Law firms and other legal providers that offer consumers fixed fees “are likely to have a clear competitive advantage” over those that bill by the hour, new research has shown.
The report, by IRN Research, also forecasts that the UK legal services market will grow by just under 4% in 2012, and slightly more in 2013 – but this will mainly be driven by larger law firms, with smaller ones struggling.
IRN’s annual review of the legal market found “little evidence” that external investors are queuing up to take a stake in law firms.
The report said new competition, the growth of online legal services, and pressures from clients are all beginning to change many traditional pricing models.
Its poll of 2,000 consumers found that for relatively simple legal matters such as conveyancing or making a will, over 80% of consumers would like to see fixed fees. A majority (59%) would also prefer them for divorce cases.
The result was less clear-cut for more complicated cases; for personal injury and clinical negligence cases, 38% of consumers wanted fixed fees but 37% said they would opt for a conditional fee agreement. For employment law, 43% preferred fixed fees, and 22% some form of conditional fee agreement.
IRN also asked 64 law firms to choose the top three negative factors likely to impact on their businesses in the next 12 months. While 38% identified pressure on fees, new competition and increased practice costs were both named by 53% of respondents. Around a third were worried about compliance with outcomes-focused regulation.
The report estimated that the legal services market was worth £26.4bn in 2011, up 3.2% on 2010. It predicted growth of almost 4% in 2012 at current prices to £27.5bn, and a further 4.2% in 2013. A third of the market is business and commercial law, with personal injury/clinical negligence accounting for 14% and commercial property 12%.
However, it said that while most larger law firms and those legal suppliers processing large volumes of cases are likely to continue to post revenue growth ahead of the market, “many smaller firms will find it difficult to improve their financial performance, particularly as competition intensifies in some consumer law sectors. Profit margins for many smaller firms will continue to be weak”.
In the short term, IRN said it does not expect to see too many non-legal national brands entering the market. “Rather, some existing players that have been building market share in recent years will strengthen their positions in the market.”
It continued: “However, over the longer term, we do believe that more large national brands will start to explore the opportunities once they have seen the experiences of the early movers. Major consumer brands like the supermarkets, high street retailers, and the financial services companies have large consumer databases, significant consumer recognition and loyalty, financial and marketing muscle, and distribution networks.
“All these will help these national brands to offer legal services that are cheaper, while more accessible and convenient, than most traditional law firms.”
IRN suggested that sole practitioners – “with low overheads and the flexibility to deal with market changes” – may be able to cope better with these pressures than firms of four or five partners “where overheads are harder to cut and changes more difficult to make”.
On external investment, it said: “While many larger law firms appear to be an attractive proposition for external investors there is little evidence yet that many outside investors are queuing up to take a stake.
“Large law firms have relatively stable cash flows, an established business track record, and offer opportunities for further growth through for example acquisitions, overseas expansion, or the development of new practice areas. However, external investors need a quick return, and the partner management structure and payment of profits direct to law firm partners are likely to be major obstacles for potential external investors.”
Such investors as have expressed an interest are most likely to seek out these larger firms and other “legal services operators able to bring a significant volume of process-led legal work to the table, for example, law firms with a large volume of conveyancing, personal injury, or family law work or even claims management companies or legal process outsourcers. There may also be interest in some of the fast-growing boutique law firms”.