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Jessica Medus: “We need to embrace the change and welcome this opportunity.” What action should law firms take to make the most out of the Legal Services Act?
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Jessica Medus
Jessica studied Economics and Social History at Bristol University. She trained at Mishcon de Reya qualifying in 2011. Jessica is a Solicitor currently working in the firm's Private department, specialising in Trust and Estate Litigation.
Jessica believes that law firms need to take a proactive, not defensive, approach to the Legal Services Act. What attitude do you think law firms should adopt in relation to the Act?
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To say commercial law firms will not be affected by alternative business structures (“ABS”) is I think underestimating the investment, companies like Co-operative and Barclays can raise in developing legal services through brand promotion and marketing. Companies this size already have a wide client base and the easy accessibility to their legal services will mean increased opportunity for repeat business. Doing nothing or adopting a sit and wait policy would miss growth and opportunity in a new market. A number of options are open to law firms:
Firstly to replicate the ABS model either through mergers and acquisitions (“M&A”) of smaller firms or by acquiring bolt on legal teams. The ABS service would not affect the firms core service but deal specifically with high volume and straight forward legal enquiries that do not require the time, expense or expertise of senior employees. This would result in a two-tier service which can meet the requirements of ABS and non-ABS clients.
Secondly as has been discussed elsewhere law firms can initiate proceedings for an IPO. However just because law firms can list themselves does not mean that they should. I believe that growing too big too fast is a high risk option as shown by the collapse of the US law firm Howrey LLP in March 2011. Furthermore in a time of industry and company change there is risk of senior employees leaving, if they do not like the direction the company is taking, which as in Howrey’s case can prove to be fatal.
Thirdly law firms can invest in marketing to target ABS clients and improve on their core services by focusing on greater quality of service and client retention. This can be done separately or I would suggest, concurrently to developing an ABS service. I believe that when competing in a new market there should be greater emphasis on brand awareness to enable a strong foothold into the new industry.
For me the legal landscape is not changing but evolving. Law firms have to adapt to this change or be left behind in the process.
Some very interesting comments all round. I tend to agree with Terese. The LSA will increase competition for all firms.
One reason is because every firm offers at least some services that can be commoditized through technology, such as document automation software. Clients will be given the choice between a legal solution that is ‘good enough’ for £50, and a technically elegant solution delivered in person by a solicitor for £800. Even the strongest, most longstanding relationship will not make the average client opt for a £750 loss. Business is business, even if it’s personal.
Therefore, in addition to maintaining strong client relationships, I would advise every firm to offer legal services that can be commoditized, online. This will strengthen relationships with existing clients (as they won’t be forced to compare prices with online providers), and also the firm to break into a new, growing market. Alternatively, as Terese suggested, firms can invest in or strike referral agreements with providers.
If anyone is interested in reading more about my views on this topic, please check out a blog post I wrote last week! http://bloggingthebottomline.blogspot.com/2011/12/viva-la-online-legal-services.html
The impact of the Legal Services Act 2007 (LSA) has been likened to that of the ‘Big Bang’ in the financial markets in the late 1980’s. This rapid deregulation and resulting new financial architecture led to the largest economic boom and bust scenario in modern economic times. Perhaps lessons can be learned from the resulting failures of this act of market liberalisation in terms of how to approach the LSA’s procedure of deregulation within the legal industry. Instead, commercial firms should be cautious about making bold moves into an Alternative Business Structure (ABS) given the area is likely to be dominated by well known UK brands such as the Co-operative. In my opinion the LSA impacts upon commercial and high street firms entirely differently, and different approaches are required to both capitalise upon its opportunities and mitigate against its threats.
The threats presented by the Act are going to be no more acutely felt than by high street firms. It is here that big brands in ABS structures, as well as more specialised law firms such as Irwin Mitchell converting to an ABS structure are aiming to dominate and absorb a significant market share. Therefore, in order to survive, smaller high street firms have little choice but to merge, pool marketing resources and improve economies of scale. Only then can they hope to compete against the rising star ABS brands.
With regards to commercial firms, different threats and opportunities exist. The ability to allow non-legal investors to take part ownership in their firm may seem alien and uncomfortable to many equity partners, but it presents at least two major opportunities for commercial law firms. The first being significant additional funds, or a ‘war chest’ to pursue an aggressive yet prudent strategy of growth that could be of significant benefit to the firm for the foreseeable future. Secondly, the existence of a private equity investor on the board of a law firm may be no bad thing. These are experts at driving businesses forward, both out of troubled times as well as into new financial prosperity. Having such versed experts to hand, would be akin to having a non-executive director present on a board, a practice heavily praised by big business. However, the fact this facility is available means first movers in the legal industry stand to gain the most with regards expansion from external funds. It is up to commercial firms to decide now what their strategy will be, either look for external investment to capitalise on the opportunity presented or perhaps hope they do not become a victim of another firm’s ambitions.
Whatever the true impact of the LSA, it seems for now the true impact has been far from the Government’s intentions of improving competition. Instead, fewer large brands may come to dominate and push smaller firms out of the market indefinitely. The impact of large brands and banks such as Santander operating free will writing services with current accounts, and the Co-operative and QualitySolicitors.com, may be to reduce high street legal fees by as much as 35%, but there is no indication of how far quality may be affected if traditional and established firms are ousted from the market. Some have estimated this may be as many as a third of all smaller high street practices. At the other end of the scale, commercial firms will almost certainly face increased competition from expanding rivals. This is unlikely to decrease commercial fees substantially, yet it may affect the availability of unique and innovative legal solutions from smaller, more specialised commercial City firms, currently a significant asset of the City of London.
There are several actions that law firms could take to respond to the Legal Services Act, however not all of these actions would necessarily make the most out of the act, but would simply be reflexive responses. One natural response would be for law firms to begin proceedings for an IPO in order to raise funds for investment. There would have to be a real need for this investment, though, and it must have the potential of increasing profits in order to generate a return for investors as opposed to merely increasing revenue. Investment banks went through this same process of going public en masse, and frequently the capital generated was retained by the partners, rather than reinvested in the business. Concordantly, in the case of investment banks, it is difficult to determine whether going public served any purpose, save to encourage a move towards short termism which helped contribute to the eventual credit crunch. Thus law firms should be wary of this when making a decision as to whether to go public or not.
It has been frequently suggested that the Legal Services Act will create “supermarket law shops” where a wide range of legal services are provided at low prices. Law firms can respond to this in one of two ways, either by competing in price or by differentiating themselves from these “supermarkets” by emphasising the higher quality advice which they offer. In any case these “supermarkets” may be more targeted at consumers, rather than commercial clients and so will have a larger effect on high street law firms, rather than city law firms, such as Mishcon de Reya. There is also the issue that the profit margin that can be generated with these price sensitive consumers may be small. These “supermarkets” may also incur conflicts of interest by having an Alternative Business Model where they offer a range of services, other than legal. Therefore law firms which do not adopt this business model can improve their appeal to clients by highlighting the fact that they offer independent legal advice.
Thus, I believe that what action a law firm should take to make the most out of the Legal Services Act depends on the law firm in question. High street law firms, catering to consumers will, more likely, be affected as their profit margins are squeezed by “supermarket law shops”. They can respond either by competing in price or seeking to differentiate themselves as offering higher quality independent legal advice. Larger, city law firms such as Mishcon de Reya, can use the Legal Services Act to raise funds for investment. This investment could be used for a number of purposes, such as lateral hiring or expanding overseas, depending on the needs of the law firm in question.
Jessica suggests that two fundamental changes will result from the Legal Services Act: how law firms are owned and how products are offered. She then goes on to focus on the effect of the latter. Jessica believes that with branding and marketing, new providers may have an edge over traditional law firms. I believe these reforms will affect the likes of Mischon de Reya and high street practices in entirely different ways, and these two legal markets need to be examined separately. Mischon de Reya is at the cutting edge of the law. The type of client that approaches your firm is someone that is looking for the most innovative, creative legal ‘product’, and this is something that new providers (such as Barclays or the Cooperative) will never be able to provide. You should continue to offer this so long as you can maintain the level of talent already present, and so I do not agree with Jessica that Mischon should 100% embrace this change in regulation, but be more cautious. Concerning the product you are selling there will be little effect and as Robert suggests, you should ‘go about [your] business as before.’
However, the question neglected by Jessica may prove to be the most testing for City law firms, and that is whether or not your partners choose an alternative model to partnership as a mechanism through which the law firm might access external investment. Robert suggests that many partners will be unhappy with the prospect of relinquishing their equitable stake to an external investor. I am more sceptical as I imagine if the likes of GE Healthcare, Tata Group or Walmart were to offer each partner £5 million in exchange for their equitable share, there is a distinct possibility that many of these partners would not be so principled. This may lead to a scramble for mid-tier City law firms to find a suitable partner and a narrowing of the number of independent law firms in the City to the magic circle firms. This would be disastrous as the lack of competition could lead to the demise of the City as the leading provider of corporate and commercial legal services, and this would have implications beyond the legal profession. The legal profession has long been an integral part of UK plc, and any radical move away from the way legal services are provided now will not necessarily mean success for either UK plc or the legal sector. Terese suggests that partners at big corporate firms are excited to see what the legal landscape will look like in 5 years. I fear that this may be because they are thinking of the kind of offers they may receive from external investors. This will have the greatest impact on current trainees and Associates as the effects would be long term. I recommend law firms such as Mischon in need of external funding to go to the bank as they have traditional done and to continue to offer the most innovative legal solutions provided by solicitors that your clients see as trusted advisors. By doing this, your success will continue long into the future.
Recent events show that the Goliaths as well as the Davids of the legal market have been (and will continue to be) shaken by the recent introduction of alternative business structures (“ABS”). Consequently I must disagree with Mr. Milligan that wealthy corporate firms will be relatively unaffected by the fiercer competition brought in by the Legal Services Act.
First, wealthy corporate firms may not lose clients but they may lose talent. Take for example Irwin Mitchell’s aggressive push to diversify its practice in the lead-up to becoming an ABS. Its successful raid on SJ Berwin’s property practice in Sept 2010 indicates that partners at big corporate firms want in on ABS, whether or not their firms choose to follow. The move was especially stunning since Irwin Mitchell, according to The Lawyer, was known as a “personal injury powerhouse” rather than a serious City contender.
Large corporate firms will also face increased competition from their more obvious rivals. Consider DLA Piper’s decision last month to become a minority stakeholder in LawVest, an ABS targeting small and medium-sized entities. That move has put DLA Piper’s proverbial foot in the door while limiting its exposure to an unexplored market. If ABS turns out to be hugely profitable, DLA Piper will be poised to make an aggressive entry and will leap above its competitors. It will also have more capital to attract star performers from other firms. If on the other hand ABS disappoints on the balance sheet, DLA Piper, unlike Irwin Mitchell, will be able to make a graceful exit.
Add to that the promise of foreign investment in ABS. For instance Kines Global, a law firm development company run by former Bird & Bird partner Stephen Kine, plans to set up an ABS jointly funded by a reputable Asian firm and a private equity investor. The Lawyer also reports interest in the UK market from US, European and Australian firms.
With so much innovation disrupting the market it is becoming less likely that any firm of any size will be able to retain its grasp without making some surprising changes. For example (veering back to the small, medium and boutique legal market), perhaps we’ll see “best friends” alliances transform into investment groups to fund ABS ventures. I’m excited to see what the legal landscape will look like five years from now.
Ms. Medus shares my stance in her assertion that law firms need to ‘embrace the change and welcome this opportunity given’ by the Legal Services Act (LSA) through the introduction of Alternative Business Structures (ABSs), which as the Law Society claims ‘favours choice, open markets and competition’. However I think it is important to note the limitations of the LSA, which seems to only garner serious competition in the legal marketplace amongst boutique, medium and small-sized firms that offer legal services to individuals within the UK. The brand named companies, like Barclays or the Co-operative, that exploit the legal market through ABSs are primarily targeting the UK public with their range of products and services, largely leaving the wealthy corporate firms who specialise in commercial affairs to go about their business in the UK and internationally as before.
Thus in this liberalised competitive marketplace the onus is placed upon Mishcon de Reya and law firms alike to maintain the highest quality of practice in which the client is of paramount importance. Firms will have to look to strategic expansion, diversification of practice areas, and investment in IT systems to be more accessible to the consumer and maintain a foothold in what will surely become a saturated market. External investment therefore arises as an attractive solution for smaller firms to generate the funds and facilitate this restructuring. Although this may be appealing to some firms, often with external investment comes a conflict of interests potentially leading to non-legal persons meddling in the legal affairs of the firm, and providing unnecessary external scrutiny. Firms may wish to explore partnerships with companies offering ancillary services with advice, counselling and aftercare departments to present a more complete package to their clients.
However to many Partners the prospect of relinquishing a part of their firm to an external investor is understandably frightening. These firms then have to consider having a dedicated marketing department which succinctly and efficiently conveys the firm’s message to their target audience so that they can compete with the well known brands of supermarkets and banks that have vast marketing budgets. A recent YouGov poll concluded that 60% of people would consider buying legal services from brands like Kwik-Fit and Barclays despite the fact that they did not specialise in law. Clearly this poll indicates that people would be willing to instruct reputable non-legal brands to advise on legal matters, reverting away from the traditional model. The LSA will encourage the growth of legal comparison websites and franchises like QualitySolicitors.com, thus firms need to clearly convey and market their brand to gain an edge on the competition. It is no good considering the potential actions outlined above, if firms are not active in the retention of their clients, paying meticulous attention to every client’s personal needs, after all, word of mouth can be a very powerful tool to generate interest in and business for your firm.