Wake-up call on law firm costs

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By Ian Fraser

Published: Herald Business

Date: 25 September 2008

Technology, regulatory change and offshoring are all reminders that legal firms need to be more progressive about their services

LAW firms are being buffeted from all sides at the moment. Not only are they having to contend with the collapse of some of the markets in which they operate – with the worst effected being residential property, commercial property and M&A. They also having to brace themselves for the massive changes that commoditisation and IT, coupled with regulatory change from Westminster and Holyrood, will bring to their profession.

In a portent of things to come, The Lawyer on August 11th published an article headlined “Clifford Chance to save £8 million as it takes paralegals offshore”. This described how Clifford Chance, the world’s largest law firm, now intends to “offshore” most of the low-value work it currently undertakes in London to a dedicated, wholly-owned Indian subsidiary.

Activities being transferred include the drafting of “395” forms detailing company changes for submission to Companies House, due diligence, document review for litigation, the preparation of shell company conversions, the cloning of documents, and aspects of low-level drafting.

Clifford Chance believes the move will boost margins on low-value work, much of which is currently carried out by comparatively well-paid trainees and paralegals in London. By 2009, the firm anticipates it will employ 20 paralegals and 300 business services staff at its site near Delhi – approximately 10% of its global business services staff. The firm was spurred into action by the Legal Services Act, which is expected to transform the legal services market by opening it up to low-cost players such as Tesco.

The move is the sort of thing that legal services guru Richard Susskind has been saying law firms must adopt if they are to have a long term future. In his book ‘The End of Lawyers?’, due to be published in November, Susskind will accuse many law firms of being asleep at the wheel. He believes that unless they start thinking more creatively about how to deal with the twin forces of commoditization and IT then their profession faces oblivion.

Susskind argues that much of the work currently carried out by lawyers could just as well be carried out by advanced systems or less well-paid workers supported by technology or standard processes – or even by clients using their own online “self-help tools”. He writes: “Open-minded lawyers, and those who genuinely care about the interests of their clients should, in the internet age, continually be looking at ways in which IT can play a more prominent role in their services.”

Susskind – an IT adviser to the Lord Chief Justice of England and Wales and an independent adviser to global professional firms – warns that if lawyers fail to rise to challenge, it won’t be long before customers start to baulk at paying way over the odds for aspects of legal work which are in fact glorified administrative work.

Philip Rodney, chairman of law firm Burness, is unconvinced by Susskind’s arguments.

He says: “We must embrace technology when it assists us in delivering our service more efficiently, but it doesn’t always do so. Embracing IT and outsourcing can bring about some benefits. But what can really make the difference in a law firm, is understanding your client’s business and their sector, rather than providing a homogenised service.”

Douglas Connell, joint managing partner of private clients firm Turcan Connell, is more supportive of Susskind. He says: “Susskind’s views serve as an important wake-up call, which may come rather too late for that part of the legal profession – and it may be a substantial part – which has been resistant to change. However there are also many legal businesses which have been innovative and progressive. Those providing low-cost commoditised services at one end of the spectrum and those providing niche added-value services at the other both have the potential to flourish even in the current more difficult climate.”

“It is firms that are caught in the middle, without either the capacity to introduce commoditisation or the technical skills to produce added value, who risk being marginalized. The present downturn is placing a lot of pressure on such firms, and some may not survive.”

Vulnerable law firms include those that specialise in the fields worst effected by the economic downturn and possible recession – for example residential property, commercial property, conveyancing and bulk mortgage processing. Already, the Edinburgh estate agents Stewart Saunders have gone bust and other firms can be expected to follow. More generalist law firms, however, are in a stronger position, as they are able to compensate for a slowdown in business in these areas by ramping up workflow in areas of strong demand. Typically in recessions these include dispute resolution, litigation, employment and private practice.

Charles Barnett, a partner in the Glasgow office of accountants PKF who specialises in advising law firms, says: “I wouldn’t be surprised if some high street firms that are focused on residential property are struggling or even have to fold. Firms that have focused on the processing of residential mortgages will also be feeling the pinch.” In Scotland, major players in this area include Anderson Fyfe, Irwin Mitchell (which merged with Golds in 2007), Morton Fraser and Walker Laird.

Barnett added: “I also suspect that firms which have a particular focus on commercial property may be having to rethink aspects of their business model.”

He believes that in the currently climate, law firms should be seeking more exposure to work for the “safe haven” of the public sector. Generally his advice to law firms in these hard times is to keep a watchful eye on cash flow. “A fee is a gift until the cash is actually sitting in the bank,” he said.

Michael Murphy, managing partner at MacRoberts, does not believe that any significant Scottish law firm will go bust as a result of the current economic slowdown. Nor does he believe that firms will have to lose any fee earners. He said: “They’ll want to hang onto their good people because, if they lose them, they may never get them back. But I do think that partners are going to have get used to earning less this year.”

An edited version of this article was published in the October 2008 issue of The Herald Business, published with The Herald on Thursday 25th September 2008.

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