The truth about the legal sector decline: the work is still out there

The truth about the legal sector decline: the work is still out there

By Richard Tromans

If a business is not reinventing itself to adapt to changing market conditions then it is highly likely it will go into decline or be taken over by those that are better adapted to the new environment. Simply put: if you’re not evolving, you’re dying. The one exception to this is when there is no environmental change and no change in competitive pressure; however, such scenarios are very rare in nature or in business, and law is certainly not in such a position.

The terminal part of this equation is what happened to British heavy industry, to the traditional City brokers before the Big Bang of 1986, and is now happening to parts of the UK legal sector.

But how bad is it? Is the UK legal sector truly in decline? There is certainly sufficient bad news to develop a narrative of decline. But what is the story behind the data? Let us consider the evidence.

Any reader of the legal press would have seen that dozens of staff, both lawyers and support roles, have been axed from the Top 100 law firms since the start of the new financial year. Countless other lawyers have also no doubt lost their jobs in smaller firms around the country, but their losses have gone unreported.

At the same time Law Society data revealed that the number of training contracts offered in England & Wales had fallen in 2012 to just 4,869, the lowest since 1998/99. This means that after huge growth in the total number of lawyers practising today, now 128,778 solicitors up from just 54,734 in 1990, the legal market does not appear to want many more young solicitors.

Worse still, when firms do take on a reduced number of trainees, far fewer than in the pre-2008 years are offered permanent jobs and become fully functioning solicitors. Also, part of the apparently counter-logical growth in total solicitor numbers is due to more lawyers choosing not to retire. Solicitors as a species are therefore aging, but not “reproducing”. One does not have to be an evolutionary biologist to understand what this suggests: long term species decline.

But, let us look at the dilemma from a different angle. The UK legal market as a whole is expected to grow 1.1% this year, then 1.9% and 2.8% in 2014 and 2015, according to Law Society research. This is despite cuts to legal aid budgets, the Jackson reforms’ impact on Personal Injury (PI) firms, the demand for fixed and lower fees from clients, and a persistent buyer’s market. If charge out rates are not going up, and there is not enough demand to merit many more young solicitors, how can the UK legal market increase in total revenues? Surely someone has to be busy billing client matters for growth to occur? The answer is contained in one word: paralegals. These “non-solicitor-lawyers” are doing more work, and increasingly will do more of what solicitors used to reserve for themselves. They cost less than solicitors but can be billed out at rates that are relatively profitable.

Law firms are now rapidly building “process units” both in their main locations and in cheaper sites around the UK. Large City law firms are also sending work to sub-contracted law firms in regional centres that have large paralegal teams. LPO companies are building paralegal teams and seeking to gain work from banks and corporates. The Alternative Business Structure (ABS) law firms, which are now proliferating in England & Wales, also are growing paralegal teams that can handle commoditised matters within highly systematised frameworks. In effect a new model is developing; one that counters the decline in solicitors by growing more efficient capability outside of the traditional producers’ far higher costs (These higher costs are in part caused by the monopoly by which solicitors have controlled a huge part of the UK legal market. But, that issue is perhaps for another blog).

Accurate data on paralegals is scarce. This is because they are not regulated and so cannot be counted. There are membership groups, but joining is optional. Many are former law students who have not won a training contract. But, technically anyone from a school leaver with limited qualifications to a former Magic Circle associate who has been sacked and can’t find a solicitor role could be working as a paralegal. Estimates ranged from 110,000 to over 250,000 in 2010. But no-one really knows, though it is likely that the figure will rise considerably as law firms struggle to produce work at a cost clients are willing to pay.

Many solicitors will say this is a negative development. But clients, as long as the work does not lower in quality, will not mind at all. Lawyers of any type only exist because clients need them to exist. If the cost base of traditional law firms has become too expensive and clients don’t like it, then as noted earlier, it is time to adapt your business model, not complain that the clients are foolish.

But this is not the end of the story. There is another more optimistic matter to consider. There is huge untapped demand in the UK for legal services that may benefit from this “paralegalisation”, which in turn may benefit law firms that employ paralegals. For example, SME clients are just 21% of the client base of top 200 UK law firms, and only 16% of the corresponding small and medium size law firm segment. Yet, many of these firms should be the natural providers of legal advice to SMEs, the most populous group of businesses in the country. Clearly huge latent demand is not being met by solicitors, as research by the Legal Services Board recently confirmed. Does this mean SMEs are going elsewhere? No. They simply are not using lawyers at all. The key problem is price; the second is weak service delivery to buyers that want fixed fees, predictability and transparency on cost.

We will examine this unmet demand issue in more detail in our next blog post, but suffice it for now to conclude: the UK legal market is not dying at all, far from it, but it is changing. The challenge among law firm managers is to change with it and find new demand, new business models and new means of production, rather than hoping for a return to the past: that way only leads to decline.

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About the author:

Richard helps law firms with important strategic decisions. He advises on areas such as merger, practice development and geographical expansion. He also provides assistance to law firms in relation to organisational and operational issues.

Richard has spent over 16 years working in the legal sector focused on the UK and global legal markets. He previously worked at Jomati as a strategy consultant and authored the Jomati Report series between 2009 and 2014.

Prior to that, Richard worked at US-based, Hildebrandt International, and also held senior, legal sector editorial roles in London and Paris.