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The New Threat to Law Firms From Across the Pond

Nov. 18, 2015, 2:31 PM

Editor’s Note: The author of this post is the founder and CEO of Legal Mosaic, a strategic consulting firm and a regular contributor to Big Law Business.

By Mark Cohen, Chief Executive Officer, Legalmosaic

It’s no longer a secret that the UK’s Legal Services Act of 2007 (LSA) is a game changer. It was intended to provide retail and corporate legal consumers more and better options of legal services delivery. Among other things, it enabled licensure of “Alternative Business Structures” that could accept non-lawyer investment, engage in interdisciplinary practice, share profits with non-lawyers- and even go public. Clients were intended to benefit. And by all accounts they have.

A recent article by Neil Rose inLegal Futures, a UK-based online journal, caught my eye. Mr. Rose, an astute legal commentator, discussed an annual review of the UK legal market by James Tsolakis, head of legal services at The Royal Bank of Scotland (RBS). The Tsolakis findings bear closer scrutiny because they not only underscore the impact of LSA, but also are a harbinger of how legal services will soon be delivered across the globe.

The Big Four Makes its Presence Felt

Mr. Tsolakis determined that the Big Four are proving “intense competition” and “quietly” taking away more commoditized work from mid-tier law firms. While it is unclear what types of matters are migrating from law firms to the Big Four, it’s a safe bet that it falls between document review and bet-the-company matters. Some call that the “fat middle.” And it accounts for the bulk of law firm revenue, especially among all but a handful of brand-differentiated firms that handle the highest value, bespoke work.

The corporate structure of these service providers provides arealseat at the management table for technologists, business process experts, and others who are critical

Though Tsolakis notes the “little short of spectacular” resurgence of mid-tier law firms even as the Big Four encroach upon their bread and butter work, he concludes those gains, attributed to efficient management and investment in technology, might prove short lived. He writes:

“The smart money, nonetheless, is on the accountants going head-to-head with the established legal order over lucrative capital markets and transactional activity once they have taken sufficient market share from the mid-tier. “

All this sounds very much like Clayton Christensen’s theory of disruptive innovation. Disaggregation has already stripped away high-volume, low-end work from law firms. That is now performed by legal service providers who have significantly lowered cost by tapping into technology, providing onshore, offshore, and “right shore” delivery options, and with corporate structures rather than the traditional law firm partnership models.

Oh, and let’s add access to capital — lots of it. As well, the corporate structure of these service providers provides arealseat at the management table for technologists, business process experts, and others who are critical to the more efficient, transparent, and cost-effective delivery of legal services.

Now, per Mr. Tsolakis, the “fat middle” is in the Big Four and other new service providers’ sights- and ripe for disruption. And he suggests that bespoke work may be in play soon, too. Translation: the new entrants to the traditional law-firm dominated legal market are building upon their lower-end work success and migrating up the complexity/profitability chain. Legal service delivery is no longer synonymous with law firms.

The Big Four have several competitive advantages over law firms. This includes: respected global brands, enormous capital, huge revenue (ten times the size of the largest revenue law firms), deep client relationships (often at the C-Suite level), hugelegallabor forces (not to mention IT and process/project managers), and a wealth of know-how to meld these resources. Plus, they are focusing on legal areas that complement their existing consulting practice-compliance, due diligence, tax, immigration, and employment.

Translation: the Big Four will be very tough competition for law firms. And they are not the only competition.

So what’s so different now about the threat the Big Four poses to law firms? It is principally that three of them — all but Deloitte — have secured ABS licenses.

This is Really Nothing New Except for ABS

The Big Four have been bulking up their legal consulting practices for years. Though they do not “engage in the practice of law” in most countries, theydoengage extensively in the delivery of legal services. What’s the difference? It’s principally that lawyers — either in-house or at outsourced law firms — retain the risk. The Big Four do not retain the risk, except in those instances where they operate as a law firm. Does that really make a big difference to clients? That’s doubtful.

Consider that if one were to compare the legal, regulatory, and compliance services offerings of the Big Four to law firm practice areas, it would be difficult to tell the difference (apart from the disclaimer on the accounting firm sites). Already, the Big Four have more lawyers on their payrolls than all but a handful of the world’s largest law firms.

So what’s so different now about the threat the Big Four poses to law firms? It is principally that three of them — all but Deloitte — have secured ABS licenses. That means, among other things, that they could elect to operate as law firms in the UK and in other nations, too.

Sound unlikely? Well, consider that Ernst & Young recently established itselfas a law firmoperating in China. It’s fair to assume that it won’t be long before they elect to operate similarly in the UK. And once that happens-and when more high-end work starts to flow to the Big Four-how long before the U.S. submits to client demand for similar re-regulation here?

While many of these new entrants are either in the retail end of the market or are performing lower-value, high-volume work in the corporate end, these providers are taking an increasingly noticeable slice of what was, until recently, law firms’ pie.

Don’t Forget Service Providers

Of course, the Big Four are not the only competitors of medium and large law firms — far from it. As Mr. Tsolakis notes: “Technology-driven specialist firms…will continue to grow and disrupt the traditional market. All this is compounded by the emergence of non-legal firms using ABS licensing as a route to market.”

While many of these new entrants are either in the retail end of the market (e.g. LegalZoom secured ABS licensure about six months ago) or are performing lower-value, high-volume work in the corporate end (Axiom is one of many providers that comes to mind), these providers are taking an increasingly noticeable slice of what was, until recently, law firms’ pie. The corporate structures of these providers, coupled with their institutionally backed funding and technological bent will increase pressure on law firms to retain shrinking portfolios of “legal” tasks. And increasingly, the determination of which tasks and matters are “legal” is being made by business, not lawyers. Add to this the “competition” posed by in-house legal departments who are bulking up instead of outsourcing more work to firms. Caveat traditional law firms.

Not all Law Firms are Standing Pat

Several law firms are taking steps to address the growing waves of challenge from new competitors. For example, DLA recently announced a collaborative arrangement with Lawyers on Demand (LOD), a flexible sourcing legal services company that spun out from Berwin Leighton.

LOD says: “The venture will enable DLA Piper to further enhance its client solutions by leveraging a pool of resources, the core of which will consist of DLA Piper alumni. LOD will help establish and manage this pool, on behalf of DLA Piper, which will be further supported by LOD’s considerable team of freelance lawyers.” That team is more than 500 lawyers strong.

What is significant about this collaboration of mega-firm and service provider is its recognition that corporate clients need flexible, cost-effective options for many types of matters that are typically inimical to the traditional law firm delivery model and structure. Much more can be said — and other illuminating examples cited — on this topic. Stay tuned for next week’s post.

Conclusions

The RBS findings make clear that if promoting competition was an objective of LSA, it has succeeded. So too has it kickstarted innovation among new entrants and some incumbents, too.

All that bodes well for clients, the “protected class” of the LSA. That said, it’s not all doom and gloom for lawyers. True, all but the very best might earn less than they once did, and many will be working for providers other than traditional law firms. Still, lawyers who embrace collaboration, understand technology, and commit themselves to delivering good legal judgment efficiently will make their way.

And for those who don’t, to quote T.S. Eliot’sJourney of the Magi,they will become “no longer at ease here, in the old dispensation.”

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