One of the main consequences of the Legal Services Act will be greater external ownership of legal practices. The removal of the current ownership restrictions around law firms will allow them to raise external finance and more significantly, allow legal services to be delivered outside of the traditional law firm structure.
The supply of both simple and complex legal services will be open to competition from any organisation believing they can provide the service. While in theory this is far reaching, in practice we do not believe that all areas of law will see competition. People will still buy a significant part of their legal services based on experience, expertise and brand although as it becomes easier to compare pricing, perhaps through price comparisons websites, fees will fall.
With increased competition for business, how do you react? We believe businesses need to review their operating models from two perspectives;
The last year has seen the launch of a number of organisations looking to increase their members volume of work by combining advertising and marketing spend, effectively acting as an outsourced marketing function. Their members understand that combining their collective marketing spend is more powerful than acting on their own.
Reducing the cost of delivery has wider implications for how law firms will operate in the future and how legal services are delivered to clients. It is likely to require systems investment to streamline processes and reduce the element of human interaction. This can be analysed into two categories:
Historically, most legal services have been provided through face to face meetings. This requirement has also dictated that the law firm had to be local. With technological advances and the adoption of broadband communication, personal meetings are less relevant in many cases. Aspects of delivering legal services can now be carried out via telephone by call centres allowing 24/7 service or by web enabling document preparation. This may, however, alienate some clients who require an element of human interaction from a person they trust.
Reducing the cost of delivery provides greater scope to improve a law firm’s financial performance. It has been possible to outsource functions for a number of years but it is the increased competition the Legal Services Act brings that has stimulated the market to look at these options. The capital investment required may be too great for a practice to undertake itself and many are too small to benefit from economies of scale. A more viable alternative is for organisations to pool resources or outsource functions to specialist providers.
We have seen an increase in the number of outsource providers and the type of services they offer as various back office functions once considered essential within a legal practice are being outsourced. This allows the organisation to focus on the law and provides valuable cost savings and flexibility to enable them to compete in the new world.
Alternatives to outsourcing also exist. Collaboration between like minded law firms who may compete in aspects of law but not in particular territories are also becoming common. Pooling resources to increase buying power is an easy example of the advantages this can bring. Significant savings can be made in purchasing professional indemnity insurance without affecting the independence of an organisation.
The impact of the Legal Services Act is far wider than some initially thought. There is no guarantee that size is a strength in a market undergoing fundamental change, early adopters are also not guaranteed success. The prize however for getting it right is vast but as yet it is difficult to identify those parties with a winning business model as they can not fully implement their plan until 2011.
If you would like to talk to one someone regarding this subject, or for further advise, please contact Christopher Clark, Partner, Corporate Finance.