Mid-tier under “intense” pressure from accountants, review states
Mid-tier law firms south of the border have enjoyed a “spectacular” resurgence since the recession, but now face “intense competition” from the big accountancy firms entering the legal market, especially in commoditised work, according to a report published today by the Royal Bank of Scotland.
The annual review of the legal market, by James Tsolakis, head of legal services, large corporate and sectors at RBS, flags up the increasing inroads into the market being made by the leading firms operating under alternative business structure licences. Three of the top four – EY, PwC and KPMG – are now licensed to provide legal services.
Mr Tsolakis praises law firms for embracing outsourcing, reducing costs and greater use of fixed costs, but warns that “liberalisation of the legal market has taken a massive step forward across the board”. Accountancy firms are “quietly” taking away more commoditised work, and their ambition “undoubtedly raises the stakes for established firms as they seek to protect existing market share and invest in the cutting-edge technology required to compete”.
He continues: “With much legal work becoming increasingly process-driven, these accountants have an instant appeal to today’s cost-conscious clients, who value efficiency, standardisation (where appropriate) and a move away from expensive hourly rates.”
Eschewing full-service capability and the “trophy hires of rainmaking partners from established firms”, they are reported as focusing on legal areas that complement their own practices, such as compliance, due diligence, employment, immigration and tax.
But Mr Tsolakis warns: “The smart money, nonetheless, is on the accountants going head-to-head with the established legal order over lucrative capital markets and transactional activity once they have taken sufficient market share from the mid-tier.”
With the flotation of Gateley plc, and the emergence of legal arms of companies such as BT and Direct Line, the threat of well-capitalised entities competing for the best talent, work, technology and knowhow “becomes more acute”.
He argues that law firms at all levels must be proactive in managing their staffing, real estate and other key costs to fit rising and falling markets. They must also be able to differentiate from rivals and focus on the most profitable areas of the market.
The report states: “The upshot of all of this upheaval is that legal work has become disaggregated, with significantly bolstered in-house teams acting as de facto project managers to a host of legal and resource providers, with the traditional law firm just one constituent part – albeit, in many cases, the one doing the most complex, more profitable work.”
And again: “The result of this competition will be continuing pressure on rates and fees, exacerbated by a market in which – despite improving market conditions – there is an oversupply of lawyers for the work available.
“The continuing trend toward unbundling legal instructions will continue, further eroding the margins previously available. Technology-driven specialist firms executing lower-cost, higher-volume repetitive work will continue to grow and disrupt the traditional market. All this is compounded by the emergence of non-legal firms using ABS licensing as a route to market.
“However, market participants are responding positively to these challenges, with progressive strategies and the emergence of innovative structures and business models.”