Beyond ABS – A Review of the Post-Legal Services Act Market

It is now three years since we released our white paper Beyond ABS: The Future for Independent Law Firms, in which we sought the views of senior lawyers, bankers, insurers and academics on the prospects for the post-Legal Services Act market. We also made a number of our own predictions for developments in the market over the coming three to five years, and the timing therefore seems apposite to look back and review how the situation and prospects for independent firms have moved on in this time.

The context here is that many firms are enjoying their best year for some time, with a booming residential property market and company/commercial transactions growing along with the economy. There is consequently an assumption in some quarters that the ‘old normal’ has returned.

However, as we argued in our recent article, this is not the case. Some lucky firms will find that the improving economy saves them from facing up to difficult issues, while others may enjoy temporary respite. But, as we predicted three years ago, some deeper changes have been taking place.

Consolidation

Our analysis has been based on the forces that we believe are shaping the market – deregulation; globalisation and low-cost competition; and technology. We can now add to this cutbacks in Legal Aid and the impact of the Jackson reforms on the Personal Injury market. Our prediction in 2011 was that pressures from above and below would squeeze mid-market firms, although it was unclear to what extent this would lead to consolidation.

There have been large, high-profile insolvencies, including of Cobbetts, Blakemores, Davenport Lyons and Atteys, and a host of smaller mergers and local takeovers. However, the impact to date has been less far-reaching than initially predicted. Our prediction was that the best mid-market firms would prosper at the expense of less efficient rivals; we still feel that there is more to come and are reminded here of Bill Gates’ famous quote:

'We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.’

External Capital and Ownership Structures

There was some disagreement around the extent to which external capital would penetrate the legal market, with commentators predicting that the impact would be greatest either for the top firms or at the bottom of the market. Our prediction was that low-value, process-driven work would be most susceptible to external investment and Alternative Business Structures, but that the impact would be limited in the middle tier of the market.

As we suggested, the emergence of ABS in the form of offerings from Co-Op, the AA and Saga has had an effect lower down the market, but as yet the impact has not been felt in the mid-market. Whether or not the reach of these businesses extends further into higher-value services remains to be seen, but typical ownership structures for medium-sized firms are yet to be notably affected.

Delivery, Pricing and Technology

One common theme emerging from our research was agreement that models of delivery would have to change and far more effective use be made of technology in delivering an efficient service, driving down unit costs and passing on savings to clients, as well as enabling more integrated management of client relationships.

Three years is perhaps an optimistic timeframe in which to notice significant changes to delivery, but more and more firms are employing technology solutions to allow them to deliver, for example, more fixed-fee services. This is another area in which we expect to see far deeper changes in the next five to seven years.

Business Development and Service

One of the keys to developing a niche practice and commanding premium fees for a premium service is successful business development, managing relationships with clients and safeguarding the firm’s brand.

At the height of the recession, budgets at many firms were cut, but we are now seeing increasing investment in business development and more interest in training staff to hold the important conversations with clients.

Strategy and Management

Again, it is difficult to identify clear changes in strategy across the market, but our prediction in 2011 was that firms would need to pursue one of two distinct strategies. Those firms seeking to compete on price would have to reach a certain critical mass, taking advantage of consolidation to grow and achieve economies of scale. Others would be better advised pursuing a ‘niche’ strategy, focusing on service and quality. We certainly stand by this analysis.

People and Performance

Attracting, retaining and developing the best people has always been vital for service businesses, and law firms are no exception. The prediction was that this would only become more important as the market becomes more competitive.

We have seen over the past three years an increased focus on training and CPD in the ancillary skills, such as finance and, in particular, business development and client relationship management. We expect this to continue. The war for talent in Property, in particular, is fiercer than ever – and many firms are held back by their inability to recruit.

Changing Markets – Changing Models

The pace of change over the past three years has perhaps been somewhat slower than predicted, but the trends we identified continue to underpin developments in the legal market. The forces we identified, as well as more recent politically driven austerity policies and pressure on prices, remain as relevant as they were in 2011.

In the medium term, business models will need to change along with markets, and delivery will more and more be driven by technology – in financial and business management, in service delivery, and in business development. We may have overestimated the pace of change in the past three years, but within ten years the nature of change will exceed any expectations.

Please email barry.wilkinson@wilkinsonread.co.uk