The Future of the Legal Profession

The news that Irwin Mitchell is considering becoming the first law firm to float has come as no surprise to many of us. Irwin Mitchell has a proven track record in adopting change and has been described as a personal injury powerhouse, carving a path for others to follow.

As traditional practices come under increasing pressure to change their ways or be forced out of business, Irwin Mitchell is aiming to become the leading supplier of commoditised legal products when the Legal Services Act comes into force.

Will this and the arrival of the “brands” change the way many law firms market their services and their practices?

Do you believe that your own brand in your local community has no value?

Are you seen as the trusted advisor but have failed to exploit this relationship with your clients, customers and other professional introducers?

Alternatively, have you advocated your responsibility for the survival of your practice by jumping on the QualitySolicitors bandwagon, building a brand that you do not own?

We have all heard about the estimated 3,000-plus legal practices which are expected to disappear over the next few years, with the impending arrival of the Act and increased competition. I have little doubt that the prediction is correct, particularly as we are still seeing many firms which refuse to face or embrace the substantial changes that are set to arrive in the very near future.

Law firms’ options are unquestionably limited; consolidation in the sector is inevitable and a strategy for survival could be to grow by acquisition or merger. However, this will not change your practice sufficiently unless you adopt a very different approach to packaging and delivering services in a less transactional way.

The alternative is to become a specialised niche player, drastically reducing overheads and delivering a web-based solution, thus joining the large number of new entrants into the sector following redundancy.

We have seen 1,126 new firms being formed in the last 12 months, whilst 484 have simply closed. This is a net gain of 642, the vast majority of which are limited companies.

We are already seeing numerous practices being absorbed by larger firms whilst mergers of medium-sized firms are also, I believe, set to increase, as partners seek to create larger stronger regional practices.

Larger firms have become the predators and many are looking to grow by acquisition. As a contact at one newly merged firm told me: “Merger? We just merged into the background!”

Hence a word of caution. If you are considering buying, selling or merging your own practice, don’t attempt to go it alone and negotiate your own deal.

Although an element of compromise is essential in every negotiation, having a professional on your side will help achieve the best possible outcome – and your survival.

Sadly, lawyers who don’t want to be part of a radically changing profession are unable to simply “shut up shop” because of the provision of run-off cover – the insurance that must continue to run after a law firm ceases to trade.

We are already seeing firms merging on the simple premise that there is no capital value whatsoever in their practices, but their run-off cover can simply be absorbed into the larger firm’s professional indemnity premium. The best that partners can hope for in such cases is to achieve a salaried partner position or a consulting agreement for a limited period.

The other alternative is to grow by stealth, finding innovative ways to both deliver and package your services. Deciding on who your clients actually are is crucial before you decide what types of services you will offer – commoditised or restricted?

Many partners, principals and directors of legal practices are not only juggling the day-to-day challenges of running a business covering everything from financial management to compliance issues to personnel (whilst, in many cases, fee-earning in their own right!), but having to also make time to consider the strategic options for their practices in the short, medium and long term.

Owners of law firms that want to survive the tough years ahead have to adopt innovative thinking in order to take their practices forward, understand and consider what is required to keep their business financially viable and plan to continually build on existing success.

Creating value in a current practice will also make that firm a more attractive merger or acquisition proposition than other less progressive practices, if this becomes the preferred option.

As time progresses and we see a growing number of practices choosing to sell or merge, we will see less value placed on them. Therefore preparing yourself now for a possible opportunity is essential if you are thinking of selling or merging.

It is vitally important that there are specific policies, procedures and controls in place to ensure that the practice is not only a financially viable proposition, but to allow a degree of compatibility with future potential partners or investors.

The management and structure of the business, its finance, personnel, technology, clients, risk management and marketing all need to be considered carefully – and without delay.

For lawyers who envisaged an enjoyable career and then a comfortable retirement, this is no doubt uncomfortable reading. But the current situation will not pass – it will simply become more acute.

Every single law firm needs to take a decision now on where it wants to be in the next five years and how it’s going to get there. Putting this decision off is not a realistic alternative – it simply makes matters worse and reduces the options available.

The good news is that for firms prepared to rise to the fundamental and inevitable challenges ahead, there will be opportunities. The market for legal services in England and Wales is an astonishing £26 billion and this is likely to increase in the foreseeable future.

Will opportunity be knocking on your door? Or will that door be closed for business?






This article first appeared in Legal Futures and is reprinted with the kind permission of Viv Williams.  (Actually, it was his proxy, Brian who sent me a text agreeing to allow me to reproduce it here!)

I was watching repeats of QI on the TV channel “Dave” the other day and Stephen Fry asked the panellists a question:

“What did the Dik-Dik do that the Dodo didn’t?”

There were the usual humorous replies and verbal dancing round the handbags until the true answer came out; which was that the Dodo lived on an Island and had no predators, so when man arrived it had no fear of man and was therefore wiped out by hunters.

Whereas the Dik-Dik, a small antelope the size of a small dog, lived in Africa and had predators all around it.  In fact everything from large birds to jackals and reptiles wanted to eat it and it was afraid of almost everything and so it developed strategies for living and was still with us.

So the Dik-Dik hid from man and the Dodo didn’t…and ended up extinct.

The panellists' banter continued and it was mentioned that fish in large tropical fish tanks are kept fit and healthy by the inclusion of a predator in the tank.  The idea being that the large majority of fish in the tank have no desire to be eaten, so they keep a suitable distance from the predator fish; when the predator fish goes left, they go right and so on and the exercise does them all good.

The subject then moved on to Darwin and evolution and the fact that Darwin never said “Survival of the fittest” what he said was “It’s not the strongest of the species that survives nor  the most intelligent that survives. It is the one that but those most adaptable to change.”

So far so good, but what does this have to do with lawyers?

Well, the next day I was reading (flicking through) a couple of law journals and towards the back they always have a page devoted to staff movements; you know the sort of thing; “Bloggs and Co are delighted to announce their new employment law partner Mr Smith, who has joined them from Briggs and Co” 

There were about 10 of these announcements in one journal and 14 in the other one, all saying the same thing.

What struck me was that the lawyers of one medium sized firm left and moved to another medium sized firm.

In the 24 examples that I read, 90% of them had simply traded employment in one medium sized firm for another!

I looked back at some old journals and saw the same thing with the same stats.

What that tells me is that the thinking, processes and culture of one medium sized firm almost identically resembles the other; the only real differences is the office location and the personalities of the staff and partners.

On that very subject, I saw an article about lawyer personalities and what makes an ideal lawyer, but then I remembered something else that I’d read about lawyers sense of self-importance; which is a subconscious element in most people.

It went a bit like this: to become a lawyer, one must go through life as an achiever, otherwise you’d never make the cut. 

As a student at school you must get decent grades. Your self-importance “thermometer” rises.

This sets you apart from the others and you earn a place at University.  To graduate you will have passed a number of exams and seen a number of your peers drop out for various reasons. Another rise of the mercury.

You are accepted for a Diploma or Legal Practice Course ( LPC ) place.  Up another notch.

Some peers drop out and you pass. Up again.

You win a traineeship. Click.

You finish the traineeship. Click.

After a few years of pay rises and titles, you are selected as partner material. Getting hotter.

After a few years as partner, dispensing advice to clients who come to you and pay you an hourly rate that is a weeks wage or more to many, your sense of self-importance is now right up there.

Now tie that in with the Dodo, Darwin theory, the movement of partners between firms.

Lawyers have had no predators in the past. They are intelligent but not adaptable. They move from one firm to another that is almost exactly the same as the firm they just left and they have a sense of self-importance that means they do not and will not listen to advice.

In a Zoo, the gene pool needs some outside help otherwise the animals in-breed and that causes physical and mental deformities.

The changes that the Legal Services Act and ABS brings might just be the DNA that the legal sector needs to survive.

There are currently some 11,000 law firms in the UK and these can be split into five very unequal categories.

Firstly, we have the magic and silver circle City firms, which account for approximately 50% of the estimated £26 billion spent on legal services each year.

Secondly, we have a number of financially-strong national and regional practices already embracing change and who are prepared to adopt and deliver services in a very different way. Some are using technology to drive pressure on costs – and these firms are placing downward pressure on all the firms in the mid-tier sector on commoditised services.

Thirdly, we have the large number of “new age” law firms – the virtual firms that have in some cases been formulated following redundancy. Often created in a back bedroom with few overheads and using the Internet as their marketing tool, these firms have a core following to challenge the current established practices.

In fourth place we have the firms who are in the assigned risk pool or have such horrendous professional indemnity insurance premiums that it is almost impossible for them to merge with other practices. A growth in numbers of these firms has been triggered by key events such as indemnity renewal, tax demands at the end of January, the Legal Services Commission running out of cash in February and March, and the banks viewing the legal profession with the same concern they expressed over builders some years ago.

Many of the firms we are asked to visit would have been closed down had they not been law firms and operating in a traditionally revered sector. Gearings and borrowings are out of control in these practices, yet the banks seem to have a reluctance to crystallise those debts on their balance sheets. It is, after all, a very messy process to wind up a partnership and the insolvencies we have seen have been predominately limited liability partnerships.

Finally we have the remainder – approximately 75% of the legal market – of one-to-five partner firms who are not under any financial pressure, although many have an ageing ownership that has not addressed the fundamental issues facing this profession.

On a recent visit to conduct a strategic planning day with a law firm in the north-east, it was noticeable that among the row of 20 Georgian properties in which the firm was located, nine were occupied by other law firms.

During discussions with the firm I was visiting, it became apparent that turnover had been dropping along with profitability. When I asked if any discussions had taken place with neighbouring law firms to explore consolidation, I was told: “We don’t discuss that sort of thing.” Some of the other law firms were renting premises and it was logical for merger discussions to take place when my client owned their premises and had surplus space available.

This typifies the attitude of much of the profession – all nine practices are seeing falling turnover and reduced profits but their personal reputation has stood in the way of a common sense approach to potential consolidation. (Incidentally we are now in discussions with two of the firms about potential mergers.)

I have personally conducted nine strategic planning days with law firms in this sector in the first two months of this year and demand is increasing. Many firms just seem to have realised that we are in 2011 and the Legal Services Act will be fully implemented in October – and they are now thinking they need to have a strategy of what to do!

These firms have reached a crossroads and need clarity on which direction to take. I believe commoditised legal services will come under increasing price pressure and, if practices are to compete for this work, having clarity both on who will be a client and who will deliver the work will be crucial. Fixed-price legal services are fast becoming more commonplace and this type of work will have to be delivered by a different resource.

Law firms currently buy hours from their partners and fee-earners and sell those hours to their clients and customers; but in many of these firms the partners are the people delivering the work. Providing ‘client-led services’ to a fixed-price customer will result in a loss-making exercise on every file that is opened. That cannot be a solution for these firms.

The only way forward is not to compete on price but emphasise the fact that they are solicitors and have the necessary qualifications, compliance and insurance to differentiate themselves from other suppliers of legal services. Solicitors need to promote themselves sufficiently and remember that the plethora of new entrants delivering legal services will not carry the same gravitas.

Many of the new entrants into the sector offering legal services will be drawn into a price war. I strongly suggest that solicitors should focus on quality and not quantity.

This price war scenario may well mean a reduction in the numbers of fully regulated solicitors’ practices operating, and growing numbers of paralegals will be able to deliver a proportion of the work required.

We currently have far too many law firms and too many partners within those firms; we also have aging partnerships, with the average age of an equity partner now 59. This section of the legal market has to consolidate and so we have to begin the painful process of having conversations with other practices.

Whilst I am not advocating merger for merger’s sake, and remain convinced that big is not always beautiful, we have to recognise that many firms will need to start kissing a few frogs in order to find the right match in this time of consolidation.

This article first appeared in http://www.legalfutures.co.uk/blog/kissing-the-frogs and was written by Viv Williams ceo of 360 Legal Group

Charles Barnett, professional services partner with PKF, said: “What we are continuing to see is that the legal sector is being hit as hard as the wider economy.

“There has been a considerable shift in the way legal practices operate with diversification, commoditisation and specialisation seen as the key means to develop firms faced with the continued downturn in corporate work.

“The traditional income streams from banks and other corporate sources remain slow and this means that most firms affected need to ensure they have appropriate strategies in place to remain active in this new market.”

Mr Barnett also said there was growing evidence that the Scottish legal services marketplace is overcrowded.

He said: “There will be a degree of shrinkage in the coming years to match the diminished demand. It is vital therefore that firms look at potential mergers and acquisitions, whilst they are in a financial position to do so, which enhance and expand their market to encourage growth in the future.

“The firms which are already emerging from the recession are those with the most diverse portfolio of services, that are effectively managed and who have a clear strategic vision of how to develop their business in such difficult times.”

He added: “Considering growth at such a time may seem problematic, but it is the firms which can grasp the thistle and recognise that in adversity there is opportunity.

“Diversifying portfolios, commoditising services, maintaining quality staffing, enhancing management, and managing cash flow will be the key factors in ensuring that the best Scottish firms not only survive this period, but also come out the other side, stronger, fitter and more able to tackle a legal marketplace which has never been tougher.

“It is undoubtedly a difficult time, but for the ambitious it is also a period of great opportunity.”

(With thanks to Scottish Legal News for that article, first published in their )