Law firms of the future—mergers v going niche

The legal profession is experiencing a period of rapid change. The demands from technological advancement, the increasing use of competitive tendering and the emergence of a new generation of lawyers all pose challenges to a law firm’s survival. Experts suggest many mid-sized law firms of the future may have to consider merging into a full-service firm or working within a particular niche.

Going niche—an alternative business model

Zoe Holland, managing director of Zebra LC, suggests there are obvious advantages to law firms going niche: ‘Specialist expertise, and clients of a particular type, enables firms to introduce efficiency into the process.’ This is particularly true in certain sectors, such as personal injury. Holland continues: ‘The challenge within areas such as clinical negligence and catastrophic injury is the potential cash pull on the firm at a time when fixed costs are looming. This work can be long tail and disbursement hungry. Hikes in court fees also impact cash flow.’ These challenges are better suited to the niche firm, Holland claims.

Viv Williams, legal services director at SIFA 360, similarly argues that going niche could prove beneficial to firms boasting specialist expertise: ‘We are all aware of the external changes affecting the profession. Firms that have previously specialised in, for example, legal aid or personal injury are looking to find suitable alternatives when their business models no longer work.’

Holland says there are also economic incentives to going niche: ‘Being niche can present genuine market opportunities, as well as the ability to be nimble and flexible in a changing market. A niche player who has a complete grip on a particular market sector is often able to command a premium because it is the desired supplier for a client. A premium will be paid for the best in the field.’

Williams agrees with Holland: ‘Niche firms can be more flexible and price services based on output and not on time spent. Generally, the overheads are lower and therefore clients will prefer this specialism and flexibility.’

Mergers in a changing market

The rapid change in the legal sector has the potential to force mergers. Williams says different lines of work will become unprofitable for many firms: ‘Stable cash generators such as conveyancing will be in the hands of a few practices geared for volume and process, which de-skills a workforce. Technology and workflows will be paramount and not an option for mid-sized law firms.’

Oliver Bretz, founding partner at Euclid Law, argues that mergers are not easy and are often borne out of necessity rather than desire: ‘Beyond systems and IT, mergers require the integration of cultures, which is both painful and difficult. They are a way of masking structural issues that exist in law firms and a way of pushing through hard decisions on remuneration structures, retirement ages and partner promotions.’

Tony Williams, principal at Jomati Consultants, agrees: ‘Most firms merge for purely defensive reasons, ie when they start to fail and lose clients and partners.’

There are, however, other reasons for merging. Bretz explains: ‘In the past, firms have sought to increase strength at national level through mergers and alliances, and mergers into national brands, such as DLA, Dentons, and CMS. In the past few years, however, we have seen a swathe of international mergers, especially with US firms, including Clifford Chance Rogers and Wells, Hogan Lovells, Norton Rose Fulbright.’

Law firms of the future, Williams explains, should ensure they don’t miss the chance to merge: ‘[Certain firms] should have planned their exit years ago. I have had more telephone calls in the past six months from firms I saw in 2008, who have made redundancies and have come through dark days and have had a reasonable time over the past few years, yet the partners are ten years older.’

Williams, Bretz, and Holland make it clear that the legal sector has room for both niche and the full service firms. As Bretz says: ‘Both models can co-exist. Whereas large law firms want to service larger jobs for a small group of key clients, there will always be a need for highly expert and specialised legal advice. That expertise is expensive to maintain and larger firms may struggle to maintain that level of dedication and expertise in the longer-term, especially when conflicts prevent the expertise being shared between clients.’

The niche and the full service law firms serve different purposes, appropriate to different clients. The key point is that law firms of the future considering specialising or merging examine which option is more suited to their needs and desires.

Keeping up with the legal landscape

Merging and going niche are two options which could protect law firms of the future. These options might not be necessary, however, if firms future proof. According to Williams, the most important challenge is keeping up with technological advances: ‘Technology will completely change the way legal services are delivered—anything that can be processed is being processed and this will only increase over the next five years. The traditional high street practice does not have the resources to compete with the private equity investment in these processed services providers.’

The sooner firms understand the challenges, the better. Williams says firms must realise many of the services they have traditionally provided will not be part of their future options, yet firms providing private client solutions need to provide a much more holistic approach to meet their client’s needs. Williams highlights one example: ‘We have financial services firms purchasing law firms and banks and I do not see how a private client law firm can survive without an element of financial services becoming involved. Future-proofing a practice will include looking at the new separate ownership rules and perhaps alternative business structures for including financial services within or part of their law firm.’

Williams advises firms to look for outside help. He says that solicitors often fail to see the larger picture and those ‘failing to plan now and planning to fail’.

For Bretz, keeping up with political developments is as vital as keeping up with technology: ‘Unless something radical happens in the political sphere, we will find ourselves in a post-Brexit UK in five years’ time. That will have profound impacts on the way that we do business, especially our freedom to provide services to clients outside the UK. At present, the impacts are largely under-estimated, especially if the UK fails to reach an acceptable agreement on professional services.’

It is likely firms will bolster capacities in Europe, which might involve operating through EU legal entities and using EU-qualified lawyers. Bretzs says there is also potential that Brexit could increase demand for UK legal expertise, as EU legislation is replicated at domestic level. The long-term impact, however, is less promising. Bretz explains: ‘A deeper split in the profession is inevitable, as there will be a greater divide between those who operate internationally and those who don’t. What is certain is that boutique law firms will continue to thrive across the legal spectrum. Small and nimble may just be the recipe for avoiding extinction.’

How do firms internally prepare themselves for the rapid changes? According to Holland, preparation starts in the boardroom: ‘There must be honesty around the equity table. Firms often fail to have honest boardroom conversations, whether around strategy, succession planning or finance.’

Honest, forthright conversations and entrepreneurship can protect law firms from the dizzying pace of change in the legal sector. Holland says: ‘Firms must be willing to start honest conversations without delay. Many firms will have already started them and have a clear plan. Entrepreneurship will be in demand and may be the key ingredient to sort the winners from the losers. I also believe that agility and the ability to be flexible around changes in the market is a critical factor in future law firms’ success.’

 

Interviewed by Ioan Marc Jones. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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