UK: ‘LFaaS’ (Law Firm As A Service): The Shape Of Things To Come?

Last Updated: 12 January 2015
Article by Richard Kemp

Driven by developments in IT, third party capital and regulation, the law is just off the blocks at the start of a period of huge structural change. Because these drivers are so powerful, it's hard to foresee, on a spectrum between 'the end of lawyers' and 'business as usual', where things will be in 10 to 15 years' time but in my first blog on kempitlaw.com, I'm sticking my neck out to make a prediction or two.

Starting a law business is as good a time as any, meerkat-like, to take a look around. As anyone who has ever read a report about a legal industry awards dinner knows, the profession is intensely competitive. Looking out however, the macro picture of the UK legal services world is more startling. Here, the industry's best kept secret is its biggest number: add up all the pieces, and the UK legal sector is worth around £30bn, or 2% of UK GDP.

Although law is a real success story of UK PLC – all that competition is the biggest spur to growth – interpretation of the figures depends on your perspective. They are either stonkingly large - £1 in every £50 of national income, employing 300,000 and equivalent to 20% of the country's manufacturing base; or nowhere – the aggregate global revenue of the big 4 accounting practices was £70bn in 2013, and each of Deloitte and PwC, at a whisker shy of £20bn, wasn't too far short of the total UK legal market, making accountancy and related services an even bigger success story.

What is clear is that IT, third party capital and regulatory change have started to redefine legal services at a rapidly increasing rate since the 2008 financial crisis. Law, the most conservative of the large professions, has traditionally been change resistant but it is now happening, fast. Yet looking ahead, it's difficult enough to predict the first generation changes caused by any of these big drivers, let alone the second and third generation changes as they all interact with each other.

In my specialist area of IT, setting up again has put into sharp focus and clarity that the Cloud is a huge structural shift that's just starting and will impact every law business: it may sound a bit fanciful, but you could say that IT is to legal services now what steam was to transport or textiles in the early 1800s. In 1997 setting up Kemp & Co - when a 144 MHz desktop was fast - launch and year 1 IT spend were £125k. This time round you can get everything you need for industrial strength, enhanced law firm IT and online legal information for £25k, 20% of the 1997 price. Not just law firm in a box, but law firm 'as a service', alongside software (SaaS) platform (PaaS) and infrastructure (IaaS) as a service.

So what do all these changes mean? Is it a total rethinking of the nature of legal services – 'the end of lawyers' in Prof Richard Susskind's memorable phrase – or will the law's traditional steadiness - the only business for which governments make the raw materials - prevail?

It's worth looking back at how the UK profession has developed since the 20 partner rule was removed by the Companies Act 1967, the time when UK law firm growth really began. In 1970, there were 22,000 UK solicitors in private practice (see chart). This doubled to 46,000 in 1990, and then almost doubled again to 87,500 in 2013. 2012 was the first year that numbers came down – very slightly, and that's been repeated again between 2012 and 2013. Correlating this increase with UK GDP growth (see chart), each private practice solicitor accounted for around £24m of GDP in the 1970s, £20m in the '80s, £19m between 1990 and 2008 and £17m since the financial crisis. This might suggest that the UK has been over lawyered for the last 5 years, but it could as easily be due to increasing regulation and complexity in business – certainly, the rising cost of external legal services has significantly contributed to the tripling of in-house solicitor numbers, up from 5,000 in 2000 (8% of private practice) to 15,000 last year (17% of private practice).

Chart: Growth in UK Solicitors in Private Practice and UK GDP, 1970 - 20131

But the scale of the forces reshaping the UK legal sector may well mean that this is one of those times where the past isn't such a good guide to the future. Although the Law Society in its December 2012 market analysis2 is looking ahead to 4.2% annual growth in the UK legal services market from 2015 – higher than the 3.7% average annual growth from 1970 to 2007 – there's no doubt that by 2025 legal service will be delivered in a very different way from today. So, looking into the crystal ball, my bets are that specialisation, segmentation, globalisation and competition will increase, and that this will see:

  • at the volume end, large scale (possibly international) capital- and computer- intensive, commoditised, mass market providers dominating all the consumer areas like probate, domestic conveyancing and person injury, and most of debt recovery;
  • large scale commoditisation – service computerisation coupled with effective project management and QA (quality assurance) from lower cost bases - moving up the value chain in the business legal services market, squeezing the middle market and taking out chunks of even the largest projects;
  • the Cloud adding to the pressure, forcing the middle market to work even harder to innovate and become more efficient in order to justify the indirect platform costs (property, back office, etc.) that typically account for £1 in every £3 of UK law firm fee income;
  • UK corporate counsel numbers on a rising trend at between a quarter and a third of the total for UK private practice; and
  • at the top end, a smaller number of much larger global firms (although still small compared with the Big 4) competing for the premium work to provide the best service for, say, a buyer in Djakarta of a chemicals plant in Sao Paulo or a bank in Beijing buying a financial services business in Copenhagen.

Footnotes

1. Sources:

2. Law Society Market assessment report 2012/13 - http://www.lawsociety.org.uk/representation/research-trends/market-assessment-2012-13/

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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