With targeted offerings, law firms can take advantage of SMEs’ need for niche legal advice, writes William Robins.

The small and medium-sized enterprise (SME) is a noble creature. While there may be some disagreement as to exactly which businesses fall within this category, there can be no doubt as to the sheer enormity of the SME legal services market.

SMEs make up 99.9% of all private sector businesses in the UK, provide 59.3% of all private sector employment, and generate 48.1% of all private sector turnover. SMEs employ 14.4 million people and have a combined turnover of £1.6 trillion.

They have a voracious appetite for legal services and together spend in excess of £9bn on legal advice in one form or another. Any commercial law firm wishing to grow needs to know how to win market share in this space.

The Legal Services Board conducted a ground-breaking study of this market, and the report of Professor Pascoe Pleasence and Dr Nigel Balmer is surely required reading for commercial firms. In its 115 pages, the report outlines the responses drawn from 10,000 businesses across a very wide range of subjects.

The report paints a picture of the acute need of SME businesses for legal advice across the board. When asked about the effects of unaddressed legal issues, 23% of SME businesses reported significant loss of income, 12% reported an increased cost, 9% reported damage to their reputation, and 6% reported that employees had to be shed and/or the business closed down.

Overall, 46% of SMEs said that unaddressed legal issues had had a tangible adverse impact on their business, with the average financial cost per issue being £13,812.

The demand for legal services was not spread evenly through the respondents. Indeed the report showed strong general trends that SME businesses with higher turnover or profit, with more employees, and those with in-house legal experience in some form have a greater need for legal services. Legal need also varied across business sectors, with the SMEs engaged in the finance, insurance, and real estate sectors having a higher need, and SMEs engaged in the retail and wholesale sectors reporting a lower need.

The survey, however, is a wake-up call for law firms. In response to a legal need, an SME is just as likely to ignore the issue or to take non-legal advice as it is to take legal advice, and it is twice as likely that the SME will take no advice at all. In the 30% of cases where SMEs do take legal advice in response to a legal issue, only 30% of them choose to consult a solicitor, with the balance consulting accountants, unions, HR advisers, and barristers.

In perhaps its most far-reaching conclusion, the survey reported that fewer than 15% of SMEs thought solicitors offered cost-effective legal solutions. The gauntlet has been thrown down to law firms, and rapid growth awaits any firm that can meet this challenge.

Interestingly the survey revealed that SMEs differentiate their legal needs and seek out advice according to their understanding of the problem. For certain problems, SMEs are turning to no-cost/low-cost options to download templates and factsheets on the law while for other, perceived to be more complex, problems they are turning to experienced solicitors for guidance. There are, of course, degrees of legal services between these two extremes.

Law firms need to have an acute appreciation of their client base, how they think, work, and consume legal services. Firms then need to focus on delivering excellence and value to those clients.

Specialisation drives growth. It allows firms to differentiate themselves from their competitors in a crowded marketplace, to appeal to potential new hires with a similar outlook, and to have a strong sense of direction.

The market for legal services will continue to become ever-more competitive; new entrants, the inexorable rise of technology, and the SRA’s promise of deregulation look likely to toughen competition further still. In the fast-moving world of today’s and tomorrow’s legal market, firms must understand who they are, what they offer, and where they excel.

Only these firms will succeed; doing nothing is not an option.

William Robins is operations director at Keystone Law