Clementi – can you afford to stand still?

With time quickly running out for UK law firms to prepare for deregulation, Sacha Ramanovitch considers some of the strategic options.

Following the Lord Chancellor’s announcement of government support for Sir David Clementi’s proposals, and with parliamentary time being promised for legislation on legal services, what does Clementi really mean for UK law firms?

The proposals open up many opportunities for law firms, from how they organise their businesses to how they finance themselves. There have been the usual contrasting views on the likely impact of the proposals – from those who recognise the opportunities and see them as a mechanism to achieve competitive advantage to those who remain cynical and point to other initiatives that promised much in theory but delivered little in practice.

The driving force behind Clementi is to provide greater choice for the consumer. Looking to other areas of deregulation in the UK suggests that the market does respond to take advantage of such opportunities, both within the UK and globally. The stock broking profession is an interesting case study – of the top-ten firms pre deregulation in the 1980s, none now exist in the same form and many are owned by overseas entities. Beyond the professions, a similar pattern has been seen in the denationalisation of utilities in the UK – who would have predicted French ownership and control of significant water supplies at the outset of that change?

So history tells us that outsiders will see the opportunities to enter the market, but their success will be driven by their ability to understand what the market – the client – actually wants. From a client perspective, legal services fall into two areas: efficient, value-for money ‘standard’ advice, and hard-edged, ‘bespoke’ commercial advice. The former is characterised by the continual commoditisation of standard services law firms provide and clients’ resistance to pay top dollar for what they see as a vanilla product. With bespoke commercial advice, on the other hand, clients are seeking a solution to a business problem – the legal viewpoint is merely one part of that solution. They will select the best person for the job and will often instruct a number of firms to advise on different specialist areas.

Let’s look at some scenarios at the commoditised end of the market. This is often referred to as ‘Tesco law’, but ‘RAC law’ is perhaps more pertinent, as the RAC has publicly shown enthusiasm for entering the legal-services market. In the consumer market, one can see how Tesco and the RAC have brand positioning that could be very powerful on the high street. If mass-market consumer organisations decide that they want to get into the market, it is likely that they would want their legal offering to be available to all their customers. To achieve this market reach they might buy law firms (then re-brand and, if necessary, relocate them); franchise law firms (under a common brand); or set up an internet and call-centre-based service.

There is some evidence for the acquisition route. For instance, the volume conveyancing and remortgaging practice Enact Conveyancing was acquired by First American Corporation, a US financial-services group, in 2004, having previously been spun out from its parent law firm. However, in the case of Enact, the acquirer was not buying a full-service law firm – it was buying a well-developed, volume processor that had invested heavily in systems, marketing and IT. As for franchising, in a sense the insurance companies have already made a start. Each major insurance company has a limited number of law firms that they use to process a high volume of claims, and in return, the law firms have to standardise their procedures and processes, meet rigorous quality standards, and commit to a tariff of fees. In terms of market perception, these law firms do not appear to be an extension of the insurance companies, but it would not take much for this to change. Each insurance company could establish a legal-services brand, manage the marketing budget and quality issues, and pass the work to its franchised law firms.

Firms in this market need to think about their strategy – are they positioning to acquire, be acquired, or become a franchisee? Have they sufficiently good processes and volume to compete in this new market scenario? Do they need to invest to position themselves better? If so, how can they finance that?

Whether firms like it or not the market for legal services is changing – driven by client demands and accelerated by deregulation. They therefore have a choice as to whether they jump into the driving seat and influence how the changes develop or sit and wait, dodo like, as the changes happen around them. Can you afford to stand still? n

Sacha Romanovitch is a partner at Grant Thornton UK. She can be contacted at: Sacha.V.Romanovitch@gtuk.com.