Still Squeezed in the Middle
In our 2011 white paper on the future for independent law firms we identified the potential for a “Gastric Band” type squeeze on mid-market law firms – with formidable pressures both from above and below, driven by the ‘three forces’ of deregulation; globalisation and low-cost competition; and technology. The main attention since then from legal market commentators has focused on the threat from below – from new low cost entrants targeting the lower end of the market.
Our original analysis, updated in August of last year, was that the threat from above – from forces shaping the Top End of the market would be at least as significant. Our thesis, building on the work in other markets of Adrian Ryans, was that the largest firms would find ways of reorganising using their financial strength and technology to drive down the cost of delivering legal services – enabling the biggest players to undercut mid-sized competitors.
Three years on from the introduction of ABS, the consolidation in the market is progressing with a steady stream of mergers and acquisitions at all levels – albeit perhaps more slowly than we initially suspected.
Shifting the Balance of Power
Our initial analysis focused on the supply-side forces affecting the market, but in the interim the demand side has been at least as important. For larger firms, the balance of power has shifted in favour of the buyers. General Counsel, under pressure in their organisations to get more for less from suppliers, are driving the agenda. This goes far beyond tinkering with charge out rates and discounts. We can now see that the traditional labour-intensive pyramid / leverage model, which is replicated in firms of all sizes, has probably peaked and is being challenged both by newcomers and by the most innovative traditional firms.
As Charles Handy said in his book on the Sigmoid Curve – “What got you here and made you successful may not keep you successful in the future”.
As demands change and competition intensifies new structures will emerge, and firms will need to be very clear about their business model and the services they deliver.
An Evolving Taxonomy
The shape of these evolving models has been analysed by the Australian author George Beaton who has developed an evolving ‘NewLaw-BigLaw Taxonomy’ that, although conceived with the American market in mind, is highly relevant for UK firms seeking to think strategically about their position in their own market and the implications this has for their business model. It is worth noting here that Australia, where Beaton Capital is based, was the first country to allow Alternative Business Structures of the type that are now emerging in the UK.
The taxonomy categorises firms on the basis of a series of hallmarks:
- Primary purpose and client base;
- Human capital;
- Practice economics;
- Ownership structure; and
- Pricing structure / risk allocation.
BigLaw – NewLaw – UKLaw
The firms that fall into Beaton’s BigLaw category (i.e. Traditional and Remade BigLaw Firms) could be equated to the top city and national corporate firms here in the UK. Worthy of remark is that the ‘remade’ firms are operating a slightly different model (hence the separate category), in which they adopt more ‘mixed’ approaches to branding, leverage and pricing – thus allowing them to market their services to clients who would not typically be willing to pay ‘traditional’ fees.
The ‘NewLaw’ providers typically employ corporate (as opposed to personal) brands, separate sales from delivery, with variable cost structures, non-lawyer owners (including investors), and often adopting fixed-fee pricing structures. This undeniably affords them the flexibility to offer services that are more affordable than those delivered by more traditional firms.
Squeezed Off the Continuum
Although presented as a taxonomy of distinct categories of providers, this model was originally conceived as a continuum – and it is highly noteworthy that there is no place on this continuum for ‘traditional, medium-sized firms’. If Beaton is right about the evolving continuum, the legal market is likely to follow other markets into an “hour-glass” shape with strength at the top and strength at the bottom, but a hollow middle. Many of the services being offered by the firms described here would previously have been delivered by traditional mid-market firms. If these firms are to survive in the medium term they will have to not only defend their own client base, but attack the next rung in the market, or find niches in which they can offer particular value.
That is not to say that there is no place in the evolving market for medium-sized firms, often located outside of London, who offer outstanding service and advice in their particular market. However, it would be to wilfully ignore the challenge facing those firms not to recognise that their share of the overall market for legal services is being eroded – from above and from below.
If such firms are to be confident of their continued existence and prosperity in – say – ten years’ time, they must be very clear about their market and clients, and the business model they need to employ in order to serve those clients profitably.
Whilst the battle for market share at the top end of the market (both in UK and beyond) may seem to have limited relevance to smaller firms today, the ripple effects of the changes at the top, both in organisation and technology, can spread very quickly downstream. George Beaton’s analysis appears to show that the preparatory phase is now advanced, and that the pace of competition is ready to step up significantly.