Tightening the Gastric Band

Two years ago, while undertaking the research for our white paper Beyond ABS – The Future for Independent Law Firms, we coined the phrase ‘the gastric band’ in reference to the three forces that are creating a seemingly ever-stronger squeeze on the middle section of the UK legal market. Those three forces we identified as being deregulation, advances in the use of technology, and the related threats of globalisation and low-cost competition.

We drew these conclusions based on our intuition having watched similar processes transform other service markets across the world, but also from the feedback and perspectives of our clients and allies who work in and around the legal profession. One of the observations we made in the paper was to echo Bill Gates’ warning that we often overestimate the scale of change in 2 years, and underestimate it over 10 years.

This is a key point made in a recent piece by Adam Smith Esq (in conversation with Herb Thomas), that the pace of change is accelerating but not always immediately apparent. Day to day it may seem like business as usual, but ‘fee pressure, low cost providers, reduced leverage, and lateral hiring are moving in swift undercurrents.’

The Attributes of Winners

We also identified the attributes of likely winners and losers in a consolidating market – which brings us to the recent Gazette article predicting a ‘cull’ of firms in the North-West. According to a survey by Liverpool firm O’Connor’s, almost 1 in 5 managing partners of North-West personal injury firms are considering closing their business down, often largely as a result of predicted dwindling profits in the face of changes to civil justice and the referral fee ban. It would appear that the ‘gastric band’ is tightening yet further, as evidenced by the recent insolvency of Blakemore’s.

What we see emerging is effectively a ‘triage’ of firms in distinct categories. Firstly, there are those firms that can be seen as definite ‘winners’ in the market shakeout, which will benefit from consolidation to increase their market share and/or partner profits. These will be the definite minority. There is also a minority of firms that can be seen as ‘no-hopers’ – poorly run and with little chance of survival. Hopefully no-one reading this will fall into that category!

However, the vast majority of firms will fall into a third group – those that have the potential to survive and to prosper, if they do the right things and display the necessary attributes. By pure coincidence, I have been delivering a seminar this month in Liverpool on the attributes of winners in the new legal market and was chatting to Nigel Wallis the author of the O’Connors report . We address 20 distinct issues under five categories:

• Finance;

• Clients & Markets; 

• People;

• Products & Services; and

• Management.

We ask delegates to score themselves on a 1-5 scale for each attribute, giving a total score out of 100. We also focus particularly on areas of particular weakness – attributes where they have scored themselves less than 3 out of 5.

Focus on Independence

Even as things get tighter in the market, we find that most delegates are in fact stronger than they think, and scores of more than 60 out of 100 are not uncommon. By clearly identifying both strengths and weaknesses in this way, partners can recognise their own strengths – but focus their attention on the things that could threaten their independence. 

But a word of warning – a chastening aspect of an earlier seminar was that Andrew Otterburn (a colleague on the Law Management Section Committee) took part, pretending to answer on behalf of the Co-op, scoring them on the same scale. They came out with 90 out of 100. Clearly, the competition is strong and things won’t get any easier for incumbent firms.

However, those firms with management teams who take the challenge seriously and are prepared to manage the firm like a business, focusing on those areas of commercial threat and opportunity, will have a good chance of surviving and consolidating their own position in the market. As Jim Collins, American management ‘guru’, noted in his book Good to Great, the best companies respond to adversity by confronting the brutal truth, but concurrently refusing to lose faith that they will ultimately succeed. This is the so-called ‘Stockdale paradox’, named after a US veteran and former prisoner of war, and it is a mindset that many firms will find helpful in the next 10 years of change.