Shifting priorities

BDO Partners Nick Carter-Pegg and Christopher Clark reveal how UK firms should review their operating models to remain competitive under the Legal Services Act.

In October 2011, the UK legal landscape will fundamentally change, with the models in operation for the past century open to new competition. 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 financing and, more significantly, allow legal services to be delivered outside of the traditional law firm structure.

The changes may also see law firms being able to combine with other professional service firms to form multidisciplinary practices. This creates the potential for accountants, lawyers, barristers, commercial property and real estate advisers to form ‘super’ professional services practices to offer clients a one-stop-shop for all their advisory needs. Whether this will happen in practice remains to be seen. If clients are buying based on price, there may be advantages in having a joined-up approach. But, clients often like to be able to buy best in class, and this may not always be from the same provider.

During the late 1990s and early 2000s, most of the ‘big four’ accountancy firms had affiliated law firms, marking the start of a multidisciplinary practice. However, these were all but shelved as fears of independence and regulation from the US prohibited providing non-audit services to their audit clients.

What the changes do mean is that the supply of both simple and complex legal services will be open to competition from any organisation believing it 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 comparison websites or similar, fees will fall.

For managing partners, the challenge of leading the firm will become much harder. Their vision and three or five-year plan will have to take into account the fact that the business will inevitably have greater competition and that it is difficult to identify where that competition will come from. It is important to think wider and more laterally than before. Current thinking is that competition will come from financial service organisations, legal process outsourcing providers and household brand names (Tesco and Co-op), but there are potentially many more.

In addition, clients are becoming more sophisticated in their procurement of legal services and, if they have a significant seven-digit budget, will be looking to see how they can get best value for money. This will require firms to think more laterally about how they engage clients but, more importantly, charge for the delivery of their services. The offer of hourly rates with a discount on the standard rate card is unlikely to impress clients. Retainer relationships, working as in-house legal counsel and joint bids with outsourcers are already starting to change the competitive landscape and impact on client relationships.

Operational review

With increased competition for business, law firms need to review their operating models from at least three perspectives:

1) increasing the volume of work undertaken;

2) reducing the cost of delivery; and

3) improving the quality of legal work.

Forming alliances

Over the past year, a number of law firm alliances have been formed to increase members’ volume of work by combining advertising and marketing spend, effectively acting as an outsourced marketing function. Members understand that combining their collective marketing spend is more powerful than acting on their own. Alliance organisations have established themselves in a number of different ways, with a common theme being around creating awareness, capturing leads and opportunities, and selling these to members for a commission.

Contact Law operates this model, as does The Legal Alliance, an association of independent medium-sized law firms. QualitySolicitors has taken this model much further and, in the past three months, its member firms have united under a common brand to establish themselves as the first high street collective in the UK, turning their back on hundreds of years of heritage.

Reducing costs

Reducing the cost of delivery has wider implications for how law firms will operate in future and how legal services are delivered to clients. It is likely to require investment in systems to streamline processes and reduce the element of human interaction.

This can be analysed in two categories:

1) changing the interface with the client (front office systems); and

2) reducing the cost of delivering the service (back office processes).

Technological interface

Historically, most legal services have been provided through face-to-face meetings. This requirement has also dictated that a law firm is local to its clients. 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 by telephone, call centres with 24/7 service, or by web-enabled document preparation. This may, however, alienate some clients who require an element of human interaction from a person they trust.

Service delivery

Reducing the cost of service 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 that 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 on its own, and many are too small to benefit from economies of scale. A more viable alternative is for firms to pool resources or outsource functions to specialist providers.

Collaboration between likeminded law firms which may compete in aspects of law but not in particular territories is becoming more 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.

Improving quality

Improving the quality of legal work will be an important strategic aim for most firms, unless a firm has a clear strategy to provide more of the volume type of legal work. In order to continue to operate at the premium end of the spectrum – where firms will be able to command the best fees and profit margins – they will need to continue to focus on ensuring that they can target and win the right type of legal work where they can really add value to clients.

No guarantees

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, and early adopters are also not guaranteed success. However, the prize for getting it right is immense.

– christopher.clark@bdo.co.uk; nick.carter-pegg@bdo.co.uk