Healthcare GC Ashwini Kavadimatti explores whether a management services organisation model would provide a better engine calibration for law firms, where PE investments can drive non-legal operations allowing lawyers to achieve better performance
An adage holds that a lawyer’s sole stock-in-trade is their time and advice. While that may remain true of what the lawyer ultimately offers the client, there have been tectonic changes in how such time and advice are organised, delivered and scaled. Modern law firms require sophisticated financial management, billing systems, business development with a focus on revenue, growth and brand, technological infrastructure, and talent management. India’s legal sector is estimated to be worth USD2.49 billion, with growth in size and scale necessitating specialised operational expertise.
Indian firms have consequently begun supplementing traditional partner-led management with non-legal CXOs tasked with running these increasingly complex business functions. However, as India’s elephant economy gathers pace, its law firms remain tethered by regulatory shackles.
The shackles have also manifested in the form of difficulty in hiring chief technology officers and chief digital officers. The profession remains highly regulated by the Advocates Act, 1961, and the Bar Council of India Rules, serving as the collective governing framework for lawyers. The permitted structures of legal practice in India include sole practitioners, partnership firms and limited liability partnerships.
MSO model skirts fee sharing
Rule 2 of chapter III, part VI of the BCI rules bars non-lawyer ownership, providing that an advocate shall not enter into a partnership or “any other arrangement” for sharing remuneration with a person who is not an advocate. This restriction is reinforced by rule 49, which limits practising advocates from taking up full-time salaried employment. The result is a regulatory model prohibiting alternative ownership structures that confines ownership and economic participation largely to advocates, even as the business of running a modern law firm becomes increasingly specialised.
In the US, however, private equity (PE) has begun to penetrate the legal services market despite similar restrictions on ownership structures. Charlesbank is currently in talks to acquire a stake in Wood Smith Henning & Berman, a full-service US-based law firm. Similarly, Uplift Investors has invested in multiple personal injury law firms in the US. Various other US law firms are reportedly engaged in discussions for PE involvement.
The most remarkable commonality across all these deals is the nature of the arrangement. Rule 5.4 of the American Bar Association Model Rules of Professional Conduct is similar to its Indian counterpart in prohibiting fee sharing with non-lawyers, non-lawyer firm ownership and third-party control over a lawyer’s professional judgement in a single fell swoop.
The arrangement of the American PE law firm deals is characterised as a “workaround” to this provision, through the management services organisation (MSO) model.
MSO structure separates legal operations
The MSO arrangement is a modern variant of the business process outsourcing (BPO) model. It has its origins in healthcare, emerging as a means of separating the regulated provision of medical services from the commercial infrastructure required to operate a practice, particularly in jurisdictions that prohibit non-physician ownership or control. The entity providing medical services would be vested in the physicians, and a separately owned MSO would supply administrative, financial, technological, operational and management services.
The same structure is now being transposed to legal services, where lawyers continue to own and control the law firm and provide their services, with the non-legal operations being bifurcated to function under a separate MSO in return for a management fee. PE is invested in the MSO, rather than in the law firm interest itself, resulting in a structure where the investor acquires ownership in the operational processes and not the legal practice.
MSOs should be distinguished from both an alternative business structure (ABS) and a multidisciplinary practice (MDP). The UK pioneered the practice of ABS law firms, where non-lawyers acquire ownership interests in the legal practice itself. In MDPs, lawyers and members of other professions participate within an integrated professional services structure. Both models permit direct ownership and management of law firms by non-lawyers, albeit in different ways. MSOs, by contrast, insulate the legal practice by allowing ownership and control of solely the business infrastructure that supports it.
MSO viability hinges on separation
The governing framework for lawyers does not expressly answer whether an MSO arrangement is permissible in India. Lev E Breydo, an assistant law professor at William & Mary Law School, terms it as a workaround to stringent laws in the US context, and the same logic appears applicable in India as well. This is on account of the MSO model’s premise being the separation of legal and non-legal services.
On this issue, Bar Council of India v AK Balaji provides an important foothold. The Supreme Court held that the practice of law extends beyond litigation to include non-litigious work such as giving opinions, drafting instruments and participating in conferences involving legal discussion. While assessing whether BPO companies providing integrated services are covered by the governing framework for lawyers, it held that services that do not directly or indirectly amount to the practice of law fall outside the application of these laws.
It is this distinction that supports the blueprint of the MSO structure, as administrative functions exist outside the regulated practice of law. Consequently, the Supreme Court’s verdict in Balaji draws the outer boundary for such distinction, to be decided on a case-to-case basis.
MDP and ABS structures are unequivocally incompatible with the existing framework as they entail ownership and control over the legal practice. The more serious difficulty would be with respect to the determination and payment of the management fee, lest it be construed as indirect “sharing of remuneration” prohibited under rule 2.
A PE-backed MSO may also attract foreign investment considerations if it constitutes an inbound investment. The Foreign Exchange Management Act (FEMA) framework does not prohibit BPO services to law firms in any shape or form.
Clause b(iii) under paragraph 1 of schedule I of the Non-Debt Instruments Rules, 2019 (NDI rules) categorically outlines that for those activities not listed below or not prohibited under the rules, foreign investment is permissible up to 100% on the automatic route. This is also subject to applicable laws and regulations.
The legal sector does not feature in the NDI rules, presumably since non-lawyer investment is already considered to be barred under the governing framework for lawyers. The BCI’s significant restrictions on foreign involvement pertain to “advisory, transactional, consultancy or related professional legal work”, which relate to legal practice rather than BPO tasks. The NDI rules’ deference to this governing framework highlights that the FEMA analysis would ultimately turn to the same above-mentioned anterior question of permissibility.
Thus, where the BPO services are clearly bifurcated from the legal services like legal process outsourcing, there is no non-lawyer influence over legal judgment, and the management fee arrangement remains compliant with rule 2, the NDI rules do not appear to create any additional sector-specific prohibition.
MSO capitalises law firms sustainably
Existing partnership structures often restrict the ability of firms to build institutional capital, hindering their capacity to finance expansion, technology and other long-term investments. PE involvement through MSO structures creates separate vehicles to raise external capital for non-legal infrastructure. This simultaneously alleviates the firm’s financial burden while also attracting funds.
This model also offers an edge over MDPs, which raise concerns by bringing existing law firms into direct competition with global behemoths such as the large accounting firms that offer integrated professional services. This risk is substantially reduced under the MSO model, as the legal practice is kept insulated without any form of integration.
Separate BPO entities could also facilitate more sophisticated corporate governance by involving non-lawyer executives in the management of the MSO. This would bring expertise in finance, strategy and operations without exercising control over legal strategy and practice. The strongest case for this model emerges from AI. Law firms may be unable to finance investments in knowledge management and proprietary technology by themselves, but an externally financed MSO could enable firms to scale technology.
The desirability of the model must be balanced with the risk of what Breydo considers “control creep”, where the lines between the MSO and law firm get blurred. This distinction must be preserved through appropriate governance approaches, with Breydo’s work, policy reports and existing scholarship being formative in this regard. Safeguards include screening for investor eligibility, structural independence and ongoing supervision.
MSO balances growth and ethics
The MSO model presents a potentially viable middle path between India’s existing restrictions and the increasing commercial demands of modern legal practice. However, its permissibility and desirability ultimately depend on how well both entities toe this very line. The challenge for regulators would be to create and enforce ethical standards that account for scale and growth without diluting the nobility of the profession. After all, while a lawyer’s stock in trade may still be time and advice, the MSO simply separates the stock from the store.
Ashwini Kavadimatti is general counsel at Healthcare Global Enterprises, which operates a network of multi- specialty hospitals and cancer centres in India and Africa. She was assisted by Simone Avinash Vaidya, a fourth-year student at National Law University, Mumbai.
