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Commercial Question

The Legal Services Act 2007

updated on 29 March 2022

Question

Has the Act’s liberation of the legal sector been a blessing or a curse for law firms?

Answer

The Legal Services Act 2007 (the Act) facilitated the provision of a ‘one-stop shop’ for professional services, giving providers the means to package legal services alongside services like accountancy and tax advice in allowing non-lawyers to have an interest in legal services. The Act provides for licensed bodies to provide licensed activities, in the form of an alternative business structure (ABS) or indeed an alternative legal services provider (ALSP).

Fast forward to 2018, and all of the Big Four accountancy firms (ie, EY, KPMG, Deloitte and PwC) alongside many smaller firms had acquired an ABS licence. Fast forward to 2019 and 23% of large law firms surveyed in a Thomson Reuters report on ALSPs reported competing against, and losing business to, the Big Four.

So what has enabled the Big Four specifically to hit the legal services market with such speed and success, and how are law firms fighting back?

Capital, speed and innovation

The legal industry’s hesitation around the adoption of new technologies is well-documented. It is time-consuming, often a substantial investment and non-billable. By contrast, the Big Four’s willingness to adopt new technologies is almost just as well documented.

In 2020, Kirkland & Ellis reported the highest revenue of any law firm at around $4.8 billion. Deloitte on the other hand reported being just shy of $48 billion. The sheer scale of these numbers often are not truly appreciated when quickly glanced over. It is numbers such as these that have enabled the Big Four to spend more on technology and training in recent years than the revenue of any law firm.

The Big Four’s capital capabilities have enabled them to place technology at the forefront of their offerings, rather than being the reluctant drag-along it is often alleged to be in many law firms. This has enabled technology to be applied in various niche manners to suit tailored client needs, such as EY collaborating with Concur to offer an app providing real-time immigration and tax assessments to business travellers.

Having had to deal with price pressures from clients in the audit market for many years, the Big Four have often also been quicker to respond to other trends in the legal industry, like those facilitated by the Act, such as the use of specialist ALSPs becoming less ‘alternative’. Many law students are told in passing on their courses about Riverview Law, and how they pioneered the use of artificial intelligence (AI) to try to make legal managed services more efficient. Less of them know that EY bought up Riverview, soon following with Pangea3 (another innovative legal managed services business).

It is however not all plain sailing for the Big Four. They are, for example, regularly subject to scrutiny regarding conflicts of interest when it comes to providing audit alongside other professional services, and are currently subject to a 2024 deadline to have ringfenced their audit functions from their wider operations. One of the perceived results is an increase in competition in this sector, which may have a trickle-down effect on smaller firms also increasing their focus on competing in an audit market that they had previously given up on (the Big Four currently audit more than 95% of FTSE 350 companies). This may, perhaps, provide law firms of varying size some additional time and space in which to focus on getting their wider offerings in order.

A steady, but now growingly evident, response…

Indeed, there are signs that many law firms are starting to better compete in the areas that the accountants first used to invade the legal space.

While law firms have historically been slower to respond to changing forces in consumer trends, there are signs that they have generally been picking up speed in recent years. These positive trends seem to have been further catalysed by the pandemic, when remote working and additional cost scrutiny from clients has transformed such progress from a nicety to a necessity.

Research by Thomson Reuters has indicated that law firms have begun to better appreciate the benefit of strategic use of ALSPs and similar options for clients, with a growing number now looking to create an ALSP affiliate or partner with existing ones, in order to make their own offerings more efficient. Examples such as Womble Bond Dickinson’s ‘WBD Advance’ and Eversheds Sutherland’s ‘Konexo’ are cases in point of this, seeing law firms appreciate the need to offer clients business and technology services alongside legal itself. The ALSP market is still in its nascent stages – it will be far easier for law firms to utilise this trend if they act now, rather than waiting and falling further behind.

On the technology front, analysis by Citi has further indicated a changing attitude among law firms regarding the role that AI can play: in 2017, just 18% of law firms surveyed said that they had already implemented AI in relation to transactional documents analysis; in 2019 this figure stood at 71%. While 15% of surveyed law firms in 2017 said that they had no plans to enact AI applications in legal research/predictive analytics, this figure had reduced to just 2% in 2019. It seems no coincidence then that Deloitte, the final one of the Big Four to gain an ABS licence, did so in 2018.

There is also a clear growing awareness among law firms of the need for individual lawyers themselves to be more tech and data savvy, such as Clifford Chance’s IGNITE training contract and DAC Beachcroft’s integrating of data literacy training into theirs.

Flotation – a means to make up for lost time?

While far less common and not seen by many law firms as right for them, flotations have been considered by some firms as a means to enable them to raise the capital to invest in the sorts of competitive advantages that have helped the Big Four become so successful. Recent Citi analysis suggested as much, and in the last few days Gateley has announced its 11th acquisition since its 2015 initial public offering (IPO), this time adding a specialist IP firm to further build its business services platform. Mischon De Reya’s IPO, expected at some point in 2022, has also seen its executive chair expressly state that the investment into technology that it would facilitate is one of the driving factors.

While an IPO has perhaps long been seen as uncommon and unsuitable by the average law firm, it is interesting to note that the Law Society Gazette in November 2021 reported that nearly one-third of partners at law firms with more than 50 lawyers were said to be ‘actively considering’ the possibility of a flotation over the coming 18 months. This is certainly a space to watch then, to see if this once peripheral and shrugged at process in the legal sector can develop into a common way of harnessing the capital needed to invest in innovation and competition with a new age of market players.

The outlook?

The Act provided external players such as the Big Four with access to a sector that has historically been conservative and slow to change. Established innovators in their own sectors already, they have had a stronger start than many law firms in integrating legal services into a wider offering of professional services, and offering legal services more efficiently.

There are positive trends, however, that seem to suggest that law firms have started to better understand how they can respond with innovation of their own, to mitigate that of the Big Four and their smaller compatriots. What the Act enabled others to do in the sector has clearly now begun to catalyse a response, which should help law firms to operate in ways better serving their own interests, along with those of their clients.

Robert Clarke is first-seat trainee in the corporate team at Womble Bond Dickinson.