Small firms increasingly worried by competition from online providers

Online services: Small firms’ main fear

Small law firms increasingly see online legal services providers as their biggest commercial threat, and are becoming more worried about DIY providers too, new research has shown.

This was against a backdrop of half of small and mid-sized firms considering that market conditions have worsened for them over the past year.

The report by Thomson Reuters was based on 91 responses from small (up to 30 fee-earners) and mid-sized (up to 100 fee-earners) firms.

Online providers were seen as the biggest competitive threat by 53% of small firms (up from 48% last year), followed by bigger firms (45%) and niche providers (37%).

However, while last year only 21% saw DIY legal services providers as a major threat, the figure was 37% in 2021.

Among mid-sized firms, ‘firms like mine expanding into my firm’s area’ (40%) was the biggest concern, followed closely by online providers (38%) and bigger firms (34%).

Mid-sized firms were twice as likely to identify alternative business structures as threats, compared to small firms (32% v 16%).

More broadly, the report said the firms have “largely managed to adapt and in many cases thrive” despite Covid.

“Reductions in demand in some practice areas have often been off-set by increases in others. Working practices, which have often been criticised as old-fashioned and inflexible, have shifted to home working and online service delivery with relative ease.

“However, many firms still feel the same pressures they spoke of at the end of 2019—managing high fixed expenses and increasingly demanding clients, regulatory change, and talent shortages.”

At the same time, firms were more pessimistic about their ability to achieve steady growth over the next year than they were pre-pandemic, with a higher%age expecting things to remain the same and more firms, particularly smaller ones, expecting a steady decline.

Controlling costs was seen as the number one objective for the coming year, particularly among small firms, followed by ‘growing in general’. Mid-sized firms were far more likely than small firms to see improving their IT infrastructure and security as a priority (36% v 18%).

The survey also showed how social media has become the most preferred marketing channel among firms.

Samantha Steer, director of market development, law firms at Thomson Reuters, said: “Small and medium law firms remained resilient despite the numerous challenges they have faced in the past year.

“Disruption to cash flow in the early months of the pandemic has, understandably, caused many firms to take stock of costs and consider implementing measures to control outgoings in the short term.

“It’s very promising that half of the respondents cited growth as one of their primary objectives for 2021, suggesting firms are optimistic about the future.”

Researchers found that, while firms were largely confident in their back-office systems to provide insight into financial and performance metrics, less than half said they had the tools to cost and price work accurately.

Only 44% of firms have invested in automation to improve processes and productivity, and 30% use client collaboration technology, with Thomson Reuters describing the rate of adoption as slow.

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