Increased confidence in the legal sector – or is it over-confidence?

By Kevin Wheeler 

According to Smith & Williamson’s latest law firm survey, optimism in the legal sector is the most positive it has been since 2007 with 82% of respondents saying that they are confident about the coming year (up from 61% this time last year).

This confidence is being driven by signs of a sustainable recovery in the UK economy. Last week’s CBI/PwC survey reported that optimism throughout the financial services sector rose at its fastest rate since the survey began in 1989 in the final three months of last year. As a result, the City – a major driver of fees for many law firms – is now the fastest-growing part of the UK economy.

Despite this renewed confidence among law firms, securing a sufficient share of the work out there is proving increasingly tough, with 81% reporting that the environment has become more competitive in the past year according to Smith & Williamson. Larger firms are experiencing the highest levels of competition, with more than nine in ten practices with 100+ partners reporting an increase in competitive pressure.

Rather than developing strategies to meet this increased competition head-on and win new clients, the survey indicates that firms are instead looking at alternatives to boost profitability. Setting up new service lines (often by recruiting lateral hires) suggests a focus on cross-selling to existing clients, whilst sub-letting office space, de-equitising partners and looking for mergers points to a focus on cost reduction.

Pressure on fees is the starkest indicator of the competitive nature of the legal sector, with both cost-conscious clients and low-balling law firms driving hourly rates down. The problem for the sector as a whole appears to be lawyers’ inability to get clients to recognise where they are creating real value  – which should command a premium price – and when they are providing "commodity" legal services. In the latter case, lawyers should be contributing to the lowering of costs by re-engineering the delivery of services, say, through the use of IT and LPO. All too often, clients are demanding discounts across the board, regardless of the work being undertaken, and this is having a damaging impact on law firm profitability.

Although it makes sense for firms to focus their business development efforts on their existing clients, a “crude” attempt to cross-sell additional services will not be appreciated by most. In my experience, gaining a better, more objective assessment of a client’s needs, and their views of your firm’s performance, is still the “Holy Grail” of law firm marketing and the source of significant additional revenue. However, only around 10% of all client–law firm relationships are audited by the firms to gain these insights, which is a pitifully small proportion when more than two thirds of clients would like to see this happening.

As competitive pressures mount, an additional challenge for law firms is the need to undertake an accurate assessment of their market position in their key markets (provided of course that they have actually identified what these are!). Without such a robust assessment, firms run the risk of building their business strategy on sand. Partners need to be honest with themselves and each other and utilise independent research to build a picture of their markets in terms of: key business providers, drivers of demand for legal services, clients’ service requirements, how the firm is differentiated from the competition, and who this competition is. Looking at a few legal directories or buying a syndicated survey is unlikely to provide the necessary answers.

Finally, firms need to start investing again in the BD skills of their lawyers if they want to meet the competition head-on. A brief that I received the other day to provide BD training summed up all too well the problem that many firms face: “There are those in their early 30s to mid-40s who experienced the boom times in the legal profession and are probably, in many senses, the weakest in terms of business development. It is often the case, we suspect, that they still do not recognise the need and they have been used for too long to the senior equity partners or the brand of the firm providing them with work.”

Filed Under: Legal Services

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