The situation for high street and SME law firms is becoming notoriously challenging. After years of prosperity, characterised by consistent growth and enviable profit margins, the effects of the property crash, recession and the difficulties experienced by many firms in this year's Professional Indemnity insurance market have created an understandably pessimistic mood in the sector.
A Perfect Storm
This is underlined by the very real difficulties many firms are experiencing. Insolvency practitioners are receiving record numbers of instructions, Law Society interventions are on the rise, and more than 400 firms entered this year’s Assigned Risks Pool – demonstrating the problems that even well run smaller firms face in obtaining cover.
This state of affairs is very likely to be compounded by the impact of the introduction of ABS on the high street from late next year and, if the government gets its way, by the proposed cuts to the Legal Aid system.
The Gastric Band
In time, the value in most open markets tends towards the extremes - and the effect in the middle is rather like that of 'gastric band' applying a squeeze. Firms do well at the Top- and (very different) firms do well at the bottom. Once regulatory barriers are removed, there is no obvious reason to expect the legal market not to conform (even if current practitioners would rather not). At the top end, the Magic Circle and major international firms will continue to serve the requirements of the major corporate bodies, and particularly the financial services industry. At the other extreme, the entry of organisations focused solely on delivering a ‘commoditised’ service, often in unregulated areas, and differentiated by price alone, could fundamentally reshape the market and will focus the squeeze on small and medium-sized high street firms.
This calls for nothing less than a fundamental reassessment of the law firm business model, and of the mindset of law firm managers. The question becomes, what is the purpose of the law firm? And what is the market? Who are the firm’s traditional clients? And who will be the clients in the future?
One element of this business model analysis involves outsourcing, and the broader question of efficiency (addressed in The Outsourced Alternative). However, it also requires new approaches to risk management, to people management, and to Business Development.
A New Approach
Firms and their people need to display new levels of confidence, to consider new methods of promotion and selling (such as Keep in Touch campaigns, developing strategic alliances, and leveraging online social media), and to develop the habits that underpin success in these areas.
These are all areas to which we will return, and which form the basis of our Profitable Partnerships Programme – in which we help partners and senior fee earners develop strategies for maximising profits in the face of an increasingly challenging market.