The legal services market is likely to experience more changes in the next few years than at any time in recent history. There are clear threats to many high street law firms and solicitors from new competition but there are also opportunities for law firms willing to explore new business models and partnerships, or those ready to expand their marketing options. The latest market review of the UK legal market from IRN Research has just been published and here are some highlights of key trends and issues from the report impacting on medium and small law firms, followed by some thoughts on how law firms could address the changing market landscape.
Pressures on revenues and profits, and more competition around the corner
Revenues in the UK legal sector grew in 2011 by an estimated 3.2 per cent and a similar growth is forecast for 2012. However, the detail behind these overall changes in market size shows a market that is far from homogenous. Generally, revenue and profits performance is much stronger at the top law firms than in the market as a whole. Results from the top 100 law firms for the fiscal year 2010-2011 show total revenues increasing by almost 4 per cent and profits growing by 2.4 per cent. Average profit margin for the top 100 is an extremely healthy 24 per cent. On the other hand, revenue growth amongst mid-tier and smaller law firms averaged only around 1 per cent in the same period and average profit margins are typically at low single-digit levels.
Financial pressures for many medium and small firms are likely to increase as new competitors increase their presence in the market. In a survey of 64 law firms (with five or fewer partners) for the report, participants were asked to choose the main negative factors likely to impact on their business in the next 12 months. Most concerns were expressed about the new competition entering the market and the general increase in practice costs they are likely face in the coming year. 34 participants (53 per cent each) mentioned these factors.
The arrival of Alternative Business Structures (ABS) has been seen by some as the signal for a rush of new competitors to enter the legal market with the potential for numerous smaller law firms to go to the wall. Our view is that there will be inevitable consolidation in the market, but predictions of the closure of many thousands of law firms are probably wide of the mark.
By the start of February 2012, the Solicitors Regulation Authority (SRA) had received 96 “Stage 1” ABS applications. These reflect an expression of interest to start the ABS process and it is likely that only a fraction of these will eventually achieve ABS status. Nevertheless, this is a significant number to start with which is only likely to grow in the coming months. Already, a few big players have declared their hands as potential ABS led by the Co-op and DAS Insurance and large law groups with significant private client practices such as Irwin Mitchell and Parabis.
Those law firms operating as general practices with a range of consumer legal services may find themselves under the most pressure as areas like conveyancing, wills and probate, personal injury and family law are likely to be areas targeted by the larger new players and volume providers. It may also be that particular categories of firm will face more pressures than others. For example, sole practitioners with low overheads and the flexibility to deal with market changes may be able to cope better than practices with four or more partners where overheads are harder to cut and changes more difficult to make. Boutique law firms and specialist firms should be able to prosper in their niche markets.
Emerging legal business models – opportunities for law firms?
ABS is just one feature of the changing legal market and there are various other service models emerging. While some of these will represent yet more competition for many law firms, these new approaches also offer some opportunities to smaller law firms. A few examples are given here as illustrations of potential routes some law firms could take to grow revenues in the new legal climate. How many of these will grow to have a significant market presence, and how many will fall by the wayside, remains to be seen but they are worth some consideration as the market changes:
- Online legal services. Should you be considering an online legal service option alongside your bricks-and-mortar presence to expand your services beyond the local area, offer convenient access on a 24/7 basis, and build a broader client base?
- White-label legal services from organisations like the AA and Saga are already up and running. More are likely to be launched and these providers will need law firms behind them to operate the services. On current example is Affinity Solutions from Pannone run as a separate business unit to advise brands on setting up legal services and to offer white-label services to these brands. The aim is to partner with businesses from sectors such as retailing, utilities, financial services, and insurance that might be planning a legal services brand.
- Branded law firm networks/franchises. So far, Quality Solicitors has been the most prominent but others include HighStreetLawyer, face2facesolicitors, and Lawyers2U. Lawyers 2U, for example, is operated by law firm Blakemores and, so far, has focused on the Midlands but there are plans to roll out the brand nationally and bring in another 150 law firms. Another example is Acumen Business Law run from a law firm in Brighton which is looking for other law firms and solicitors to join the network, receive back-office support, and use the Acumen brand.
- Some mid-tier/smaller law firms should consider merging with each other to achieve some economies of scale, or partner with other professional service businesses on the high street, e.g. accountants, estate agents, to create a one-stop shop for services.
- Virtual law firms. Apart from the fact that virtual working means lower overheads and costs, and potentially improved margins as a result, it can be a means of growing from a small, local business to a larger more geographically spread one without any large-scale investment.
- Expansion through acquisition. Some ABS and other legal service models will be looking to grow through the purchase of other law firms. For example, venture capital business Duke Street has just taken a majority share in expanding legal business Parabis Group which includes Cogent Law (PI, medical negligence, wills & probate, employment law). It is investing £50m which will be used to acquire other law firms.
- US legal brands entering the market. Rocket Lawyer, which is backed by Google Ventures, has already signalled its intention to enter the UK market later this year and it is likely to be looking for law firms to join its panel. To join will be free but panel members will have to offer a free legal document service but have the option to sell other legal services to potential clients.
Staying independent and local – marketing your reputation and client care
If none of the above are attractive propositions then for law firms committed to remaining totally independent and local the good news is that evidence from various consumer research continues to show that experience and trusted advice are still key factors influencing clients when they choose legal representation. Innovative law firms will build their local profiles around these strengths, and focus on good client care.
The key is the development of this local profile. Too many firms think a Yellow Pages ad is enough but a local profile should encompass much more and does not necessarily involve too much spending. Some examples to consider: joint advertising/marketing with other local service companies; regular news items and features in local press; sponsorship of local groups and events; membership of, and attendance at, local business groups and networking events; special deals for local groups, eg young adults, over 60s/65s; innovative ads, eg local radio, on taxis, local transport etc.
There are also good marketing opportunities available from the feedback from satisfied clients. An interesting article in Marketing
Week in August 2011 brought together various names from the legal sector to consider the forthcoming changes in the UK law market and concluded that marketing to compete head-on with the new entrants is unlikely to work. It noted that a large slice of marketing for a law firm should focus on client satisfaction and the role client recommendations can play in business development. Here are two quotes from the article:
“A more convincing strategy may be for law firms to attempt to use their strengths in marketing, such as focusing on recommendations.”
“The professional services sector is not as sophisticated as the retail sector and the legal profession needs to learn what retailers do best – customer satisfaction and customer service.”
While it would be foolish to try and predict how far the legal landscape will change over the next few years, it is clear that more competitors are entering the market and more routes to legal advice are emerging. Other issues likely to concern law firms in the coming months include: new compliance demands on law firms and solicitors from a new regulatory regime; a possible ban on referral fees; a reduction in funding for legal aid; client demand for more fixed-fee pricing models. Plus, of course, there is no sign yet that the economy is about to improve.
It will be those law firms that actively respond and adapt now to these uncertain times that should be able to overcome the threats and benefit.
David Mort is co-owner and Director of IRN Research, a full-service market research agency providing a range of bespoke research services to law firms and suppliers to the legal sector.
The UK Legal Services Market 2011 (3rd edition) report is available directly from IRN Research.