Dynamic market analysisMarket trends
A growing legal industry
Looking at the number of individual authorised persons over time shows large increases for solicitors and barristers, with falls in the number of trademark attorneys. However this fall may be a result of changes in dual registrations between trademark and patent attorneys. The biggest increase is solicitors working in-house.
Looking at total market values, Office for National Statistics data for the UK shows the legal services sector total industry turnover returned to pre-recession levels in 2010/11 reaching £25.49bn compared to £25.47bn in 2007/8. There was a fall in turnover of around 8% for solicitors’ firms between 2007/8 and 2008/9, returning to pre-recession levels in 2010/11. However, for barristers and other legal activities, turnover grew during this period driving the return to pre-recession turnover levels for the whole market. During this period, solicitors’ firms consistently account for around 44% of legal industry entities and generate around 60% of the total turnover.
Non-solicitor and barrister legal services consistently account for a third or more of total industry turnover. While services provided by unreserved legal businesses are included in these figures, there is no way of separating these from reserved legal service providers. This breakdown is shown below.
While these figures suggest little change in supply, the SRA statistics1 show the churn of solicitors’ firms – the ratio of firms closing to those opening – increasing from 1:1.8 to 1:2.3 over the 2008-2011 period. Over this period, the proportion of all solicitors firms classified as sole practitioners fell from 46% to 39%, and the proportion of firms classified as 2-4 partners grew from 41% to 46%.
Changes in services between 2007 and 2011
The major reported changes in the legal services market since the introduction of the Legal Services Act, but before the implementation of alternative business structures (ABS) can be grouped into four areas:
1. Collectivism: Establishing network brands
Some existing law firms are trying to establish recognisable brands through harnessing collective marketing before the implementation of ABS and new entrants. Examples include Law Net, The Legal Alliance, Lawyer Locator and Quality Solicitors: “Quality Solicitors launched with 15 firms in May 2010, with a further 55 in November and an additional 50 by February 2011. However, the network passed the 150 and is planning on having more than 250 by the end of summer 2011 meaning the cover 19% of the five to 25-partner firms‘ segment. They only allow one firm within a given catchment area but the criterion may be refined to reduce the size of the catchment areas and allow more firms in more densely populated areas.2“ These are separate organisations operating under a franchise as opposed to representing a full merger.
2. Expansion: Changing services
Existing law firms are expanding the services they offer, though it is not clear how many are doing so and to what extent. One approach taken is harnessing technology to provide new routes to market. For example some firms have developed a range of online services targeted at different segments, operating under different brand names3.
Another approach appears to be changing the breadth of services offered, with a survey of solicitor firms showing that 30% said the Act had made them more interested in exploring the potential of a joint venture with an independant financial adviser (IFA) and 33% were interested in a joint venture with an accountant while 27% wanted to explore the potential of a multidisciplinary practice including both IFAs and accountants.4
3. Structural: Changing frameworks
Structural changes have taken place with the advent of legal disciplinary practices (LDPs), the rise of Direct Access for the Bar, and the development of the ProcureCo model by the Bar Council: “it is a model of practice which enables the traditional Chambers to remain and thereby does not give rise to a partnership with its attendant problems of conflict of interest; secondly, it enables the Bar to make inroads into areas of work that it has not hitherto been effective at penetrating; thirdly, it reverses the traditional role of the solicitor as instructing lawyer since now the ProcureCo can set up its own panel of solicitors to instruct as and when required to assist in performing the contract; and fourthly it provides a vehicle that once formed can be readily adapted to take account of future regulatory changes5“.
4. Competition: Rise of ‘unreserved’ firms
The most reported example of an organisation offering unreserved legal services during the 2007-2011 period was Co-operative. Launched in 2006, Co-operative promoted legal services to 17m weekly shoppers on legal advice on will writing, estate administration, employment and personal injury claims6. In 2010 it was reported that “Co-op‘s legal services business grew by 45% from £14m to £20m, with operating profits up from £1.7m to £3.8m. The group claims it is now one of the leading providers of wills, probate and estate administration services in the UK”.7
Organisations offering unreserved services are able to operate beyond the reach of existing regulation. However the RIR found no other information on changes in other unreserved services.
Drivers of market changes
The research sources reviewed as part of the RIR provided a wide range of commentary on why changes are taking places within the legal services market. These have been grouped into seven main areas set out below. Clearly there is a substantial degree of overlap in each of these factors and they should not be considered in isolation. This was echoed in a 2010 study where reforms to legal aid, increasing use of non solicitors to provide legal advice, technological change and consumer adaptation to new technology, outsourcing, and referral fee changes, are all cited as drivers of market changes.8
1. Technology expanding reach:
Legal information solutions are being used to substitute for the professional services of a lawyer and expand the market reach of firms. Allowing organisations to mass market legal services on line, whether they are traditional law practices or not. One commentator writes that “these new non-lawyer legal websites are very efficient. Once content is published to the site there is little else that the publisher has to do to generate cash flow, except to market the site on the Internet. Consumers pay with a credit card. Cash flows directly into the publisher‘s account within 48 hours of purchase.. … These new alternatives are capturing or acquiring clients from both the latent market for legal services and from existing law firms”.9 This suggests that technology can be used to offer lower cost fixed prices services to clients who can access these services at their as opposed to providers convenience. In one example of use of technology one firm claimed to have taken on 80 new divorce cases a month, citing the firm‟s accessibility, customer service and clarity on costs (fixed fees) as a reason for this volume of work.10
Another commentator states that because of this technology “Clients will eschew bespoke services, demanding more efficient, less costly points on the continuum to commoditization. Lawyers will pay more attention to recognition (of the
need for legal advice), selection (of the source of legal advice) and service (the process of delivering legal advice and assistance), and IT will optimize each of these stages11.“ This suggests that technology will lead to 5 types of lawyers in the future:
- Expert trusted advisers – handcraft legal solutions, but their work is a luxury clients will not pay for.
- Enhanced practitioners will support the delivery of the standard and commoditized packages produced.
- Legal knowledge engineers utilising legal expertise.
- Legal risk managers are counsellors who avoid legal problems .
- Legal hybrids schooled in complementary disciplines aligned to law, project managers, strategy consultants, etc.
Research into individual consumers found that the use of the internet for advice seeking steadily increasing from 4% in the 2001 survey to 11% in the 2004 survey to 16% in the 2006-9 survey.12 However in 2010 there was no evidence of widespread use of technology in the way that these commentators envisage.
2. Corporate Client demands:
A recent survey of 81 in house counsel reported that they will retain more of their work in-house as technology enhances their ability to handle major projects in-house and to access the knowhow required to keep sophisticated jobs in-house. As a result, despite the budgetary pressures they face, 22% of general counsel expect their departments to grow further in size, compared with just 4% who expect them to shrink.13
In the US, it is reported that corporate clients have had a substantial impact on the way law firms handle core matters, such as billing and staffing. This has led to legal services being split into three distinct types of matters:
- “Outsourceable” matters, such as document review and standard contracts.
- ”Running the Business” matters that are deeply ingrained into how businesses work, like intellectual property, compliance and employment issues.
- ”Betting the Business” matters that are critical to the success of the company, such as antirust or securities litigation or bankruptcy.
“This hierarchy has an implicit value attribution, whereby matters that can be outsourced have a lower value, because, arguably, they can be performed by anyone with fundamental legal training. Clients therefore expect these kinds of legal services to cost the least out of the different layers of service. At the top of the hierarchy, Betting the Business matters include not only major transactions and litigation, but also knowledge of how to work government agencies or understanding how a case will be positioned in the media.14“
3. Increased sources of supply:
Growing numbers of solicitors and barristers have increased the pool of supply of reserved legal services. However the breadth of supply has reportedly been widened as a result of technological developments making legal process outsourcing viable. As one piece of research reports: “The value chain for law firms is disintegrating. This possibility had existed for some time, with new ICT technology. Much of legal knowledge can be standardized, systematized, and packaged for delivery using self-service and smart systems. Moreover, the billable hour, which developed as a common way of charging clients, has come under severe attack, as the notion of professional autonomy and self-regulation came into conflict with the notion of business efficiency and consumer interest. Combined with the availability of new locations as sources of supply of talent, ICT has pushed global corporations in the direction of off shoring”.15
4. Changes in the law:
Reforms to the courts have been cited as a cause of the fall of 29% in the number of civil court cases between 1997 – 2003. Changes in the law have been cited as a driver for the increase in criminal trials, with 3,000 new criminal offences since 1997.16
5. Recessionary impacts:
6. Anticipation of ABS:
Current providers have been preparing for the introduction of ABS, in anticpation of a range of new entrants. It is belived that new entrants will be attracted to legal services because “There is a large fragmented market of series of markets with identifiable over capacity and inefficiency. The reserved, unregulated consumer services will probably be most attractive ….. though the £2bn legal aid market could also be tempting.Capital could be made available for investment in expansion or IT consolidation. There are economies of scale to be derived from investment in and the restructuring of commoditised or bulk services. They are in a position to expend and exploit their brands in ways in which the fragmented high street is not.“
7. Reduction in public funding:
While legal aid represents around 10% of the value of the legal services market, nearly a third of solicitors legal practices and around a quarter of self-employed barristers undertake this work. Therefore it is reasonable to conclude that changes in legal aid are a significant driver of changes in the legal services market.18