Feb 21 '13
Last week we looked at the layout and state of the UK legal economy and it gave us all something to cheer about. Yes things are hard and will continue to be so, but the Law Society expects an eventual return to stable growth of 4% in the next 4 – 6 years.
Until then and in the immediate term, we all need to be mindful that the fate of the legal industry is closely tied to that of the UK and world economies and that new thinking and practices are the key to running a successful legal business.
This week we want to look at Part 2 of the Law Society report which looks at the four main sectors of the law industry: the top 200 firms, small and medium sized solicitor firms, advocates and in-house counsel.
Today we want to be more specific and firstly look at the top 200 law firms in the UK, and secondly at the UK’s SME law firm market.
In total there are 9,776 firms in England and Wales and as you should know, not all of them are big corporate types. In fact 9,309 are small and medium sized by turnover.
It has taken us a while to wade through this monster of a report, but to make your lives easier we have, here are the key points.
We’ll begin by looking at the UK’s top 200
The Law Society’s 102 page report produced a huge wealth of data and information on recent legal market movements. In order to synthesise and provide the total view we’ve decided to list the key findings on the performance of the UK’s top 200 law firms.
The top 200 UK law firms make up 2.1% of the UK legal market but drive 62% of the turnover in the legal economy.
The top 200 can be subdivided into four categories.
Firstly, the five member Magic Circle family which account for 20% of top 200-firm revenue. Four of these firms are deemed global leaders.
Secondly, silver circle firms are practices with big domestic and international client bases and fall within the top 20 of the UK 200.
Thirdly, ‘the majority’ make up the rest of the UK top 200. The 51-200 tier was responsible for one third of the revenue generated by the top 200 law firms.
The third grouping are made up by a range of different law firm models, from those with a limited international reach to more regional firms. Mergers have been a big trend in “the majority”, however only 7% of the firms surveyed had a desire to take advantage of the Legal Services Act and adopt alternative business structures.
Alternative business structures and deregulation is rattling established actors – The Co-op drove big revenue in 2011 and others have enjoyed positive growth which has rattled more established large law firms. It’s also shown that new business models and services offer real upside potential.
The top 100 UK firms stabilised their fee income in 2011 after a turbulent two years.
Increasingly top 200 firms are enjoying fee income from international clients which is encouraging ambitions for international expansion – 47 of the top 200 have offices overseas which include all of the top 20. Reports of a shift to international markets “is clearly in evidence”. Emerging and growth markets show real potential.
The top 200 cover a range of legal services but are dominated by business and commercial work which is responsible for 47% of top 200 turnover.
The Law Society identified 6 key challenges facing the UK top 200:
- client expectations
- growth of regulation
- economic challenges
- emerging markets
- technology (tools)
- alternative business models (LPO BPO)
The Law Society identified 3 solutions to face off the on-going difficulties:
- “Clear strategy and flexibility” is required to meet the challenges.
- build a niche/specialist practice
- drive towards globalisation
The second part of the report looked at High Street and Retail Solicitor Firms
These are the guys who provide the off the shelf legal service, everything from conveyancing, wills, probate, family law, employment law and personal injury. The individuals they serve are private individuals (56% of client base) and small businesses.
So, what do you need to know?
Small and medium sized solicitor practices make up 98% of solicitors firms in the UK legal economy.
In July 2012 there were 4,482 sole practitioners (44.4% of all firms), 4,152 firms with 2-4 partners (41.1%), 942 firms with 5-10 partners (9.3%) and just 331 firms with 11-25 partners (3.3%). This represents a total of 51,184 solicitors. This is a big rise from 1997 when there were 38,796 solicitors, but lags the growth seen by the large firm community.
Growth in the number of small and medium sized law firms has slowed since 2007.
No single practice area can be identified as a primary driver of revenue as is the case with the top 200, however these six key practices are dominant income drivers:
- personal injury, accident, medical negligence – 15.4%
- business and commercial affairs – 15%
- residential conveyancing – 12.1%
- family law, including matrimonial and child care law – 11.5%
- probate, wills and trusts – 10.6%
- crime – 10.4%
Within this area of the market there were a number of key trends to note:
- Move to specialism – In the main part, small and medium sized law firms offer a broad range of services. However, it is important to note that 27% of UK SME law firms were described as ‘narrow practices’. These are firms where 90% of their workload is grounded in one single area. ‘Narrow practices’ are most commonly focused on criminal, immigration, employment and employment practice.
This is an interesting trend and deserves note. Leading legal commentator David Lat has previously explained that in order to survive and succeed in the new normal of legal practice, law firms must go global or go specialised.
Whereas the UK top 200 firms are showing an appetite to expand into the global economy, small and medium UK firms appear to have an appetite to get narrow and specialised.
- Mixed technology uptake – According to the Law Society Technology Survey 2011, 26% of UK law firms have no website.
Emergence of new business models – The top 200 law firm category has shown that large law firms have been taking advantage of alternative business models and succeeded. It’s also shown that established businesses can take a lateral side step and effectively establish themselves in the legal economy. Small to medium sized law firms have also shown a readiness to adapt to the new environment and adopt new practices and processes. As of January 6 2013 the Solicitors Regulation Authority has licensed 60 ABSs
Some examples worth considering…
Franchises – a number of market actors have used this time of crisis to reinvent themselves by offering franchises.
Dispersed law firms – Technology has born the dispersed law firm, which is stocked by staffers working from home around the country. Keystone Law and Scott-Moncrief and Associates are leading examples who are forging ahead on this model. This also includes the rise of freelance lawyers. Interestingly the Law Society reported that Eversheds has recently adopted this model.
Virtual Firms – Virtual firms sell legal services online. This typically concerns commoditised legal products such as wills. This has the enhanced benefit of giving clients direct access to legal documents. Epoq’s “Desktop Lawyer‟, the US online legal document service Rocket Lawyer launched in the UK in 2012 and UK online legal document service, LegalZoom are other examples of technology driving change in how legal services are run and delivered.
Going forward 5 key challenges remain for retail and high street lawyers:
- Market evolution – ABS and new business models such as franchises, dispersed and virtual firms.
- Technological and process innovation – widespread access to internet, mobile communications and growth of business IT solutions.
- Global and national economy – drop in demand from business and individuals, difficulties in obtaining credit
- Government agenda and regulation – legislative developments have altered legal aid, ban of referral fees for PI cases and liberalisation of the legal industry.
- Changing consumer habits – the power of the consumer lobby is applying considerable pressure on legal service deliverers.
As SME law is so closely coupled to the health of the economy and consumer sentiment the short term will remain challenging. Large market movements including business failures are a very real possibility. This could result in increasing mergers and buy outs, and also raise the possibility of the folding of some law firms.
However, times of crisis can offer opportunity. Economic difficulty requires fresh thinking and new ideas and there are opportunities for those who stick their head out and try new things in relation to specialisation, business development benefits through technology and tapping into unmet needs.
Of these, technology in particular offers the ability to streamline processes and services. The report noted also that the internet offers marketing and brand development opportunities that were formerly unobtainable.
A final compare and contrast… Comparing the performance of the top 200 to the retail and High Street sector
The Law Society has identified that retail and High Street practices have been proportionally more affected by the continuing down turn. Where large law firms can draw revenue from international clients and expand into new markets, small and medium sized firms are inextricably linked to the performance of the domestic economy which continues to falter.
Economic indices such as consumer sentiment, housing prices and GDP are effective market tests for gauging the state of the legal economy in the UK.
SME law fee performance over past 3 years:
- 42% have experienced a drop in gross fee income over the past 3 years
- Only 27% reported an increase
Top 200 law fee performance over past 3 years:
- 15% reported decrease in fee income
- 62% said fees were up from 3 years ago
As noted by the report, this data represents a more serious drop in demand for high street legal services that for top 200 services.
However, the mechanisms for gaining instructions remain solid for all. Small law firms acquire proportionally more clients through referrals and recommendations than the top 200. Non-top 200 firms acquired 34% of new clients through referrals while the top 200 gained 21% of new work through a referral process. All firms regardless of size rely heavily on repeat clients as a source of business. Repeat clients represent roughly 50% of business, which rises to around 70%.
For both the top 200 and the high street sector of the UK legal economy there have been winners and losers. It’s also clear that the high street sector have been more affected by the economic headwinds of recent years.
However the varying state of health of the various suppliers has shown that, in spite of the difficulties, law firms can still succeed and grow business.
As we move forward it’s important to take note of the recommendations laid out by the Law Society on how law firms can tackle the current challenges.