Segmentation of the Legal Services Market – ‘The Banker’s View’
4 July 2013
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Price point and service model are the first areas on which the UK legal market is segmenting, but as Barclays’ Lee Everson says, there is more to come.
At Barclays, the professional services industry team has banking relationships with over 80 per cent of the UK’s top 20 law firms, as well as a significant share of mid-tier and niche practices. Talking to our law firm clients on a daily basis gives us a privileged insight into the sector and how it’s coping with the current challenges and changes. Some firms are making waves in the industry by tearing up the old rule book and turning to new delivery methods and technology to keep ahead of the competition.
Until recently, there has been one dominant business model in legal services. This has generally comprised a relationship-based service model, with prominent office space, on-the-clock pricing and full distribution of profits. But over the last five or so years, a combination of changing demand, technology and de-regulation are allowing new models to emerge.
In particular, and of key interest to me, the legal market and its customers are starting to segment. Customer segmentation is not a new thing for industries like retail and technology. They have been thinking about their customer segments as different markets for a long time and have become expert at building tailor-made propositions. Law firms across the country, aside from having to deal with systemic fee pressure, will have to start thinking about how they serve their diverging customer segments. My view is that price-point and service model are the first areas on which the market is segmenting, but there is more to come. This article aims to look at the core competitive themes with which new entrants are looking to target the customers of more established firms and how they fit within each new customer segment.
The first and most obvious theme to emerge is simple low-pricing. A number of ‘virtual’ firms have already emerged that are able to operate on a reduced cost-base and pass this onto the client. Many buyers of legal services don’t want or need face-to-face contact with a solicitor, so why pay for it? Through a mix of reduced premises costs and staff-mix, virtual firms are able to offer competitive pricing at a competitive margin. As they build scale, these firms will undoubtedly force down price expectations in the market.
Simple lower-pricing can be extremely effective, but these firms are taking this a step further and attacking the perceived incentive issue with on-the-clock pricing. Fixed-fee work has been around for a while, but the difference here is that new entrants, particularly in the consumer and SME space, are making this a core thread of their marketing message. The appeal in the consumer/SME market is obvious, where clients want certainty on what they will be charged. But fixed-fee is working its way up the food chain into matters as complex as M&A. Ultimately, fixed-fee work is about the firm, rather than the client, taking the risk on the time taken to complete a matter and this, unsurprisingly, is proving attractive to clients.
A recent example of this in the ABS space is Brilliant Law. Based in Leeds, Brilliant Law offer a range of consumer and SME legal products and packages for a fixed fee. The attraction to firms where cost control is paramount is clear, but Brilliant Law also target the customer journey and for example, allow payment by a range of methods. Clarity for the consumer is key. Another new player, Riverview Law, is targeting the UK corporate space with a fixed fee offering that provides its corporate customers with unlimited access, within the agreed service scope, to its legal teams. This out-sourcing model again provides significant benefits to firms looking to gain certainty over their legal spend.
Price competition, when combined with a willingness and ability for the firm to take WIP risk are powerful competitive themes that cannot be ignored by traditional players across the spectrum.
Another significant benefit of this pricing strategy can be dramatic working capital improvements. Fixed-fee and a willingness to take risk on a matter, can in many cases incentivise the client to pay upfront. Lock-up management is on the agenda at most of my relationship directors’ meetings, but the creative use of pricing can bring cash-flow improvements way beyond any traditional attempts to bring down debtor days. Taken together with the fact that many new entrants are not looking to take cash out in the short-term, cash flexibility can bring an extra competitive dimension.
The next theme to emerge is the use of technology. This appeals to another customer segment that is happy to procure some of their legal needs with no solicitor contact whatsoever. Two such entrants are Rocket Lawyer and Epoq Group, the latter with mylawyer.co.uk. Both provide intelligent software capable of producing legal documentation based on client inputs. Should the client’s requirements become more complex, they are able to speak to qualified solicitors. This tech-led approach will clearly appeal to the large and growing segment of consumers who are happy to buy most things online and my view on this market is that there will be fewer, larger winners and these existing players are likely to take advantage of their first-mover status. The R&D involved in bringing such offerings to market is considerable and therefore difficult for traditional firms to replicate quickly.
The final theme to emerge, and one where the benefits of ABS are proving particularly relevant are where law firms are looking to offer multiple disciplines under one roof. In the professional indemnity defence market, Robin Simon is transforming itself into ABS licenced Triton Global Ltd. This new ABS structure allows them to take a multi-disciplinary offering of legal services, claims management and other related services to their insurance clients. To add to this, Triton is able to offer this for a fixed fee, which will allow them to provide even more certainty to the client.
So virtual servicing, price competition, fixed-fee risk taking, technology and the use of multi-disciplinary offerings are what I’m seeing in the market and they all have their place. But the key consideration is, where? Each is ultimately targeting a customer segment that prefers a different service model and has a different willingness to pay. At the consumer end, I think it’s fair to say that new markets are being formed where previously consumers were priced out of legal services.
Many of my discussions are also focused around how legal services firms will be funded going forward. Clearly, any model that brings true economies of scale, or is building a new marketplace will be attractive to external capital. Strategic investments into law firms are likely to become more common, although the cultural fit between the firm and equity provider could be a major barrier to much deal activity in the near future.
The Innovators’ Dilemma by Clayton Christensen is a very relevant read for traditional firms thinking about how, when or indeed if they need to change. The book looks at the issues faced by incumbent firms when challenged with disruptive new business models. There is plenty of precedent in other industries where incumbents have refused to cannibalise their own margins to compete with new models. That is of course until it was too late and the new entrants had the scale and most importantly experience to be a credible threat.
It’s tempting to end on a prediction, but none of us have a crystal ball. One thing I am sure of however, is the growing relevance of your customer segments. This article is not meant to suggest that new models spell the end for the traditional partnership/LLP. That is clearly not the case. But the importance of customer segments has precedent across many markets. If you believe your clients are optimally served at a price point that is sustainable, then there is little need to change. If, on the contrary, the opposite is true, now could be the time to bite the bullet and embrace change before it is too late.
Lee Everson, corporate director (professional services industry team), Barclays