Looking ahead, the LSB will use the segmentation framework to understand competition in legal services.
The review found limited existing competition analysis on legal services as a whole. Some sources looked at competition issues with in areas of the legal services. The OFT report, Competition in professions, found that a lack of compettion in the provision of legal services for individual consumers. This ultimately gave rise to the Legal Services Act, following the Clementi Review. However our review found analysis largely focused on competition in international legal services: “Competition for business in international financial markets is largely between London & US law firms, though European firms are becoming more active, US law firms don’t cover the same range of banking and capital market activities, US firms win fewer but larger deal because of strong links with US investment banks, while London firms international coverage has enabled them to build relationships with these banks as their share of the European & Asian markets has grown.”1
The changes being introduced by the LSA 2007, have been seen as a source of competitive advantage against American lawyers: “Regulation of lawyers in England and Australia is being modernized in crucial ways that make their firms increasingly competitive in the global marketplace, to the disadvantage of their American competitors. New laws which allow outside investment in English and Australian firms, and permit them to expand into multidisciplinary practice, will further sharpen their competitive edge.” 2
A key feature of the legal services market is the existence of channels to customers. Often sophisticated buyers such as banks, or government establish panels of providers – a selected pool to whom work will be offered. For example: “A consortium of local authorities have come together to set up a panel of lawyers from whom they will buy legal services….. The panel will be in place for a minimum of four years, with an option to extend for a further three. The consortium has negotiated discounted rates with the panel firms, with further discounts in return for providing a certain volume of work across a wide range of areas. In addition, panel firms will provide ‘added-value’ services, such as training, to consortium members. 26 firms and legal departments on the panel were chosen on a combination of quality of work, price, range of work and overall quality of the tender. More than 80 firms originally responded to the consortium’s request for proposal. Kent and Essex legal teams win places on new ‘outer London’ consortium panel.”3
One piece of research on City solicitor law firms found that the use of panels was much more widespread than in the past with, “Financial institutions, especially banks, and the largest corporations were the types of clients that were seen as both most commonly using panels and also having the most complicated panel arrangements which reflected their overall legal spend. Government bodies were also seen to be increasingly using panels.”4
For markets where referral fees are common, the approach, “for profit-maximising strategy for solicitor firms is to incur their own costs up to the point where marginal expenditure required to gain the next case is equal to the marginal value (i.e., the referral fee) that they can obtain. In this way solicitor firms maximise their total profits.”5
For some sectors of the legal services market, such as personal injury and conveyancing, competition has been increased due to previous reforms. One study reports: “In conveyancing: solicitors firms, threatened with outside competition in the late 80s, cut their prices and began to compete with each other. Fixed price conveyancing was offered and the relaxation of the profession‘s advertising bans enabled consumers to shop around in a meaningful way on price (hourly rates, the previous base of any competition, provided no means of ascertaining the actual price). The substantial reduction in profits that would have been expected as a result of this price cutting was offset by the property market picking up with sufficient vigour to shield the profession from the worst effects of its reduced margins. Prices were set in a more fixed and transparent way but by reference to (rising) house prices. New entrants into the market, notably licensed conveyancers, were rather thin on the ground and have not challenged the dominant position of the solicitors’ profession.”6
The challenge to the professions monopoly position has not come from alternative providers but from purchasers: financial institutions have for some time exerted a powerful influence as referrers of work, able to insist on reduced prices from shrinking panels of higher-volume producers often referred to as conveyancing factories’ (with persistent allegations that volume and price is achieved at the expense of quality).”7
This same research reported that “some work had even been tendered through Dutch auctions, while for other work the client may set the particular price that will be allowed for work and law firms can determine whether or not they want to be on the panel for that particular type of work at that particular price”.
Barristers compete with each other both intra and inter Chambers. In addition, barristers compete with solicitor advocates who have had rights of audience since the Courts and Legal Services Act 1990.8
In terms of how solicitor firms compete for work, there is some limited information on two areas of legal services provided by solicitors firms:
- Legal aid: Legal aid firms bid for contracts to undertake legal aid work in different categories of law, usually every three years. They are assessed against a range of service and capacity criteria, such as office locations, ability to offer a range of services. They are not currently assessed on price, as all rates of pay are set by the Legal Services Commission, as opposed to though price competitive tendering. Contracts allow providers to undertake a set number of cases, reviewed at least annually. Since 2000 a firm without a legal aid contract cannot undertake legal aid work.9
- City: Among City solicitor firms, research suggests10that competition is largely based on:
- Reputation – either of the firm, a practice area, or an individual. Membership of one of the different city firms groupings enhances reputation. There are some high profile, highly valuable and complex pieces of work for which only the Magic Circle firms would be considered sufficiently high quality to do the work. The role of the legal directories such as Legal 500 and Chambers were also seen as important ways of conveying reputation to potential clients.
- Panel membership – “clients use panels as way of providing a firm with a large volume of work for reduced fees. Prices are key but other factors such as provision of secondees to the clients firm, and or training of in house legal teams can also be important.”
- Price – “Even for repeat business for existing clients, it is increasingly common for firms to have to compete against other firms for particular pieces of work. For example, submitting formal tenders or attending a beauty parade would be typical”.