Breaking dawn

This year is likely to be remembered as the period when the transformation of the UK legal services market gathered pace. Fundamental changes are taking place as a range of new suppliers of legal services enter the market, some traditional law firms change their operating and business models, and new ways of delivering and using legal services emerge.

These changes come at a time when revenue and margins for many high street law firms are already under threat from the continuing economic troubles. Other issues such as new compliance demands on law firms and solicitors from a new regulatory regime (outcomes-focused regulations), client pressures for more fixed-fee pricing models, and reductions in law firm panels and legal aid funding are also concerns for many firms.

External forces

Of course, there have been some competitors to traditional law firms for many years, but the number of these competitors is likely to increase significantly led by the arrival of alternative business structures (ABS) which allow non-lawyers to invest in ?law firms. At the middle of February, ?the Solicitors Regulation Authority (SRA) had received 121 ‘stage one’ ABS applications including applications from law firms, insurance companies, consumer services companies and online legal service providers.

However, the changes are not just about ABS, as there are many other legal service models emerging, such as white-label legal services from organisations like the AA and Saga in conjuncton with law firms, branded franchise networks of high street law firms, legal retail outlets and DIY online legal services.

The UK legal landscape is changing significantly, although, at this stage, no one can predict the pace of this change. The experiences of some of the newer players emphasise the opportunities available as the market opens up: in just five years, the Cooperative Legal Services has grown to a £25m business and effectively become a top 100 legal practice; in less than a decade Parabis Law has become a £100m legal business; and in around 18 months the high street legal franchise brand QualitySolicitors has grown to over 200 law firms around the country.

Traditionally, the fragmentation of the legal services market has meant that there are hardly any national legal brands familiar to consumers. This is likely to change as more volume legal providers develop their services and non-legal consumer brands begin to enter the market. There is also a likelihood that increased advertising, marketing and branding of legal services could actually increase the size of the retail legal market as more consumers start to use legal services. Take the wills market, for example. Only around a third of adults in the UK have made a will so there are real market opportunities and advertising of low-priced, easy-to-use wills services from national brands is likely to increase take-up.

Generally it is expected that it will be the smaller and medium-sized law firms that face the most threat from these new suppliers and particularly those that operate general businesses covering various practice areas. Areas such as conveyancing, wills and divorce are high-volume, low-margin sectors that involve a large amount of routine legal processing. So these areas offer opportunities for commoditisation and economies of scale and appeal to some of the new larger players entering the market. Volume suppliers of these services among law firms are also doing well, so smaller law firms are fighting for a reduced share of the market.

In summer 2011, market research consultancy IRN talked to a panel of 64 high street law firms (firms with five or less partners) and asked what they considered to be the major threats to their firm in 2012.

New competition coming into the market was one of the two major concerns. The other was the general increase in practice costs they are likely face in the coming year. Thirty-four participants (53 per cent each) gave these factors. Alternative legal choices for consumers have increased in recent months, and will continue to grow ?in the next year, so it is hardly surprising that the new competitors are seen ?as a major threat. Increased practice ?costs include staff costs, insurance, ?more costs associated with compliance and in some cases office rent and ?lease increases.

No other factor was considered a major threat by a majority of law firms, but the third factor causing the most concern was the impact of the economic troubles on their business, mentioned by 35 per cent. Over a third also had concerns about the pressure on fees having a negative impact on revenue ?and margins and how they will deal ?with the new compliance regulations.

Play makers

Here are a few examples of the new entrants and new business models beginning to play a significant role ?in the market.

Legal services from a well-known and trusted national brand. Cooperative Legal Services was one of the first to announce its intention to apply to become an ABS. In November 2011, it recruited two leading family lawyers as the first stage in the development of a full range of family law services in 2012. The legal services business has also been merged with the Life Planning Service in 2011 and the latter service includes The Co-op’s funeral services.

Clearly, The Co-op’s network of outlets offers opportunities for advertising to a broad range of consumers and, already, a high-profile in-store campaign has been run in ?over 3,000 food stores aimed to ?increase awareness of its legal services. There have also been trials of legal advice alongside financial advice in ?bank branches.

Large law firms expanding. Irwin Mitchell. In 2011, the firm announced its intention to change and simplify its management structure ready for a possible ABS application and it confirmed its ABS plans in 2012.

Turcan Connell. In August 2011, this Scottish law firm with a strong private client practice announced that it is likely to apply for ABS status (the timetable for ABS in Scotland is some months behind England and Wales and ownership rules for non-lawyers are more limited).

Online legal services from traditional law firms. Last Cawthra Feather LLP has offices in Yorkshire but has set up online legal service Legal365 in conjunction with Freeserve founder Ajaz Ahmed. There are plans to develop the Legal365 brand on the high street as well and one shop is being trialled in Leeds. Visitors to the Legal365 website can obtain various legal documents from as little as £5 for a pet agreement (when buying a pet) to more traditional documents such as wills (£80 for a pair of wills for a married couple, or £125 for documents and a review by a legal professional) or power of attorney (£25 for document, or £50 to include a review by a legal professional).

Another law firm, Coodes, with offices in Devon and Cornwall, launched its Coodes Direct legal advice service in 2010. Visitors can download legal documents and access legal advice at a fixed price. For example, £120 for advice on a straightforward will and £400 for an uncontested divorce.

White-label services from law firms with others. Manchester-based Pannone serves a national client base from four offices and practice areas include family, dispute resolution and personal injury and accidents. In April 2011, the firm set up Affinity Solutions as a separate business unit to advise brands on setting up legal services and to offer white-label services to these brands. The aim is to partner with businesses from sectors such as retailing, utilities, financial services and insurance that might be planning a legal services brand.

Legal services from consumer service businesses. CPP Group PLC is a leading international provider of what it calls ‘life assistance’ products with sales growth in the UK driven predominantly by its credit card protection business. Services are offered to consumers on an annual subscription basis and it has recently launched a similar legal service, Your Law. For £59.99 a year, consumers have access to a 24-hour free legal helpline, fixed discounts on any legal work undertaken, the opportunity for more detailed consultations with a solicitor, and access to a members’ only area offering legal advice and legal templates and forms. CPP is working with law firm Irwin Mitchell and legal document company Lawpack. So far, Your Law is only on the CPP website but it is likely that the brand will be offered to some of CPP’s business partners mainly ?in the financial services sector.

Consumer network

These are just a few examples, and, over the medium to longer term, IRN expects the legal market to become even more competitive. More large national brands will start to explore the opportunities once they have seen the experiences of the early movers. Major consumer brands like the supermarkets, high street retailers and the financial services companies have large consumer databases, significant consumer recognition and loyalty, financial and marketing muscle, and distribution networks. All these will help national brands offer legal services that are cheaper, more accessible and convenient than most traditional law firms.

Overseas legal service companies are likely to enter the market. For example, US legal documents assembly service Rocket Lawyer, partly funded by Google Ventures, has already hinted at a UK launch. LegalZoom, another leading ?US legal documents business, may also arrive in the UK.

Legal process outsourcing (LPO) businesses and legal forms/templates businesses are well-positioned to ?take advantage of the volume opportunities in those areas of law ?which are process-driven. Some LPOs, given their focus on process-led activities, could become attractive propositions ?to potential investors looking to enter the legal market.

More private equity funding will be pushed into the legal market enabling funded businesses to invest more in their brands and business growth. Indeed, at the beginning of February another private equity deal in the sector was announced with Duke Street purchasing Parabis Law.

What is less clear is whether any of these new legal brands can actually carve out a significant market presence. The total UK retail law market (including personal injury, conveyancing, family law, employment law, wills and probate among other segments) is valued at around £11bn a year, so even a brand with £150m-plus sales a year would still only claim a small market share and there are few brands so far among the new players that are close to this £150m mark. What may be more likely is that a few brands will begin to take a significant market share in a specific retail market such as personal injury or wills and probate.

Pressure cooker

Smaller and mid-tier law firms are likely to be the ones facing the greatest pressure as the market becomes more competitive and more price sensitive. Some consolidation in the sector seems inevitable, although IRN does not believe that there will be carnage in high street law, as some have predicted, but a more gradual reduction in the number of high street law firms. So, what are the likely developments among high street law firms and how might the high street adapt?

Traditionally, there has been little appetite for mergers in high street law, but market pressures are likely to change attitudes for some in the next few years. Some firms will merge to gain size and rationalise costs, while others may merge with other local professional services providers such as accountants and estate agents to offer a one-stop shop.

Some smaller firms will be acquired by the new players to boost their volumes. Some will leave the sector, either through business failure or retirement. More high street law ?firms could consider shared outsourcing some support services to reduce ?costs, obtain economies of scale and increase competitiveness.

QualitySolicitors has led the way, but more high street lawyer franchise networks and membership groups have appeared in the last few months. Examples include HighStreetLawyer and face2face solicitors. These specific market initiatives are still in their early stages and, for many smaller law firms struggling to maintain margins, there is a Catch-22 situation. They may need to join a group to boost marketing, revenues and profits, but their current financial weaknesses make it virtually impossible to join such a group or be attractive to group operators.

More of these groups are likely to appear in the next few months, but, in the longer term, IRN expects some to fall by the wayside because they cannot reach a sufficient number of member firms, leaving perhaps two or three major national law firm networks.

More ‘virtual’ law firms will be created to take advantage of new ways of working, reduce overheads and increase outsourcing of non-core activities. Virtual firms will have the flexibility and low-cost base to be able ?to continue to compete effectively.

Online legal services will become more important and offer another opportunity for law firms, willing to invest in interactive and client-friendly websites, to compete with the ?bigger brands.

Evidence from IRN’s regular client surveys continues to show that experience and trusted advice are still the key factors when choosing legal representation, and that the overwhelming majority of consumers would still go to a solicitor/law firm for legal advice. Admittedly, this might change when well-known consumer brands start to market their legal ?services more aggressively and consumers become familiar with these brands as legal providers.

However, good client recommendations remain an important marketing tool for high street law firms and those firms failing to take advantage of these should look again at their value: ?surveys regularly show that, for the ?overwhelming majority of consumers, ‘word of mouth’, i.e. recommendations from friends, relatives, work colleagues, is the most important way of finding legal advice. Good recommendations ?and service reviews from clients ?should be a central part of a firm’s marketing strategy.

David Mort is a director at IRN Research