A recent headline in the Law Society Gazette picked up on Professor Richard Susskind's suggestion at the Law Management Section conference that pressure from major clients is likely to force down legal budgets by as much as 50% within a few years – with a commensurate expectation of reduced fee rates for firms. Last autumn his projections were for 30-40% reductions in a much shorter timescale. Perhaps he has taken to heart Bill Gates’ dictum that we tend to overestimate the likely change in the next two years and underestimate the change in the next 10 years.
As ever, the response to his projections has been mixed to say the least!
The key phrase that Susskind is now using repeatedly is "more from less". This is what he says clients will demand from lawyers, and consequently it is what firms need from their staff and operations. Leaving aside the exact numbers, two key questions emerge:
• Are major reductions likely to be demanded – and if so, why?
• Are they achievable – and if so, how?
The answer to the first question lies in the nature of markets – supply and demand. The legal market has traditionally had high barriers to entry which has limited the extent of competition and allowed for cost-plus pricing, which can harbour inefficiencies. This in turn has allowed firms to make (and publish) high levels of profitability – even since the credit crunch and market difficulties.
Deregulation leading to the advent of ABS has removed many of the barriers which limited competition in many areas of the legal market and the prospect of such a profitable market will tempt new entrants. Competition in itself will force down prices so long as the increased supply of legal services is not matched by increased demand (which looks exceptionally unlikely in the UK at the moment).
There are two significant riders to add to this. Firstly, at the top end of the market the main barriers to entry are not regulatory but reputational, and therefore some niches may be able to resist the pricing pressure. For the rest of the market the converse is true. Not only will markets open up to new competitors, but many of those new competitors will not be bound by history and will be able to setup more streamlined and efficient operations, largely through better use of, and a greater willingness to invest in, technology.
Secondly, and crucially, deregulation does not only open markets up to conventional competition but also to "Low-Cost Competition". As Professor Adrian Ryans has written in Beating Low-Cost Competition, true low-cost competition – which may use cheap labour offshore as well as labour-saving technology in order to reduce costs by as much as 70% – has a seriously disruptive, but often predictable, impact on markets.
The Threat from Low-Cost Competition
Professor Susskind may have arrived at his conclusions purely through research within the legal market and with legal buyers, but on a wider analysis it is hard to see how large parts of the legal market both for standard business services and for consumers (never mind legal aid) can avoid the syndromes which have affected other markets for goods and services once opened to low-cost competition. Open markets can be utterly unforgiving. Ultimately, Professor Ryans’ analysis describes markets which look like an hourglass, with a very strong base (of low-cost providers) and a healthy and substantial upper segment of high value suppliers. For a variety of reasons the middle is inevitably squeezed.
In due course, we suspect that Professor Susskind's predictions may come true, but perhaps led more by the supply-side than the demands of general counsel.
How can firms respond?
The short answer is that the first step is to proactively manage the cost structure in all its aspects, and to ensure that every item of expenditure provides value to the clients rather than reactively responding if demand falls. The key focus should not be just on "what you spend" but on "what you get for what you spend". For some kinds of expenditure this will mean spending more (to make more) rather than less.
One aspect of increased competition is that many firms will have to spend more on marketing and business development simply to stand still. In most cases this cannot be in addition to existing levels of expenditure, it will have to replace something else – most probably unproductive or inefficient staff time. It is tempting to focus the attention primarily on "support" costs, but this cannot deliver the scale of cost reductions that are likely to be required in the years to come. The performance and operations of fee earners needs to come under the same degree of scrutiny.
Many firms will be surprised by the extent of cost reduction that can be achieved by systematically and relentlessly adopting this approach. The tools and techniques of cost management have been around for over 25 years and 20-30% improvements in efficiency are often achievable.
For those firms whose value proposition and client selection is based on quality and service rather than low prices, this approach will provide most of the answer. It may involve hard choices, but the change can largely be evolutionary rather than revolutionary.
However, firms whose market position exposes them to the full force of price competition face a starker choice – either copy the low-cost producers or outsource to them.
These are all issues identified in our White Paper, The Future for Independent Law Firms, and these are the factors we will be considering in our Masterclass, Understanding Cost Structures and Effective Cost Management for Law Firms, run by Barry Wilkinson of WRP and Chris Bull of Edge International and hosted by Ark Conferences on June 27th in London.
A discount on this Masterclass is available to subscribers to our bulletin. Please email email@example.com for more information.