The big bang

The unprecedented challenges facing the legal profession will be familiar to all but the most complacent of high street firms. The UK's regulatory environment, which once protected solicitors from competition, is undergoing the most radical shakeup in its history, a moment akin to the big bang in financial services of the mid-eighties. Those of us who practise in small to medium-sized firms now face an onslaught from banks, insurance companies and even supermarkets that have announced their intention to offer legal products to their customer base.

We in the profession have been used to dealing with other collegiate partnerships like our own firms. In the new legal landscape our adversaries will be money-making machines with enormous brand awareness, marketing muscle and IT capability; not to mention customer bases which number into the millions.

The part of the profession most likely to be affected by the changes is already mired in a whole host of problems: a rise in indemnity insurance premiums, government cutbacks in legal aid and the lingering impact of the global recession.

A recent survey of 129 small firms conducted by Wesleyan for Lawyers found that 57 per cent have seen their fee income shrink in the past 12 months with more than a quarter reporting a drop of ten per cent. Half have been forced to make major redundancies, nearly a quarter have closed at least one office and 72 per cent will have to borrow money to meet the increased costs of professional indemnity insurance. This may be just the beginning. According to research conducted by the Legal Services Policy Institute, as many as 3,000 high street law firms (35 per cent of the total) will have to disappear in the subsequent upheaval as new providers enter the market.

With the impact of commoditisation it is likely the market will become increasingly process-driven and develop along similar lines to that for residential conveyancing. If that's the case, in five years' time, fee earners may have to charge about 35 per cent less for the same work they currently perform; this, when many firms operate on a margin of 20-30 per cent.

Off the peg

Is it time to herald the death of the high street? Certainly firms are facing unprecedented pressure and those that are not currently planning for change will face a tough outlook. However, other consumer data has presented a more encouraging picture. Research has revealed that a segment of clients will always require a bespoke, customised service and are therefore looking for a relationship with a professional. When accessing legal services, consumers prize expertise, trust and local knowledge '“ all the key values of a smaller firm. This suggests law firms with good local reputations with be able to withstand competition if they can successfully reach out to and meet the needs of this potential client base. To do so will require these firms to overcome two major obstacles: the demands of clients for greater convenience and ease of access to services and the now pressing need to generate greater efficiencies within the practice. With advances in technology both are now within the capabilities of small firms.

The new entrants to the legal services will be the streamlined, modern and efficient businesses that consumers are used to dealing with in other areas of their day-to-day lives; organisations which have invested huge amounts of capital into their customer services. In contrast, the small size of most firms and a set of engrained cultural problems have prevented many from investing sufficiently in customer service.

The result has been a very high number of complaints and a poor public reputation. A survey conducted by an online legal portal found that only 54 per cent of retail clients considered their last contact with the legal profession was money well spent, with 23 per cent describing their lawyers as bad communicators. Research by consumer rights organisation Which? confirms this grim picture of public perception. Matters are made worse by inefficiencies and a duplication of costs; each of the UK's 10,000 high street firms needs to recoup their expenses and, because of their size, are unable to achieve substantial economies of scale. This results in higher prices for clients.

Trail blazing

It is clear that innovation is required but many firms still operate only during traditional office hours and require clients to visit the office '“ a practice which is more and more out of step with the modern lifestyle. A large segment of today's consumers of legal services are part of an internet generation which is highly receptive to new methods of online delivery. These individuals are 'wired'; they use online banking, comparison engines to find and purchase financial services products and an array of internet-based services in the course of their working lives, and they are used to a culture of online communication and relationship building.

These consumers increasingly expect the same level of interaction from their legal service providers. It is said 50 per cent of online legal searches now contain the word 'solicitor'. These now number more than two million a month in total and the number is growing rapidly. Our own research, conducted by YouGov, revealed that 56 per cent of consumers expect good law firms to give customers the ability to use their services online in the next couple of years.

Far from being peripheral, the web is now clearly an important channel for law firms and this trend will only continue. The question is can law firms offer more than just brochureware for their online presence? The vast majority offer a website that simply lists the firm's staff, services and contact information without any of the interactive elements we see in other industries such as secure client areas, online helpdesks and interactive questionnaires.

Now technology platforms have come to market which operate on a 'software as a service' model (saas). These third-party applications allow a law firm's clients to collaborate with their solicitor and perform legal tasks over the internet. The impact of these web-based, interactive applications is to save the lawyer time and often increase lawyer productivity and profit margins, while providing a more convenient and satisfying experience for the client. Small law firms can now adapt their business model without prohibitive capital investment, service their clients in a very different way to the traditional high street firm and overcome many of the barriers described above.

Clients who choose an online service, such as an employment contract or a partnership agreement, are presented with an interactive question-and-answer session via their server. These systems use pre-programmed logic to ask the user the same questions a lawyer would ask in a client interview. As the user answers these, the system determines the right language and clauses to be inserted into the document to reflect the client's circumstances.

The end product is a detailed first draft of the legal agreement, which should be individually tailored for the client. Once completed, the draft can be securely sent through to the solicitor for review and further changes. The client is also able to log into a secure client extranet, communicate electronically with the firm, pay fees and check the progress of their matter.

Using this approach, legal documents can be produced at a fraction of the internal cost, increasing a law firm's recoverable hourly rates. The time solicitors have to spend on the interview process is massively reduced, yet, from the clients perspective, the firm is providing a more convenient and accessible way of delivering law.

By shifting a proportion of the legal work onto the client, fee-earner time can also be freed up to concentrate on more complex matters and consultative elements of the solicitor-client relationship. And, as the service can be paid for online, further cost savings can be achieved by negating the need to issue and chase up invoices.

For law firms implementing this model the website is increasingly becoming the primary way to relate to clients and manage the flow of legal work. Firms can add information to their homepage about their interactive capabilities, which save clients time and money. These will set firm apart from others and increasingly attract a client base that increasingly prefers to do business over the internet.

Price wars

Another area of opportunity is pricing. According to research complied by business advisory group Selling for Solicitors more than two thirds of the 105 firms surveyed reported they had come under strong or moderate pricing pressure from clients, but they had largely resisted this. With an online strategy that reduces internal costs, law firms could use their improved margins to address client demand for clarity of price as they will be able to provide certain document services at a fixed fee.

The market in which we have been used to operating is changing beyond all recognition. The entrance of retailers, banks and insurers into the market will introduce consumers to new models of legal service delivery; multiple service levels, legal packages, efficient customer service and greater accessibility. However, this can serve as a catalyst for change among traditional law firms, offering scope for some real innovation, and affording firms the opportunity to build better relationships with clients, generate new revenue streams, and tap into latent markets.

To compete, law firms will have to rethink their business model; their technology, pricing, distribution and workflow. Time will tell which will be up to the challenge and which will succumb to market pressures.