Legal Services Reform - In Whose Name?

The theory goes that “consumers” were badly served by the professional regulation systems of the past. To keep the legal services sector fit for purpose it had to be reformed and competition introduced both at regulatory and practitioner level. The bogey man of Tesco law was promoted – interestingly not by Tesco – but the scare tactics to justify changes introduced have been relentless.

Way back in 2003 – the Clementi brief was “To consider what regulatory framework would best promote competition, innovation and the public and consumer interest in an efficient, effective and independent legal sector. To recommend a framework which will be independent in representing the public and consumer interest, comprehensive, accountable, consistent, flexible, transparent, and no more restrictive or burdensome than is clearly justified”[Our emphasis]. Taking a dispassionate view of the events over the last decade, both driven by the regulatory changes, and the market itself, it is hard to conclude that the interests of consumers have always remained at the forefront of every ones thoughts and actions.

Very few detailed analyses of the economic implications of the changes to the legal services market overall have been undertaken. Among those that have, they have identified, for example, disaggregation of legal services as a major theme. That a sea of change is happening with or without the intervention of the regulators and the esteemed Reviews and reviewers is evident.

So we have set out in this series of blogs to run through the discrete issues in turn and put the numbers and facts relevant to them in plain view. A clearer understanding of the vested interests and the directions in which they steer the debate can only help. We have no axe to grind here, and hope to present a dispassionate and independent view of the landscape. We are also prepared to say what others are not.

It may well be, for example, that some would conclude the Jackson Review is essentially about keeping big risk items off the Legal Aid and NHS budgets; that Legal Aid in the UK is probably at least twice as expensive as it should be, and that the Legal Services Act is all about tooling up to defend protectionism and established monopolies and oligopolies, not increasing competition for legal services.

That no-one is candid about these positions is a testament to the strength of the legal professional lobby. For good or bad – it is an exceptionally pervasive and effective one. It could also be that some would conclude the real money has already disintermediated the legal profession which is increasingly seen by the deeper, cannier commercial pockets as simply a cost of failure – and one that they are increasingly reluctant to pay.

Legal Services Reform - White Heat or White Noise

This is the first of a series of posts on the plethora of events in the legal services arena currently. There is a lot of hype and misinformation - having reviewed the numbers - the following (in no particular order of priority) are the headline (for some - uncomfortable) findings:

1. October 2011 will be a whimper, not a bang. The bag was 10 years ago but just as GCs are not fussed about the Legal Services Act now, no private practice lawyers were listening then. The latest reforms aim to empower solicitors to compete in a wider legal services market at the cost of minimal concessions to other professional interest bodies.
2. Personal injury work will not become legally aided, but when an access to justice issue is side tracked into automated cost arbitraging, even the MoJ has to act. Jackson reforms are a lamppost that generates more support than light in terms of the access to justice high ground.
3. Competition between regulators is unlikely to reduce the costs of regulation on qualified lawyers. It could even increase it. Forcing other legal services providers to take on the overheads of lawyers in the name of competition – levelling costs up in effect – is nonsensical. They will find other ways to disintermediate or marginalise the “reserved” lawyers, who will simply get more uneconomic.
4. As long as non-lawyer entrants to the market are forced to first get a licence through one of their competitors’ regulators, the impact of deregulation will be essentially protectionist rather than deregulatory. This allows legal lobbyists to claim increased competition and economic forces on prices, etc while delivering anything but.
5. Direct access to the Bar is a tipping point for commercial work. Barristers approving ABS’, and especially Licensed conveyancers offering this will be seminal moves, but restricted rights to conduct litigation are typical of the noise without substance that characterises this debate. Had the Bar Standards Board allowed commercial barristers rights of conduct, tanks would have been parking on lawns, but access to pupillage remains heavily constrained.
6. ABS’ from outside the profession are already thriving - not “in waiting”. Rights of audience are not as precious as lawyers think. Lawyers will not become ABS empowered entrepreneurs overnight.
7. Legal Aid is structurally unsound. 17% cuts are unlikely to fix the core problem: the £2bn budget is twice as large or half as effective as it should be. This source of legal work will not increase and will be forced to consolidate and improve efficiencies.
8. Better training, higher entry restrictions and continuous professional education – in effect all the core activities of the regulatory bodies have been ineffective in either building “consumer” confidence or equipping lawyers to deal with “unreserved” legal services competitors. Increasing the costs of being a lawyer is not synonymous with being a “good” lawyer.
9. Some firms will see listing as a viable route, but this it is not likely to come from the most lucrative end of the legal market which has no need of external equity. The track record of listed consolidators in professional services in the UK is not good.
10. Most law firms are simply not much greater than the sum of their parts (or partners). The fact that key partners can and do move firm is both a strength and a weakness. It means establishing an equity value in any given agglomeration of partners is elusive – a weakness. It also means acquiring firms is largely unnecessary when acquiring their key partners or fee earners can be a cheaper, simpler route. By now it should be clear that VCs will not be beationg a path to equity partners’ doors.
11. A mid-market consolidator is not contingent on ABS’ to emerge, although one may yet see this as a reason to try. They are much more likely to fail than to make any serious dent in the magic circle global positions.
12. ABS’ may be a useful route for firms hedging consumer focused legal services risk. Competing within a fickle government regulator environment, while relying heavily on automated scale based systems and self interested insurance drivers makes limited liability and speed of decision making essential.
13. The real debate should be the sustainability, pace and scale of fewer partners using technology and increased fee earner support ratios to maintain or enhance profits per partner.
14. A protectionist approach to restricted entry to the professions is economically illiterate and achieving the exact opposite of the intended preservation of exclusivity. Global firms circumvent it, mid-market firms are weighed down by the cost of it, and clients have access to a growing pool of talent with which they can devise their own cheaper solutions.
15. There is no shortage of entrepreneurial and clever lawyers – industry internal rivalry is keen and focused. Lawyers are not good at inter-industry rivalry and are being progressively disintermediated – cut “out of the money”.
16. Talk about the reforms being for the benefit of “consumers” is disingenuous. Legal lobbyists who do not differentiate between solutions for consumer and commercial clients, but persist with an “us” and “them” view lose the trust and confidence of both constituencies.

Private practice lawyers risk putting themselves deeper into the position of claiming to be the protector of consumers who resent being protected in that way or even by them at all – and certainly not at that cost.

Data behind the above will be spelt out in forthcoming blogs covering:
- Change in In Who’s Name?
- Reserved Activities and Restrictive Practices
- Access to Justice and Legal Aid
- Consumers, Confidence and LeO
- Jackson & Insurance Costs
- Regulatory Competition
- Consolidation
- The Problem with VCs and Listing
- Fixed Fees and Disintermediation

Six Strategic Shockers for Law Firms

1. Fixed fees are not about cost cutting; they are an arm wrestle about whether you “get” the pressures on the client’s business or not. The addressable market in regulation and compliance is growing faster than you are.

2. Academics and consultants have not yet done enough leg work to really uncover a road map for the way ahead for the partnerships. You are not entirely on your own, but it will feel like it. Sadly you still have to do it in the dark, but then so did Gates, Buffet, Dyson, Jobs – oh yes, and Farraday, Edison, Brunel, Turing, Berners-Lee...

3. If you are finding yourself forced into LPO and international outsourcing – you are in more trouble than you think. Lawyers making project management their core competence fits the white board matrices, but it is a real stretch. GCs are more likely to disintermediate you than not here sooner or later.

4. Lawyers in private practice are seen by the GC’s bosses boss as a cost of failure. Being good at dispute resolution, doesn’t mean people still basically hate disputes arising at all.

5. In commoditised legal services there’s more money in selling the shovels than panning for the gold. Latent markets are extremely rare, but solutions you don’t recognise are legion.

6. The speculative capital will not go to partnerships or anything essentially controlled by partners. They only want you for your know-how, not your clients or cash flow. And they won’t respect you in the morning.

Lawyers - you get the software you deserve

It’s not quite as simple as saying “you get what you pay for” – but it’s close. Establishing the brand of your law firm is hard – and it is every bit as hard for the software developers who want your business. The boxes all look the same, the people all have the right patter, there are horror stories and reference sites in equal measure. In UK legal practice, case and matter management software development there is a full range: some suppliers cater for early adopters, some avoid the bleeding edge, some integrate, some claim integration, some stay with best of breed. Some do hardware, some do clouds, some do document management; for some, document management is collaborative versioning across borders and jurisdictions, for others it is the size of your shredder. Some cover firms of all sizes, some only big firms, some only small and some only in-house teams. There is a bewildering choice of suppliers and competencies in legal software development – and these days that is actually a very “good thing”.

Ponder for a moment the alternative – a take it or leave it, one-size fits all, low service world? Yes it would be cheaper, but would it put your firm where you need to be when faced with top 100 US law firm competition, more GC fixed price packages, or Co-op Legal Services?

Comparisons with Accountancy Software:
Parallels are often drawn with the neighbouring profession of accountancy. They wear similar suits, send their kids to the same schools, and allegedly take to computerisation quicker and easier than lawyers. Maybe; but the shape of the accountancy professions’ software support market is radically different. The theory goes that if you can serve one profession well you know how to do others too. So what shape is the accountancy profession software support sector and why?

It is a bit of a caricature, but large accountancy firms basically have two choices: do it yourself or go see CCH; the mid-market firms largely have to either take it or leave it from IRIS’ old Transaction Technology platform, while smaller firms are at the mercy of assorted spreadsheet jockeys – always ingenious, but sometimes fragile.

The accountancy software market has played hard ball with suppliers for decades – it has been very prepared to run its own software development teams and squeeze price and external development investment accordingly. It has also had the luxury that many of its core processes are eminently automatable. The balance of power between buyers and suppliers is heavily weighted towards the buyers – so much so that the size of this market is around a third of the comparable legal one.

IRIS’ market leadership in mid-market accountancy solutions is well known and while the product has its detractors, it does what it says on the tin. They are good at what they do, and they know how to hold and defend a market leadership position.

There are a number of good entrepreneurial teams mounting rival challenges. To Thomson Reuter’s credit, they have both Digita and Abacus in harness now to build a credible alternative – arguably the Waitrose to IRIS’ Tesco style ubiquity. Smaller firms like Practice Engine, TCSL, APS and innovators like Liquid Accounts will change things in time and typically offer solutions and service that IRIS cannot match. This is a tricky market, however. Sage, for example, built a whole division here over a decade ago, and was unable to achieve many synergies given their brand. Lexis has given the accountancy and tax sector a wide birth, which is odd, considering that the Butterworth’s brand is as strong if not stronger than the CCH brand in tax.

The reasons for the apparent lack of choice in the tax and accountancy software sector are cultural as much as anything. Just as the accountancy professional information market is less than a quarter of the size of the legal one, their attitude towards software is fundamentally different. Having some experience of looking under the bonnet in enterprise systems used by their clients, accountants know that it is rarely rocket science, but they also assume the five most dangerous words in strategy: “how hard can it be?” It is a defining characteristic of the tax and accountancy software market that the larger firms have repeatedly developed solutions themselves, sold them and started them up again in a long term strategic display of major buyer power. Both of the major corporation tax specialists in the market, TSCL and Abacus started life inside KPMG and Andersen respectively. Thomson Reuters recently acquired the Abacus branded solutions from Deloitte and the cycle will no doubt go full circle again in due course.

What the accountancy market loses, precisely because of the power of its buyers, is a strong enough gene pool among independent software development firms willing to commit to excellent long term solutions. The end result is that only a few stalwarts are willing to play, and who can blame them? You can spend decades building intricate solutions for large firms with complex integration protocols and global competence only for the client to offer your core developers twice the salary and better kit to jump ship. You can get as cost effective as possible only for the client to move supplier after a long standing relationship or take the business inside capriciously, purely “because it is time”. Ironically the “we need to avoid complacency” or “we can’t afford to rely on one supplier” arguments end up delivering precisely that.

Economics in the UK Legal Software Market
So the theory goes that the legal software market will go the same way – it’s just a matter of time. It has even had some big players trying to force the pace in recent years such as multi-billion pound VCs who see the consolidation of the UK Legal IT market as a no brainer. In the noughties an impressive lady by the name of Vin Murriah did a sterling job rounding up MSS Alphalaw, AIM/Teamflow, Laserform, Opsis, Meridian Law, Mountain Group and Videss for CS Group. After the £500m take over by Hellman & Friedman, IRIS carried on picking up smaller targets in barrister’s chambers and other niches; so if that agglomeration be for you – who can be against you?

Well, Thomson Reuters – a £30bn global conglomerate – with their Elite brand for one. Lexis, a paltry £10bn global conglomerate by comparison brings VisualFiles and Axxia to the party. The home grown smaller listed team of Tikit are well known and while IT managed services is their core, the old TfB/Avenue brand came out of the recession quite well. Wolters Kluwer UK sold their legal operations to Thomson some years ago and have stayed out so far while a US VC-backed Aderant is largely doing what they would have done. Wilmington have been pre-occupied with core issues in CLT and training through the recession, while Bloomberg are looking hard for ways into the UK legal scene. EMAP and Euromoney remain more focused on the know-who than the know-how markets in legal services for now, while neighbours such as Civica (3i backed since 2008), Achilles (backed by Hg, IRIS’ former backers) and Landmark (Daily Mail General Trust backed – a £2bn group) are taking targets of opportunity in niche legal services areas already. In short, at a headline level there are 3-4 other major and global groups active, at least 3-4 others are prowling, and 3-4 other major players nibbling actively. The same cannot be said of the tax and accountancy market.

So is this a good thing? Well what the above picture doesn’t tell you is the strength of entrepreneurial and innovative talent elsewhere in the market. IRIS, Lexis and Tikit did not buy everyone and many of the remaining independents are actively showing up their big group rivals. A raft of exciting and innovative firms are offering genuine alternatives to the “big blues”. Eclipse, Flosuite, IKEN, Practicce, Pilgrim, Linetime, FWBS and Quill to name but a few are doing some really quite exciting things, as are Bar Squared for the chambers market.

The Recession’s Impact
The CS Group (as was) merged with IRIS in mid-2007, and a little matter of the legal profession heading into a recession first instead of last interfered with their plans somewhat. In economics terms the recession for Legal IT was bigger than in ’02; different in both size and shape. A £12m reverse in 2001-2 equates to a £20m one in 2008-10, a sharper and more condensed hit than the last recession.

So where was the list of casualties from the smaller developers? Thankfully it is missing. There were no comparable casualties in accountancy either, but that’s what you expect from a consolidated market run by “big boys” – the point is, the diverse market in legal IT fared just as well if not better, consolidated or not.

Bear in mind also that pre-07 many of the development teams had already invested significantly in repositioning their platforms, in some cases rewriting whole swathes of core code from scratch on new platforms aiming to launch in 2009-10. All were stretched; many were caught by the double whammy of recession and investment cash flow exodus simultaneously. That they emerged in rude health is a very heartening sign, not just for them, but for the profession.

Consolidation versus Choice
Managing partners and their CIO’s can expect this range of choice to continue. For the very largest global players, there remains Elite, Aderant, FWBS, Flosuite, Norwel, internal teams and a few more attempts to squeeze SAP or Oracle into the box. For the public sector, GCs and in-house teams players like Eclipse, Flosuite, and IKEN offer good alternatives to established services from Civica (as well as reliable top firm pitches too). Private practice has a strong choice from Pilgrim, FWBS, Norwel, Linetime and SOS in addition to the usual suspects from Lexis, IRIS and Tikit. Smaller practices have some great solution from experienced teams like Pracctice, Peapod, DPS and Meridian Legal and even LPO options, from firms like Quill/Pinpoint. Niche specialists such as ICSA Software, Business Integrity, Class Legal and Bar Squared offer variety as well as depth.

81 brands have become 64 firms over the past decade - to see the market map in full go to http://bit.ly/hgXokh for RBP's pictorial version. The respective sizes of the boxes are good approximations of the turnover of each firm. All of these firms pictured have achieved critical mass and survived a tough recession so there will remain a healthy scramble to find the elusive nirvana of matter management and practice efficiency. Yes, the profession is paying more for its software pro rata than the accountants are, but it has a healthier talent pool to call on and more choice and creativity at all levels. The suppliers survived the hardest test of 07-09 well and there are even new entrants emerging such as Peppermint – well worth a look.

Good Enough versus Critical
If anything the economic lesson from the market data is to certainly ignore any nonsense about lawyers tailgating accountants. More importantly it is probably also to stop comparing “one stop” and “best of breed”. In a sense everyone wants best of breed – it’s just that for some (usually smaller firms) the best of breed is a time and fees based single box. The real vibrancy in the market seems to come from in-house counsel needing industrial strength matter management, whereas for them time and fees needs to be very project specific rather than department generic. For private practice, time and fees remains essential, whereas case management does not need industrial strength, but bespoke tailoring. The neighbouring market of CRM systems probably still suffers too much from GIGO – garbage in, garbage out – but at least for lawyers there are more and better brains tackling the issue than in other markets.

Peninsula and Particle Physics

A strangely dressed chap turned up recently outside the Hadron collider claiming he'd come back from the future to stop us making the mistake of firing the thing up. I think they treated him as just "a very naughty boy". The Hadron collider is aiming to see if the Higgs Boson theoretical mechanism can be observed in reality - not that I really know much about quarks and high energy particle physics. The problem is - "they" don't really know what else it might reveal either. My personal favourite hunch is that when it does work, a large neon sign will automatically materialise in the skies over Switzerland in letters one mile high saying "LEVEL 2" - but who knows...

Recent results from Peninsula Business Services, Northgate's First Business Support, Citation, Ellis Whittam and Drury PSM suggest something is up. Or to put it another way - not up. There will be a lot of shadenfreude among Peninsula's many detractors at sales dropping in their latest accounts - all well and good - but at group level they grew slightly and achieved something really quite special in the tax fee business. Northgate's results for First Business Support are unusually flat, as are Citation's, and even Drury is not it's usual ebullient self.

So what is going on? Well sadly, its quite simple. Maths. Not everyone's favourite at school, and downright baffling when you get to the particle physics level of it. But essentially the regulatory consulting market is finally reaching "LEVEL2". Peninsula's sales drop in the employment and safety business has more to do with their size, than the market. The maths is simple. Increasing the size of a sales force continually eventually reaches a point of diminishing returns. In Level One you can play the game by simply adding more and more sales staff - "piling it high". Even with an addressable market of 800k businesses, however, 100 teleappointers ringing 100 firms a day will cycle through that 3 times a year or more. Small firm clients annoyingly also go bust and cancel, so the gap to fill each year before achieving growth simply gets bigger.

So IF - and its a big "if" - clients renew at, say an annualised 86%, and new sales staff generate, say £75k each pa, it takes 122 front line sales staff at full tilt for a £65m business just to break even. A 1% increase in cancellations means a £5-600k drop in turnover even with the team at full tilt. It's maths - not five year contracts, recessions or quality of service that is the main driver here. The market is now over half a billion in sales pa, it reached Level 2 in the late noughties and the rules are changing.

Peninsula have dabbled with the new rules, and growth in Ireland and Taxwise have kept them growing at the top group level. Ellis Whittam are growing and we expect other mid-market differentiated players to continue their growth too. But what worked in Level 1 simply is not enough in Level 2. Throwing sales staff at growth will only get you so far. Taking cancellations on the chin will no longer be an option. Price dumping hurts no-one more than the main dumper. Throwing ever more qualified management bodies at problems is also usually a fast track to complexity instead of growth - a bad thing. Growth is important - it is one of the key determinants of enterprise value, so only a very brave few will give up on it. To sustain it in the Level 2 environment, however requires new thinking.

New significant service lines are required - and if there is any criticism of this market that really hurts, it is that an insurance mentality doesn't go far enough. More bells and whistles for the sales team is fine as far as it goes - what's needed are complementary service lines with real grunt.

For a profile of Peninsula based on the latest accounts for the group, see www.rbponline.co.uk

Was that a pie eating contest where the 1st prize was more pie?

We are often asked what the shape of the UK legal technology market really is now. Surely CSGroup/IRIS' series of deals, Tikit buying TfB, Lexis snapping up Visualfiles and Axxia, not to mention some smaller teams merging as well means it is over and out? Well, actually no. None of the big brands have a market share head to head here of over 20% and most are firmly still in single figures, despite their deep pockets and best efforts so far.

The RBP Market Fundamentals Report for UK Legal Technology Suppliers 2011 Q1 - the definitive guide to practice, case and matter management software solutions suppliers - spells it out in detail. Over 80 firms are tracked, and while the core attractiveness of the market explains why big firms would try to muscle in - no one really has dominance yet.

In fact, while some of the consolidations probably still have a recurring case of indigestion, the market is being changed by a range of reinvigorated independents.

To see the full picture, the extensive analysis of the market from 1995 to 2015 is now available in an accessible powerpoint version at:
http://www.rbponline.co.uk/rbpsectors.asp?sector=LTS

Rule Britannia

It is a travesty frankly that the old National Britannia brand in safety compliance services has become so knocked about that it had to undergo the indignity of an unplanned sale. The buyers of the core contracts are BECAP, the private equity investment vehicle of Better Capital Limited. And as phoenix players go - Mr Moulton is one of the best, so it is perhaps fitting that they are back in the hands of a world class player at last; although "phoenix" would be overstating this - Moulton has a gem in his hands. NatBrit was rebranded Santia last December, such was the Windscale effect of the Connaught collapse on Connaught Compliance.

NatBrit has had to endure relegation and insult after a period of inept group management - thankfully mostly endured under the Connaught Compliance banner. Anthony Record, NatBrit's founder was one of the best entrepreneurs I've ever had the pleasure of working with. He had the vision for a safety compliance specialist team with an IT core and interlocking specialisms decades ahead of its time. What everyone takes forgranted in the safety industry now, Anthony had nailed on years ago; and he kept doing it - SafeContractor was another one of his babies. Yes he did have some good lieutenants, but most were just that compared to Ant's Admiralty level thinking. He was lucky enough to retire before the Connaught debacle and did see a good return on his efforts - but he would be distraught to see his baby so shabbily treated. Perhaps now the safety business will also see that segmentation by blue collar and white collar safety is nonsense - there is just compliance done well.

If Moulton plays true to form NatBrit will be back on its feet within months and back in the fray punching above its weight again within a year or so. This should be a £60m+ sales business with 25% profitability routinely achieved and consistent double digit growth. In a people intensive business such as this, a full turnaround will take a little while, however. Both former senior management and close competitors will have been trawling around the back rooms and kitchens in depressing detail over the recent months. It doesn't help. But as slides go, a period in the doldrums of around 2-3 years could be short, and in retrospect look like a mere blip eventually. Others in neighbouring sectors have been stubbornly flogging dead horses for two or three times that with inept strategies. The transition from record growth to a more digestable platform was never going to be easy - no-one would have chosen this route, but it may be the best thing in the end. The core in NatBrit is solid and we hope the flag will fly again.

I may be only one with an allergy to obviously white board derived brands - but why they didn't do the RBS/NatWest trick and just resurrect the largely untainted old brand is beyond me? "Santia" feels more like a women's health product advertised by youngsters in white jeans - or maybe a hispanic reindeer-botherer in December - a cure for sneezing perhaps? Any other suggestions on a postcard please...