ABSs: react or die – it’s time to cut out the “Fat Middle”

By Catherine Gannon

What do all consumers want? Answer – 1) high quality products and/or services 2) low cost 3) tailored products and/or services 4) good customer/client care. The consumer legal market is no different.

The problem

The introduction of Alternative Business Structures (ABSs) has changed and looks set to further change the legal services industry quite substantially. Many ABSs have large marketing budgets with which to trumpet bucket prices reaching the ears of consumers meaning that traditional law firms have to alter their business models quickly if they are to acquire and retain clients.

Law firms like other businesses were riding on the crest of the wave for many years and recruited many solicitors for their qualifications, skills and experience and offered healthy salaries for those traits. After all, the fees imposed on the clients could fund this. When clients were walking in, there was less emphasis on whether solicitors had the right type of personality to develop work. There are therefore many solicitors in law firms who are expensive and do not bring in work but are good at doing the work and hence expensive – we will call these individuals, collectively, the “Fat Middle”. However, due to the economic climate and now the existence of ABSs, law firms have to work harder to acquire clients and to retain them whilst trying to save money wherever possible putting the Fat Middle at risk.

The market

Consumers want the quality that comes with good lawyers but for a lower cost. The only way to achieve this is to either reduce the hourly charge-out rates of the fee earners and hence their salaries or have a lower level lawyer and/or non-lawyer do as much of the work as possible. The issues here are that lower level lawyers and/or non-lawyers will understandably take longer to do the work due to the lack of experience, and there will have to be the requisite supervision required to avoid professional negligence claims. Every time a consumer cuts the charge out rate from say £300 per hour to £200 per hour are solicitor salaries cut accordingly? If the response is “no” this is why there is such a pressure on margins and some law firms have gone bust with more to follow.

Increasingly, advice for clients involves an overlap of legal areas and overriding commercial advice which simply cannot be achieved by the simple fixed fee, bulk work approach of the ABSs as the requisite time and skill is not in the budget. The problem is consumers fail to appreciate what is missing in many cases as they have come to the specialists in the first case to plug their lack of knowledge. If I had to bet, I do not believe ABSs offering bucket prices will last forever, eventually being consumed with claims and pressure on fees, but whilst they exist, law firms have to react or die.

The solution

What then can be done to compete with the new desire for bucket shop prices? The only choice seems to be to cut out the Fat Middle and save on the salaries. The Fat Middle is not the dead wood camp – they have been moved on from many firms by now. The Fat Middle did work hard and produced billings in the good old days but struggle now as they do not have the client development type of personality and this is not something that can be easily taught. This will leave a firm with top-tier partners and partner-level solicitors who will ultimately be responsible for driving the business forward and bringing in the work, and lower level lawyers and non-lawyers who will carry out the work for less money but with appropriate supervision so as to not compromise the quality of advice.

The solution can be viewed as short sighted because of the lack of succession inevitably caused. The scale of obliteration of the Fat Middle will depend upon the ability to ride it out and avoid financial disaster rapidly. The solution requires careful thought and speculation upon the shape of the legal market when the recession ends.

The consumer

Will consumers ever want to go back to higher charge out rates – probably not? Is law forever consigned to the equivalent of “made in China” with a conscious decision to buy British? Many law firms will have no desire to directly compete with ABSs and are seeking the longevity which is still far from certain for the ABSs but the inevitable is that in the meantime the consumer is now aware of the options out there on the market and are therefore in a better bargaining position when it comes to fees. Law firms are therefore forced to react and alter their business structures accordingly.