Posted by Viv Williams, chief executive of Legal Futures Associate the 360 Legal Group
There are currently some 11,000 law firms in the UK and these can be split into five very unequal categories.
Firstly, we have the magic and silver circle City firms, which account for approximately 50% of the estimated £26 billion spent on legal services each year.
Secondly, we have a number of financially-strong national and regional practices already embracing change and who are prepared to adopt and deliver services in a very different way. Some are using technology to drive pressure on costs – and these firms are placing downward pressure on all the firms in the mid-tier sector on commoditised services.
Thirdly, we have the large number of “new age” law firms – the virtual firms that have in some cases been formulated following redundancy. Often created in a back bedroom with few overheads and using the Internet as their marketing tool, these firms have a core following to challenge the current established practices.
In fourth place we have the firms who are in the assigned risk pool or have such horrendous professional indemnity insurance premiums that it is almost impossible for them to merge with other practices. A growth in numbers of these firms has been triggered by key events such as indemnity renewal, tax demands at the end of January, the Legal Services Commission running out of cash in February and March, and the banks viewing the legal profession with the same concern they expressed over builders some years ago.
Many of the firms we are asked to visit would have been closed down had they not been law firms and operating in a traditionally revered sector. Gearings and borrowings are out of control in these practices, yet the banks seem to have a reluctance to crystallise those debts on their balance sheets. It is, after all, a very messy process to wind up a partnership and the insolvencies we have seen have been predominately limited liability partnerships.
Finally we have the remainder – approximately 75% of the legal market – of one-to-five partner firms who are not under any financial pressure, although many have an ageing ownership that has not addressed the fundamental issues facing this profession.
On a recent visit to conduct a strategic planning day with a law firm in the north-east, it was noticeable that among the row of 20 Georgian properties in which the firm was located, nine were occupied by other law firms.
During discussions with the firm I was visiting, it became apparent that turnover had been dropping along with profitability. When I asked if any discussions had taken place with neighbouring law firms to explore consolidation, I was told: “We don’t discuss that sort of thing.” Some of the other law firms were renting premises and it was logical for merger discussions to take place when my client owned their premises and had surplus space available.
This typifies the attitude of much of the profession – all nine practices are seeing falling turnover and reduced profits but their personal reputation has stood in the way of a common sense approach to potential consolidation. (Incidentally we are now in discussions with two of the firms about potential mergers.)
I have personally conducted nine strategic planning days with law firms in this sector in the first two months of this year and demand is increasing. Many firms just seem to have realised that we are in 2011 and the Legal Services Act will be fully implemented in October – and they are now thinking they need to have a strategy of what to do!
These firms have reached a crossroads and need clarity on which direction to take. I believe commoditised legal services will come under increasing price pressure and, if practices are to compete for this work, having clarity both on who will be a client and who will deliver the work will be crucial. Fixed-price legal services are fast becoming more commonplace and this type of work will have to be delivered by a different resource.
Law firms currently buy hours from their partners and fee-earners and sell those hours to their clients and customers; but in many of these firms the partners are the people delivering the work. Providing ‘client-led services’ to a fixed-price customer will result in a loss-making exercise on every file that is opened. That cannot be a solution for these firms.
The only way forward is not to compete on price but emphasise the fact that they are solicitors and have the necessary qualifications, compliance and insurance to differentiate themselves from other suppliers of legal services. Solicitors need to promote themselves sufficiently and remember that the plethora of new entrants delivering legal services will not carry the same gravitas.
Many of the new entrants into the sector offering legal services will be drawn into a price war. I strongly suggest that solicitors should focus on quality and not quantity.
This price war scenario may well mean a reduction in the numbers of fully regulated solicitors’ practices operating, and growing numbers of paralegals will be able to deliver a proportion of the work required.
We currently have far too many law firms and too many partners within those firms; we also have aging partnerships, with the average age of an equity partner now 59. This section of the legal market has to consolidate and so we have to begin the painful process of having conversations with other practices.
Whilst I am not advocating merger for merger’s sake, and remain convinced that big is not always beautiful, we have to recognise that many firms will need to start kissing a few frogs in order to find the right match in this time of consolidation.