Dominating the high street

Expert opinion and research reports suggest that the Legal Services Bill (LSB) will push the legal profession into meltdown '“ particularly for consumer services '“ and that high street firms will become extinct. But is it so bad, and what are small and medium-sized firms doing to protect themselves in advance of the potential new competition?

In March 2007, Professor Mayson, director of the College of Law's Legal Services Policy Institute, gave a talk titled Legal Service Reforms: Catalyst, Cataclysm or Catastrophe? where he argued that the change need not be catastrophic but would involve the redistribution of:

• clients and revenues among law firms and new entrants;
• work from qualified lawyers to paralegals and from people to technology systems;
• profit from law firms to new entrants and from short-term income to longer term capital growth; and
• ownership and capital either to fewer partners or open up ownership.

Professor Mayson warned that as many as 3,000 smaller firms (particularly those with less than 10 partners '“ of which there are 8,500) would disappear. The Law Society estimates at that time were for at least 800 legal aid firms to close.

At the start of September research by Intendance/Sweet and Maxwell into the views of 90 senior legal respondents suggests the Act will have a seismic impact: high street firms will become a rarity by 2015, replaced by 'Tesco law' competitors wielding their branding, retail distribution networks, technology infrastructure and economies of scale. Forty per cent of barristers and solicitors interviewed believed that most high street advice will be delivered online. But are these views typical amongst small-and medium-sized firms?

John Gould, senior partner at 44-partner Russell-Cooke in south-west London and head of its commercial litigation department, holds a more measured view.

'It is a very long time since legal services were only provided by lawyers,' says Gould. 'Historic examples range from the pedestrian provision of probate services by banks to the highly volatile structures developed for claims management. In estate agency, the institutional rush into ownership produced costly failures. On the other hand, financial services have undergone a transformation with the substantial elimination of face-to-face provision.

'Lawyers are expensive to employ so if services can be organised as standard products, large commercial organisations may be able to finance and organise factory or call centre-style provision with lower direct costs per transaction. They will need to operate at lower wage costs to compensate for higher indirect costs for marketing and they will need to 'portion control' the service provided. So this is a particular threat to medium-sized firms if their business model already depends on the same approach.'

Gould concludes: 'Highly experienced lawyers undertaking tasks for which neither their qualifications nor their experience are necessary will undoubtedly come under increasing pressure. Given, however, the degree of competition that already exists within the market, one may doubt the significance of this endangered species.'

It is hard to defend inefficient firms who charge clients more than necessary to make up for their failure to modernise. But if the reforms dispense with such operations then surely that must be for the greater good of both consumers and better managed law firms who have invested in technology and updated their practices?

Mark Day, practice manager of Thomson Snell and Passmore, a regional firm in Kent that has grown 60 per cent in the past five years, echoes John Gould's views.

'Where and when any effect will be felt will vary widely between different sizes and natures of practices. Tesco formally entered the property market in July and this is a direct threat to many high street firms with a high dependence on conveyancing. Higher end work and levels of personal service will differentiate many law firms but there is no room for complacency. One general side-effect of the introduction of major brands is widely anticipated to be an increase in the incidence of fixed prices'.

He continues: 'Another obvious and worrying response has been the sharp increase in defensive merger activity. Size isn't everything '“ you still need a clear strategy to maintain long-term profitability. Unfortunately, the historical success rate for any merger is low and with the relatively low level of experienced professional management in smaller law firms, the likelihood of many of these tie-ups being successful is lower still. If you combine failed mergers with the pressure from legal aid reforms, then sadly, more smaller firms may fail.'

Matthew Hansell, partner at the Birmingham office of Mills and Reeve sees the impact restricted to particular segments of the market: 'Tesco and other big companies may make further inroads into the wills and conveyancing markets although they can do this already. It will open up the market further regarding personal injury and insurance claims. It will put further pressure on solicitors in small firms at the commodity end of the market to provide their services even more cheaply. Even the larger firms operating 'law factories' may find it tougher'

'Smaller firms need to move up the market and provide advisory services. But these are things that you can not just suddenly do '“ you need to have invested in the market, made a commitment to do private client work and recruited and trained the right calibre of staff. The advisory market is well established and heavily competed so new entrants now will find it extremely tough. '

Business as usual

Other firms regard the Bill as having little impact. Frances Pierce, a lawyer specialising in catastrophic personal injury claims at Rix and Kay (a 16-partner firm in Sussex) said: 'The LSB doesn't really affect my very specialist area '“ its impact will be mostly on claims farmers, smaller claims handlers and the bulk providers of personal injury work'.

'There are opportunities for us '“ for example, the chance to work more closely with accountants,' explains Emma Moore, associate in residential property at 23-partner firm Barlow Robbins in Guildford, Surrey. 'But having specialised in residential conveyancing for many years, we are used to the competition '“ from licensed conveyancers to the big conveyancing factories. It is a commodity product at the lower end of the market and is becoming more price sensitive. Our emphasis is on a more specialist service to the upper end of the market'.

Deborah Jeff, head of family at 18-partner London firm Seddons commented: 'Many of our clients come to us from other firms '“ because they were passed around between different lawyers, because they did not feel that their lawyer was taking sufficient interest, that there was a lack of empathy or that they did not feel they could call up half-a-dozen times a day. In something as personal as divorce, people want the sort of relationship that they will only get through a traditional solicitor-client relationship.'

She concludes: 'It will be difficult to provide that level of support through the heavily systemised, streamlined process typical of mass consumer service businesses. Our size is an advantage because the client gets the one-to-one service that is often lacking from larger practices and mass roll-out. The client in those circumstances feels 'semi-anonymous' and as if they are just a number.'

Time for change

'The LSB will certainly have an impact on the legal sector and on the expectations of those who buy legal services, both individuals and corporates,' comments Nigel Higgins, marketing director of 52-partner firm Bircham Dyson Bell. 'As with all change the management consultants have been quick off the blocks organising conferences which have promoted new multi-disciplinary business models and predicted levels of significant investment from unnamed sources who are supposedly keen to invest in the sector.

'Much of the ongoing debate has centred on the impact on the individual consumer and the threat of commoditisation. Co-operative Legal Services has already stolen a march by offering wills, personal injury and conveyancing to the mass market. But will this 'supermarket' approach have any impact at the top end of the private client market?

'Like others my gut feel is that any effect will be limited. There are various reasons for this: the complexity and international nature of their affairs and the need for bespoke solutions. In many incidences firms have been advising clients and their families for many years and the knowledge of the client's affairs and the trust and relationships built up over time is a strong barrier to change. But this does not take into account what others might already be plotting '“ for example, the major private bank that acquires a stake in a major private client law firm, creating a new firm with an enhanced range of services.'

David Maxwell, head of private client at Seddons sounded a warning bell to potential new entrants: 'Commercial organisations eyeing the legal market will quickly find out that legal practice is not as profitable as generally supposed. Lots of smaller firms have tried in the past to expand by opening branch offices only to find out that without direct hands-on day-to-day control it is very difficult to make a legal practice profitable. It requires an intense focus on recruiting and retaining the right calibre people, investing in technology, winning the right sorts of clients and watching margins like a hawk in an extremely competitive marketplace. It is hardly the sort of cash cow opportunity to attract most commercial organisations.

'There are some deep misunderstandings about the legal profession '“ it is not about the few fat cats in the City firms earning millions but about the majority of high street practices struggling to survive. Often law firms receive poor financial rewards and no credit for the huge contribution which they make to the UK by oiling the wheels of civil society'.

Looking closely at the numbers

The threat of law firm closures is not new. Hansard reports a Parliamentary exchange back in January where it was noted that while 5,657 firms of solicitors had closed in the past three years there had been 6,093 new firms established '“ a net gain of over 400.

While the UK legal market might look attractive to outside investors at £20bn, a massive £14bn is generated by the UK's top 100 firms.

And though many fear the strength and might of Tesco, it is important to recognise that there is a small but growing reaction against the giant's domination of some localities and its monopolistic policies that have destroyed independents and effectively removed choice for many consumers. And as many will point out, while Tesco thrives so too does Walmart-Asda, Fortnum & Mason, Harrods and numerous specialist and independent food stores.

Is the legal market in denial about the potential impact of the LSB? Or are they right to think that the firms that are well managed, efficient, focused on particular markets and with a careful eye on client needs have nothing to fear?