Thought leader

Following the Lord Chancellor’s announcement of government support for Sir David Clementi’s proposals, and his promise that parliamentary time will be made available for legislation on legal services, now is a good time to revisit some scenarios for this brave new world for law firms.

In particular, many lawyers have looked at the ‘consolidator’ role played by new entrants to the accounting profession in recent years and are now asking whether there is a pot of gold out there for them.

The thrust of Sir David Clementi’s recommendations is about improving consumer choice, and, in particular, doing that by allowing new entrants to the legal-services market. For many months, the popular shorthand for this has been ‘Tesco law’, although it may be better to talk about ‘RAC law’, because so far only the RAC has publicly shown much enthusiasm for entering the legal-services market.

If mass-market consumer organisations decide that they want to get into this market, it is likely that they would want their legal offering to be available to all their customers. After all, they are mass-market consumer organisations; why would they want to treat legal services differently? To achieve this market reach they might buy law firms (then re-brand and if necessary relocate them); franchise law firms (under a common brand); or set up an internet and call-centre-based service.

So far, there is some evidence for the acquisition route. For instance, the volume conveyancing and remortgaging practice Enact Conveyancing was acquired by First American Corporation, a US financial-services group, in 2004, having previously been spun out from its parent law firm.

Our view, however, is that there is little appetite for acquisition of law firms. In the case of Enact, the acquirer was not buying a full-service law firm, it was buying a well-developed volume processor that had invested heavily in systems, IT and marketing, and had funded that by venture capital (which in turn dictated that the business be structured as a limited company).

In effect, the acquirer was choosing the internet and call-centre strategy, but buying an established operator so that it could fast-track towards that objective.

As for franchising, in a sense the insurance companies have already made a start. Each major insurance company has a limited number of law firms that it uses to process a high volume of claims, and in return, the law firms have to standardise their procedures and processes, meet rigorous quality standards, and commit to a tariff of fees.

Those law firms do not yet appear to the market as an extension of the insurance companies, but it would not take much for that to be done. Each insurance company could establish a legal-services brand, manage the marketing budget and quality issues, and pass the work to its franchised law firms.

In a good franchise relationship, both parties gain benefits and that might apply to law firms that preferred this route. Again, however, it seems to us that few law firms will have a big profit bonanza at the start of franchising – the profit stream will come on a year-by-year basis as the brand becomes established, just as with franchises in other markets.

While all three strategies – acquisition, franchising, internet/call-centre – will play a part in the way the market develops, we think there will be few ‘pots of gold’ for lawyers to pick up. Law firms wanting to position themselves for such capital sums as are on offer will be those that have already spent a lot of effort, time, and money in developing volume businesses on a scale attractive to mass-market organisations.

Other law firms must do what well-managed firms have always done: recognise that they are a people business where the financial reward comes not from capital appreciation, but from providing good service to good clients.

The majority of firms should not be distracted by seeking a ‘pot of gold’. Rather, they should take a careful look at their strategy and ensure they are well equipped to face the new challengers coming into the legal-services market.

Thought leader compiled by Sacha Romanovitch and Roger Zair of Grant Thornton UK LLP. For more information, contact Adam Soames at adam.soames@gtuk.com