The future for small law firms looks more challenging than ever

Are small law firms sustainable in the UK or are we close to seeing the shakeout that has been predicted for some time now, as control of the distribution channels for traditional work is lost to new entrants and a smaller number of large players?

Perhaps the most vulnerable at the moment are those firms exposed to personal injury (PI) work like Blakemores, which closed its doors in early March with the loss of over 200 jobs.

According to recent Law Society research, PI accounts for 15.4 per cent income for firms outside of the top 200 – the largest segment. From 1 April, the margins on this work will fall significantly.

It seems likely that PI work will continue to consolidate around a few larger players that have access to the organisations which distribute this work, or become controlled by them. With access to external capital, these players can afford to build increasingly large businesses based on thinner margins and higher volumes.

Firms with high exposure to PI work could well find themselves in difficulty as soon as their existing caseload completes. Those firms with a smaller exposure may be able to carry on, but could soon face more challenges in other core areas of their work that seem to be heading the same way.

Residential conveyancing accounts for about 12.1 per cent of income for high street firms and volumes are currently about half of what they were five years ago. Transactions are likely to pick up as the government’s ‘funding for lending’ scheme reduces the cost of mortgages. That offers hope to small firms of increased volumes and improved fees and profits, possibly to replace lost PI revenues.

However, large players that control the distribution of residential conveyancing work are becoming more prominent in this part of the market too. They threaten to divert more of it away from the high street into their own hands.

Countrywide is the number one estate agency in Britain by transactions and revenues, and has recently announced plans to raise capital for further expansion with an IPO. It is no coincidence that Countrywide Property Lawyers claims to be the largest conveyancing business in the UK. It nearly doubled the number of completions it did last year to just under 60,000, about 8.5 per cent of the total market. Premier Property Lawyers, an alternative business structure (ABS) owned by another large player, My Home Move, says it has three per cent of the conveyancing market and aims to treble that to ten per cent by 2016.

Wills and probate – a traditional bastion for high street firms, accounting for over ten per cent of revenues – aren’t immune from this trend. The Co-op has its funeral business as a natural distribution channel to its ABS law firm. The ICAEW has submitted its application to become a regulator of probate services and ABSs, and it hopes to be licensing accountancy firms this autumn. Other new entrants joining the probate market include Saga, whose legal services business is currently managed by Parabis Law, one of the major players in the PI market.

With access to distribution channels, plenty of capital and a real focus on technology and customer service, these increasingly important players pose a real threat to high street firms over the next few years, even if the economic outlook improves.

Of course, some small law firms will survive and prosper as they find a niche for themselves as the ‘family solicitor’ offering a more personal and local service, or become part of a national brand. But, last year saw the first drop in solicitor numbers in private practice since records began, and the fall was in high street firms.

As the distribution of traditional high street work comes increasingly under the control of larger players, will we see this trend accelerate and a significant number of small law firms failing? The combination of events doesn’t look promising.