangements. Thirdly, the ILP structure provides better options for managing a legal practice.

The majority of ILPs are either sole practitioners or firms with three to ten partners. Several of the large firms have also incorporated in NSW. Incorporation in NSW has taken a number of different forms. These have included multi-disciplinary practices, which provide a one-stop-shop for clients offering for example, legal, property and financial services as well as at least one firm that has franchised its practice.

Law firms have also used incorporation to attract external funding through public listing. In May 2007, Slater & Gordon made legal and corporate history when it became the first law firm in the world to list its entire firm on the Australian Securities Exchange (ASX). One other law firm in Australia, Integrated Legal Holdings (ILH), has since listed on the ASX, and a number of other firms have expressed an interest in doing so.

Slater & Gordon, importantly, included a hierarchy of duties in all of their constituent documents. This hierarchy clearly states the primary duty of the directors is to the court, the secondary duty is to the client and the tertiary duty is to the shareholder. The importance of this hierarchy will be explored in Part 2 of this opinion.

Ancedotal evidence suggests that whilst other firms in Australia are interested in attracting external ownership there are a variety of reasons as to why they have not pursued this option. Some of these reasons include branding issues.

Adding to these structural changes has also been a change in legal practice through the use of new technologies. Outsourcing has fundamentally altered legal practice globally and domestically. Australia has become well entrenched in the legal outsourcing market (valued at $640 million globally) as both a provider and user of outsourcing. Initially, outsourcing was used to perform basic legal administrative functions, whereas today, complex legal research, due diligence, contract management and negotiation, and intellectual property services are also being exported. The work of lawyers, paralegals, legal secretaries, and litigation support personnel are all capable of being performed by legal outsourcing companies.

There are a number of different types of legal outsourcing arrangements that exist in the Australian legal marketplace. Legal work can be outsourced directly to subsidiaries of the firm. Law firms can also hire a foreign law firm to undertake the work. Alternatively, a law firm can employ a third party vendor, known as a legal outsourcer (LO). The work conducted by an LO may be undertaken onshore (within Australia), near shore (e.g. New Zealand) or offshore. Over the past few years, global LOs such as Pangea3, Clutch Group, CPA Global and Integreon have expanded their reach into the domestic legal market, particularly at the large law firm level -firms such as King & Wood Mallesons, Ashurst, and Corrs Chambers Westgarth have all recently established agreements with offshore LOs to outsource repetitive due diligence and discovery tasks.

Technology has also brought to the legal services marketplace new ways of servicing clients and managing practices. A range of technology exists to facilitate law firms to operate virtually today through specific legal online management systems that offer document management and storage platforms, secure document and information exchange services, secure email networks, digital dictation services and billing/timekeeping services. A number of online management systems provide Trust management, general practice accounting, time recording and simple payroll services for users.

For legal practices wishing to have a purely virtual practice, specific cloud computing software can be installed allowing legal practices to store client data, financial records, legal documents, and other information on the Internet, rather than house data in servers physically located on their premises. Several providers allow clients to discuss matters online, download and upload documents for review, diarise, handle billing, invoicing, and payments online, complete online forms, and handle other business transactions in a secure digital environment. These providers do so by offering users a secure, password-protected client portal enabling clients to interact with a firm online, view documents drafted online, pay legal bills via an on-line payment system, look at documents related to their matter 24/7 via web-based access and be notified of important events about their matter by logging into the website.

Social media also plays an important role in legal practice’s today. Social and professional networking services such as Facebook, LinkedIn and Twitter are being used by legal practitioners both in Australia and overseas to create online profiles that contain personal information and legal opinions, which can be made available to anyone with an internet connection or who is a member of the networking site. For example, a legal practitioner may create a Facebook profile that is accessible to family, friends and prospective clients at the same time. The legal practitioner may then post professional announcements that are shared with all of those people.

Whilst these developments have broadened the delivery of legal services and enable practices to adapt to market forces, they have also brought concern that the commercialisation of legal practice will diminish the profession and bring it into disrepute. Commercialisation, it is said, can fuel not only profit but also greed.

It is undisputed that today’s lawyer faces a myriad of ethical challenges in light of the ever increasing commercialisation of legal practice. The commercialisation of legal practice brings to bear situations for lawyers in which competing duties such as the duty to the court and the administration of justice and the duty to the client need to be considered and weighed against each other.

In our experience the ethical challenges posed by commercialization can, at least in part, be addressed by an effective and responsive regulatory regime that creates a framework for instituting ethical behaviour, understands market dynamics and promotes the professionalism of practitioners. This framework will be discussed in Part 2 of this Opinion. 

This opinion was co-authored by Tahlia Gordon, Research and Projects Manager at the OLSC