Report: Law firms’ unwillingness to change opening the door to new market entrants

Murphy: firms being squeezed on all sides

Murphy: firms being squeezed on all sides

The slow pace of change in the legal profession means it is “not surprising” to see new types of firms, with completely different business models, winning market share, an authoritative survey has found, adding that “the market is ripe for change”.

The 21st annual Smith & Williamson professional practices report also found that around half of the 95 firms of all sizes that were surveyed expected to see external investment become more a feature of law firm funding in the next five years, with private equity the most likely source, followed by multi-disciplinary practices with external resources.

Even though confidence among firms was at an all-time high – especially among larger firms – the report said that competition and pressure on fees are still on the increase, “with many foreseeing a growing impact from new business models and fee structures”.

It said the “default response” though, appears to be to invest in what firms already have to enhance efficiency, “rather than taking advantage of a growing market to re-model themselves”.

The authors warned: “This raises some important questions about whether a more positive outlook and easing economic pressures will make firms less inclined to make tough strategic decisions.”

Changing fee structures – such as fixed fees and value billing – followed by technology for both managing the firm and interacting with clients were seen as the big issues facing firms in the next five years.

“The common theme among respondents is of an unrelenting uphill struggle to grow their businesses and maintain adequate profitability in the face of increasing competition, together with downward fee pressure from highly demanding clients asking more for less.”

The report added: “Many firms are grappling with the issue that if they were starting from scratch to design the modern firm of today, it probably would not look like the traditional firm they currently own.

“Firms with limited operating hours, requiring appointments to be made in advance, responding only slowly to client requests and billing simply on time incurred are operating an increasingly risky business model. Many firms have offices in expensive city centre locations, yet meet their clients less and less. Many use only highly qualified staff for tasks that could be more cost-effectively outsourced. Do they really need these high-cost overheads?

“Given the slow pace of change in the professions generally, it’s not surprising to see new types of firms, with completely different business models, winning market share. The market is ripe for change.”

The findings chimed with a survey published yesterday with RBS, which highlighted how the Big Four accountants are gaining ground on mid-tier firms and will in time go after bigger practices too.

The Smith & Williamson results showed that there was still an expectation that private equity has a role to play, in spite of the absence of the activity anticipated at the time of the Legal Services Act.

“There appears to be something of a mismatch in expectations, with limited appetite for investment at the traditional end of this sector on the part of private equity providers due to a lack of obvious growth potential and/or exit strategy options.

“However, the availability of external capital potentially gives firms more flexibility in how they structure transactions and may lead to a more ‘corporate’ approach to acquisitions.”

Giles Murphy, head of professional practices at Smith & Williamson, said: “Law firms – and the broader professional practices sector – are being squeezed on all sides by the arrival of new business models and new entrants to the market. In particular, all firms face a massive threat from new uses of technology to gain and interact with clients.

“Firms need to develop a ‘clear differentiator’ to stand out from the crowd, thereby demonstrating the value they deliver and to help them resist downward pressure from clients on fees.

“If firms are simply enjoying improved performance from an improvement in the economy, they shouldn’t be surprised if they quickly slip into reverse when the economy takes a downturn.”

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