Countdown to Legal Services Act: Identify your weaknesses

It’s now less than four months until the Legal Services Act comes fully into effect, significantly liberalising the UK legal market by allowing non-law firms to provide legal services.


With implementation just around the corner on October 6, many smaller law firms are yet to fully understand the impact it could have on their business.


To recap, one of the broad aims of the reforms is to deregulate the provision of legal work, with the ‘Tesco Law’ tag implying that purchasing legal services should be as easy everyday shopping. The new rules on Alternative Business Structures also permit external investment in law firms, such as private equity backing, and flotation on the stock market.


I’ve been working with law firms in a number of areas to prepare them for the Act. Law firms preparing for changes need to consider a number of factors.


Know your weaknesses


It’s important to look at where work is coming from right across the firm and identify which services are most vulnerable to competition from new entrants to the market. This is most likely going to be in areas where legal services can be commoditised and provided direct to the consumer, such as will writing and conveyancing, but it’s useful to do a full audit on fees to determine the costs associated with carrying out different types of work.


Minimise the impact


Once you know where the firm is vulnerable to increased competition you can put a plan in place to lessen any significant impact. At the very least, firms should ensure they have divisional accounts on a service line basis to make it easier to understand areas of the business that are performing less well or are more of a drain on cash flow. Firms may also consider training staff in more vulnerable departments to work elsewhere within the business, giving it the agility to scale up or down quickly while avoiding loss of skills in the workforce.


You may also look at restructuring the firm where service lines with similar funding requirements may be placed into a separate company or LLP, or indeed those services at risk may be wound down to a more manageable size and cost base within the restructure.


Introduce more robust systems and procedures


Looking at systems and procedures more closely, and tightening up any slack, will also put the firm in better shape to deal with competition. For example, we have worked with a number of firms who have gone through the Law Society’s Lexcel practice management accreditation ahead of the Legal Services Act coming into force. This has helped to improve business performance and client care, as well as lower insurance premiums.


Consider mergers and acquisitions


Given recent economic events, I’d be surprised if there is still a law firm out there that hasn’t at least thought about the possibility of merging with another firm or acquiring a key team. Being a successful law firm will increasingly be about the ability to shift track and adopt new ideas quickly. Mergers can provide smaller firms with greater flexibility, bringing in additional expertise and creating a more rounded business. Incorporations are increasingly being used to make firms a more attractive proposition when it comes to a joint venture, merger or sale.


Use the new regulations to your advantage


Firms should see the Act as an opportunity and not just a threat. Alternative Business Structures are coming at a time when law firms are coping with a sluggish economy, public funding cuts, new technologies, and more demanding clients. Allowing external non-lawyer investment and fundraising will allow firms to become more financially focused. Increased competition will ultimately make the legal profession stronger, but it will also give firms the option of a number of different business models from incorporations, joint ventures, mergers, acquisitions, franchises, outsourcing and even shared services.


Karen Hain is head of the professional practices team at Moore and Smalley Chartered Accountants and Business Advisors.