Change is inevitable and solicitors must adapt or fall behind in a competitive marketplace, writes Adam Makepeace


The Law Society has been very positive in its response to the Clementi proposals and is taking proactive steps to position itself in readiness for a new regulatory regime. However, there is still a soft underbelly of the profession which is in danger of feeling the impact of regulatory change before assessing the likely consequences.


It amazes me that this is the case only five years after regulatory change had such a fundamental impact on personal injury services. No amount of crowing now by solicitors heralding the failure of claims management companies can hide the fact that the profession was comprehensively out-manoeuvred by a few people who knew relatively little about the law, but a thing or two about marketing.


I have been enjoying the debate prompted by Sebastian Fox (see [2005] Gazette, 3 February, 31) and his suggestion that law firms should get a niche or get out of certain service areas. This drew some indignant responses (see [2005] Gazette, 3 March, 16) and there is no doubt that change is not easy. However, it is time for the debate to be elevated to explain why regulatory change and its consequences are inevitable, so solicitors can move on from engaging in pointless discussions relating to whether or not change is necessary, desirable or will be easy to adapt to.

Sir David Clementi recognised that many practitioners perceive a ‘conflict between lawyers as professionals and lawyers as business people’. Unsurprisingly in light of his brief – which was to consider what ‘would best promote competition and innovation’ – he found that accountability derived from business principles could enhance protection of the public. There will continue to be opposition to his proposals but those who defend the status quo fail to understand that it is because of their views regarding the irrelevance of business principles in the provision of legal services, and not in spite of them, that the proposals will be implemented.


Particularly if deregulation of legal services results in capital being available from outside the profession, I believe that smaller solicitors’ partnerships are most at risk from the inevitable reforms. A brief analysis of small partnerships and the kind of work they do is necessary.


It is a principle of economics that the form of business model that thrives will exhibit the structure that provides above-average profits for businesses in that risk class. Cutting through the jargon, this means the survival of small firms should be capable of being explained, in part, by reference to the fact that they are more (or at least as) profitable as their larger counterparts. However, this is simply not the case. The Law Society’s Business Survey 2003 showed the bottom quartile of firms with two to five solicitors had average profits per partner of £26,000 per annum. The corresponding figure for firms with six to 12 solicitors was nearly double at £47,000 per annum and the figure was £83,000 per annum for firms with 13 to 40 solicitors.


Thus many small firms are not able to reinvest in the business out of relatively meagre profits. The lack of capital available to these businesses is exacerbated by the fact that younger solicitors have no wish to become partners by investing their own money in such firms because, understandably, they do not perceive that the risks justify the rewards. The result is that these firms simply do not have many of the resources that are needed to run a modern business.


What resources are these? In his book Making Sense of Law Firms, Stephen Mayson, director of the centre for law firm management at Nottingham Law School, referred to the two extremes of work-type as being ‘efficiency’ and ‘expertise’. By getting away from defining work in terms of ‘conveyancing’ or ‘probate’, it is easier to see the important distinction that needs to be made between work-types.


In Professor Mayson’s words: ‘Too many lawyers consider their services to fall into the expertise category, forgetting that the important assessment is made by the client. If the client perceives the service to be largely procedural and capable of being performed by any number of suitably qualified lawyers or firms, then it will be an efficiency service.’


Many clients do indeed believe that many services can be performed by any number of solicitors. The government should also be viewed as a client, in which context the future for legal aid is simultaneously frightening and exciting.


Efficiency services require process to achieve profitability. Process requires investment in IT infrastructure and IT skills. It also requires investment in marketing, as market share is important to compensate for lower margins. These are the resources that many small firms do not have and the resources that many are not able to afford.


It is therefore inevitable that firms with different business models and access to capital will come into the market, bringing with them an entirely new basis of competition. They will not respect the longevity of those small firms which survive by virtue of the artificial protection afforded by not allowing non-lawyers to invest in legal practices.


This is not the end for law firms, even small ones. However, it is the beginning of a period of significant change. Even if some or all of the new entrants fail, their presence will affect firms against which they compete, particularly if those firms blind themselves to the change that is inevitable.


Adam Makepeace is a solicitor and practice manager at central London firm Streathers. He recently completed an MBA, for which his research project was looking at the likely impact of the Clementi reforms