Racing to beat the accountants
Law firms need to prove their worth to the small business sector before the competition gobbles up the market, writes Mark Stobbs
A lot of attention has been given to the legal needs of small and medium-sized enterprises (SMEs) of late. Research by the Legal Services Board (LSB) was cited as a reason for the Competition and Markets Authority (CMA) review of the legal services market. At a recent Law Society risk and compliance conference, the Solicitors Regulation Authority's (SRA) Paul Philip was quoted as suggesting that abolishing the separate business rule might assist the development of multi-disciplinary practices (MDPs), which would assist
the development of legal advice to SMEs.
The CMA spun the research to suggest lawyers are unfriendly and that there is something wrong with the market. It noted that only 13 per cent of SMEs thought lawyers were cost-effective and around half agreed that lawyers were a last resort in resolving legal problems. A number of firms will have been surprised at this. They'll tell you of excellent relations with their small business clients and that there isn't a problem.
It's worth looking at the research to test some of these points and because the findings ought to give firms pause - not for fear of regulatory action, but because of the market information contained within.
Some statistics first. Only 8 per cent of SMEs retain a law firm. When seeking external support, 43 per cent used accountants; only 9 per cent reported using a solicitor. As shown by the figures above, the bulk of problems arise around trading, tax, and employment. Almost 20 per cent of respondents thought they couldn't afford a lawyer.
The smaller your business, the less likely you are to use a professional adviser. If you encounter a problem you try to resolve it yourself, turn to a friend or business contact, or, if you have one, your current retained business adviser. If they can't help you might then go to a lawyer. Around 80 per cent of SMEs were satisfied with the outcome at the end of whatever process they'd chosen.
So what? You could say this simply reflects a common-sense truth: lawyers are an emergency, expensive, distress service. Why pay for them if you can resolve it yourself? Except that lawyers have expertise that should provide value beyond an emergency.
The report suggested that lawyers could engage more with the SME community. That may be a bit naïve. But what set alarm bells ringing in my head was that five times as many SMEs use accountants as their retained adviser than lawyers. This work should be bread and butter for law firms.
With the Institute of Chartered Accountants in England and Wales (ICAEW) granted rights to regulate some reserved work, and the SRA apparently looking to make it as easy as possible for accountancy alternative business structures (ABS) to offer reserved legal services, you can see how law firms may find themselves even less relevant to the SME market. If your accountant can offer most of the advice you need, why bother with a lawyer at all?
If the research is correct, law firms currently serve only 8 per cent of the SME market. There are 5.4 million small businesses out there and with an annual turnover of £1.8tn, according to the Federation of Small Businesses. Many will be far too small to be worthwhile even for accountants to target, but over 44 per cent are registered for VAT or PAYE, suggesting a likely need for advice. Surely law firms can provide practical, cost-effective, expert advice that is better than the 'phone a friend' or 'reach for the accountant' approach?
I'm unconvinced that simply permitting ABSs or relaxing the separate business rule will encourage firms to change. The SRA and LSB are worried that over 95 per cent of firms have looked at becoming ABSs, as if they were horses looking at an unattractive stretch of water and announcing that they've been drinking all morning, thanks.
Relaxing the separate business rule and limiting the scope of the SRA's jurisdiction over unreserved work may not help much either. The point of MDPs is that you get the whole service together and that you can't advertise the title or hold client money when doing unreserved work. Solicitors could offer the bulk of services that SMEs need without any change of structure.
ABSs have benefited some firms, but it's hard to say that those with traditional structures have missed out. They've made no appreciable change to the availability of legal services. This suggests that there are problems on both sides: firms aren't recognising the need to be attractive to SMEs, who, understandably, don't understand why they need lawyers with cheaper options available.
Still, firms should ponder the size of that market and decide if there's an offer they can make to it, before the accountants get there first. Assuming they haven't already.