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Articles and opinion

I have been fascinated by disruptive business models since advising the founders of an innovative insurance company on the sale of their business, which undoubtedly caused some disruption in the insurance sector with their new approach. Some years later, I spent time working with the IT architects of SBC Warburg  who applied the power of the internet technologies to introduce online trading direct to stock exchanges.

So what is a disruptive business model?

There are many definitions and a great deal of academic interest and discussion, but to keep it simple:

‘ A disruptive business model is one which radically destroys an existing way of doing business by creating superior value whether by substantially changing the value proposition or substantially reducing the cost of providing the product or service.’

Disruptive business models are important in the private wealth industry as they can create wealthy entrepreneurs very quickly and also destroy the value of significant holdings in traditional providers sometimes overnight.

It is also a key theme of the emerging markets investment story. Who needs fixed line telephony in China with ¾ billion mobile phone subscribers?

Technology is often a key enabler of a disruptive business model as is the blurring of boundaries between disciplines and the addition of a creative process.

The internet has disrupted so many industries now and another good example in the financial services sector is Wonga.com, which reduced the loan approval process to 15 minutes through intelligent data systems.

What are the implications of disruptive business models for individuals, legal practice and society?
 
Clearly, the real advantage of disruptive business models is that consumers get access to new and innovative products, services and opportunities.

Dahabshiil has created a bank for Somaliland, a country not even officially recognised and without infrastructure, by applying money remittance network to mobile phones leapfrogging the fixed line stage.  No-one can doubt the value created for Somali society which has been transformational.

Disruptive businesses often create flexible jobs and provide wealth and rewards to innovators and investors. They shake up the competition and, frankly, are a lot of fun.

However, if you have an urge to be disruptive in your business sector you need to be aware of certain legal pitfalls. A number of disruptive business models are predicated on the effective use of data management and profiling, so you need to take care of this and have regard to regulations relating to data protection, privacy and freedom of information.

The management of identity-related data is not something we have managed well as a society so far. For example, a recent Information Commissioner report on Google and Streetview raised concerns regarding individual privacy.

The financial services industry regularly employs senior staff subject to an enhanced CRB check. How many of you knew that the police can put unsubstantiated allegations onto CRB records that can be difficult to remove? Recently, one lady who lawfully attended an animal rights demonstration found herself refused a position on the basis of unsubstantiated information placed on her file. This was only removed when she had received leave from the courts to apply for a judicial review.

The second issue is the protection of key data relating to clients, contacts and knowhow. Do you have adequate IT security policies in place which keep up with the proliferation of mobile computing and smart phones?  Do you have key contractual protections in place to protect your data assets or are you unwittingly, setting up assets for your competition? Many disruptive business models keep costs down by employing home-working staff.

However, employment law struggles to keep up with this growing trend. How do you manage your health and safety obligations for your home-workers. How do you outsource sensitively?

Disruptive business models dependent on key talent also struggle with the allocation of rewards between founders and key employees.  This allocation is further exacerbated for financial service businesses by the FSA requirement that certain businesses award deferred equity in lieu of cash bonuses. Add to this consideration of the impact of the current tax regime for high income earners and the possible impact that might have on London.

Another key trend that I have noticed amongst entrepreneurs who have made their money from disruptive business models is that the speed at which they accumulate the wealth creates problems. Traditional advisers move quickly to put structures in place based on the needs of previous clients, but these may not provide the flexibility these serial entrepreneurs need.

On the sale of a disruptive business, we tend not to be asked to set up a family office to manage their wealth and succession planning, as would be typical for a traditional business.  The entrepreneurs are usually still young and ask us to create frameworks that allow them to continue building or investing directly into businesses. They also need investment managers who are able to ensure that their portfolios are not correlated with the risks run by their operating businesses. In short, they need a framework to control their business, investment and philanthropic interests that gives them flexibility, transparency and control as well as asset protection and tax efficiency.

On the other side of the coin, we are also seeing traditional businesses who are being affected by disruptors and are forced into either fundamentally rethinking their business models or selling up.  If you see a competitor disrupting your business model you need to decide very quickly whether you are going to retaliate with an even more devastating response, sell or rather counter-intuitively see how you could collaborate together in a joint venture.

We are finding that creative collaborations are requiring a new more relational approach to contracting and are enjoying developing joint venture arrangements which permit all parties to share in any capital as well as revenue reward.

Disruptive business models certainly create value and innovation and in doing so they present professional advisers with a number of new challenges too!