I have been asked to write about my prognosis for small law firms in NSW. As a solicitor, it pains me to do so. This is because the prospects are potentially bleak for the bulk of these firms. This has very little to do with the quality of technical skill of the lawyers working in small firms – mostly hard working, dedicated professionals who demonstrate incredible commitment to their clients’ legal affairs.

It has a lot to do with the way the market is changing and the pressures this places on legal service providers. Law firms are rapidly being caught up in these dynamic changes and it’s fair to say that most are not prepared for them. It’s not like we haven’t been warned – we have. Other sectors have already been hit by these changes, the most notable being retail, which is now dominated by volume-based, low price companies. These huge retailers have swept away the small shops that used to be part and parcel of the normal shopping run. They have done so with ruthless efficiency. With it, they have swept away a way of life. They are now feeling the pinch of another wave of change. Take the current impact of on-line shopping on major booksellers, or on retailers such as Harvey Norman.

Law firm owners, as well as solicitors, are wrong if they believe they are somehow immune from these forces. 

Consider for a moment the sheer number of qualified lawyers the system is producing. In 1998, we had less than 10,000 lawyers in NSW. Now we have over 24,000. There are simply too many lawyers being produced, for the amount of work the profession is required to do.

Take into account, as well, the way the market is structured. In NSW, over 80 per cent of all firms are sole practitioners. Ninety-five per cent of firms are under five partners. Now this would be acceptable if we knew that the value of the market was increasing, at a rate that allowed these small firms to derive a decent income. But it’s not. At best, the value of the market is static or contracting. To put it simply, there is less to go around.

Consider that the legal services small firms offer clients, for example, conveyancing. Almost all of these services have become ‘commoditised’ in a very quick period of time. When this happens, the service is perceived as similar by buyers and price becomes the main differentiator. Also, lawyers are simply not needed to deliver most of these legal services. The intellectual component that lawyers can bring is a very small part of the delivery to the client, compared to the process required, which can be managed by non-lawyers and /or the client, using technology.

Also, law firm owners and solicitors should consider that clients are rapidly becoming customers for their services. Price is the key element, and they want flexibility and ease in the way they purchase – increasingly, using the internet which provides unparalleled ease.

And, finally, lawyers need to take into account the impact of technology. Technological advances permit much of the process involved in legal work to be automated, or outsourced. Workflow and knowledge management technology produce powerful economies of scale for traditional legal services.

Implications for Smaller Firms

It is reasonable to estimate that at least 40 per cent of smaller firms, probably far more, will not be able to survive the dynamics described in this article. The first trend, which we’re already seeing, is a decline in fee income from most smaller firms. This is because the vast majority of smaller firms produce most of their income from commoditised services. The second indicator is a decline in profitability. This is because despite the decline in income, most firms refuse to change the way they use their overhead to deliver the services. It is only a matter of time, but NSW has yet to see the type of reform that has occurred in England & Wales under the Clementi reforms (Tesco Law). That will only accelerate the structural change that is inevitable for this part of the market.

It’s not all bad news, though. Lawyers who take the chance now to embrace the future will reap major rewards. In the future, lawyers will be able to choose far more innovative and flexible corporate structures to deliver their work, replacing the partnership model. 

The successful small firm of the future will also have at least the following characteristics:

# Services – a focus only on the services that clients need lawyers for, being work requiring high levels of intellectual expertise. Other legal work will be divested.

# Specialisation – senior lawyers with high levels of specialisation in services requiring legal expertise. This is a key differentiation driver, in that the firm can assure clients that their work will be done by top level senior lawyers.

# Work engineering – a detailed focus on the structure of legal matters to identify the elements that can be done by non-lawyers and / or automated, reducing the cost of production and also increasing economies of scale.

# Work management – use of paralegals and non-lawyers, combined with advanced technology, to deliver legal work.

# Outsourcing – outsource the law library, photocopying, know how. Reduce the overhead, without sacrificing quality.

# Pricing – the above analysis permits firms to offer services at more certain and predictable prices, using fixed fees, for example.

The one thing that owners of small firms cannot do is to pretend that the status quo will always continue. It is unforgiveable to not have a business plan or clear strategy in the current market. 

The leveraged profit model, relying as it does on ‘fee-earners’ churning out billable hours, is coming to an end for smaller firms, as it does not work for commoditised services. Firms that are not investing in technology, expertise and training to deliver legal work differently, will fall behind. By far the best strategy is to focus on the core drivers that makes law worth practising – a strict focus on services requiring high levels of technical expertise; using technology and non-lawyers for client work that does not need lawyers; and wrapping this up in a special client relationship. This unique quality has always been a core driver of the success of lawyering, which is ultimately a relationships business.

Ted Dwyer is director of Dwyer Consulting. He provides law firms with expert advice on profitability, strategy, CRM and pricing.