What Off-side Rule is There for Refs?

Quite why an Ombudsman should seek to extend their remit after only a month in effective operation is beyond me. Especially where the raison d'etre was to build confidence in the quality of service from solicitors and barristers - it raises the question - is that job now 'done and dusted'?

Far be it from me to point a white finger - but is all well and good now in the legal High Street? Can miners sleep soundly again? Can victims of spurious whiplash claims go about their business? Are we happy that in camera family courts are spotless? Can the 45% of prospective clients who think law firms don't care about them find good alternatives easily? Maybe no cases really are now being unduly delayed or client accounts confused; I certainly hope so.

The Legal Ombudsman Business Plan 2012 makes interesting reading. http://www.legalombudsman.org.uk/aboutus/consultations.html

After a month in operation they have a 3 year plan to set their world to rights. Behind the motherhood and apple pie stuff, however, this unit is expecting its costs to go up from £14.8m to just shy of £20m this year. Interestingly they expect to have 165k contacts - maybe 'enquiries' - in a year: that's 15.7 per solicitors practice in the UK. As for 'cases': a benchmark of 1.4 cases per solicitors firm in England and Wales is anticipated. Is that a case load they are happy with? Is the profession proud of these levels of Ombudsman referrals? Ombudsmen are supposed to be a 'last resort' - are that many really coming down the pipeline?

To be fair, the team deserve some praise too. It really is no small feat to put 304 people in place, operational and equipped - well done.

But behind all the rhetoric that Annual Reports and assorted plans inevitably entail, is it not time to see if this is where we want to start from?

Is the legal profession happy to admit that on average its clients throw the toys out at these sort of ratios? Silence.

What rate of improvement would be acceptable? Not a word.

What timescale is expected to be required to reduce the case loads by, say 10% per year? 25%? 50%? Not addressed.

Does this require using the full £30k sanction often? If so how often? The budget suggest less than 10 times a year - is that enough? No elaboration.

On what basis does the full £30k penalty become likely? What is the anticipated median/mean/average penalty? Even law firms should know the 'tariffs' in play, surely, or they're diluting the deterrent effect of what they do? This must be buried deep in the bowels of various memorandums of understanding, as it is not explicit in the budget other than as the level of fee income expected. Why hide the stick and walk noisily?

What alternatives to fines are there for repeat offenders? How does LeO move to prevention rather than apologist?

There is much chaos in the legal service world currently, and it is possible to forgive some degree of getting swept along in the tide of 'reform' - but strip away the rhetoric and there is much to be worried about here.

The risks inherent in any body such as this are two fold:

(a) regulatory capture; and

(b) regulatory/mission creep.

Regulatory capture is where a body designed to police other organisations in some sense 'goes native'. This is always a fine balance, but given that the regulated always want to achieve certainty at least and ideally a measure of control over their regulators, this has to be viewed as a pervasive and subtle risk to the regulator at all times.

Mission creep is simply where a body set up to do one thing, ends up diluting its focus by tackling other issues as well. This is not an inherently 'bad' thing, but it needs justification and balancing especially if it is likely to make the core objective less achievable.

With regard to the former, the explicit admission by LeO that while their money comes from the government, it is effectively only channelled by them from levies on the professions is interesting. Frank; and welcome in that they have this issue out in the open. But to state this and then fail to openly address the issues above which are central to how to make the perception of the profession improve is confusing at best. It seems we are expected to assume that the creation of the ombudsman role in itself is enough. It isn't.

Why is LeO not tackling the appropriateness of the level of workload issues first? To fail to address this issue is lamentable as it (no doubt unintentionally) opens the doors to accusations of being an apologist rather than a genuine consumer resource. That is not a good start.

'Mission creep' is explicitly an aim within the next 3 years. Section 128 (1) of the Legal Services Act 2007 relates solely to 'reserved legal activities' and the activities of 'an authorised person'. While s12(1) explores other legal activities and in other subsections goes beyond Clementi's intentions with regard to reserved activities - that is beside the point for LeO. It is not the role of an Ombudsman to redefine reserved activities, whatever their length of experience.

Seeking to extend their remit this early in the process is frankly misleading. The invitation to others within a 'broadly legal context' to seek their (LeO's) assistance is apparently something they would feel obliged to pursue. Why? Who's definition of 'legal services' will we apply this week? They only operate once other's procedures and disciplinary codes have been exhausted - do they have to be approached only by regulatory bodies or institutes? Why go there?

I can understand a rush of blood to the head in the current rush of nonsense that pervades the legal services debate - but LeO would be better advised to stick to their knitting right now. The main complaint of the professions is that they have a tougher regulatory burden than many of their competitors. That is open to debate, frankly - and usually just boils down to a complaint that they spent a long time in law school. To dismiss the regulation of insurers, listed companies, financial services and the myriad certifications in ISO/UKAS, etc for other businesses is unwise and in fact simply reveals an ignorance that does the professions no credit whatsoever. For a regulator to already be in their corner in seeking to extend their cost and oversight burden to 'others' puts them squarely off side from the first whistle. Consumers - and especially consumers who are businesses - will simply not wear it - LeO will increasingly be seen as an apologist, no more, and that was not the intention behind their creation.

LeO also fear they may not be able to keep up with demand concerning their core task - on benchmarks which at the very least are worryingly high already. So they want more scope as well? It simply doesn't add up.

A final point on ABSs: Isn't the point of them that they bring with them a raft of other business models with their own checks and balances? Liberalisation should mean opening these business models up to lawyers who should be able to benefit from them and compete more readily - any attempt to simply add more legal overheads to all the other regulators is both anti-competitive and futile.

Companies, and especially listed ones, already have additional tiers of regulation in place. Surely the point of a deregulated legal system is to give consumers more power to pick, choose, move and even sue if need be for professional negligence. For business clients, even small ones, surely they are arms length transactions between grown ups? Why does the 'new ' regulator use the terms of art such as 'consumer', customer and client in the unique and parochial way lawyers do - ie to refer to a unique band of people simply as 'non-lawyers' when the context permits? It is unhelpful, unwise, and reinforces the perception that they are starting 'off-side'.

So what? Can LeO get back onside? Maybe:

1. Lets see what LeO plans to make the referral burden via the other regulators a declining benchmark. Surely a sign of success for LeO is a declining workforce - not a growing one. they have nailed their colours to the mast at 1.4 cases per solicitors firm - let's see how quickly that comes down to below 1:1.

2. Stick to the knitting. Tell us what level of referral and case resolution is deemed acceptable and why it isn't 'zero referrals'. When that task is well on the way to being achieved, let us know - and we mean at least a 50% reduction on the benchmarks you inherited.

3. The funding is not technically hypothecated as far as we know - so drop the assumption that in the real world it isn't. In the real world, the profession do not control your purse strings, and if they do - pack up and go home now, as you'd become just another appellate tier on an already costly system.

4. You do not get the right to cover all legal services complaints until you have earned it. One month's performance is not enough. 3 years performance is not enough. Prove that you can reduce the level of complaints about the existing bodies, get the perception of the profession back on track after scandals around miners compensation etc, and then people will be clamouring for you to tackle other areas or issues. Right now - focus.

5. Stick to the areas where the real imbalance of commercial power arise - consumers. Businesses can and do fight their own corner - even small businesses - as they are increasingly 'informed' buyers (often ex-profession) and have plenty of choices for alternatives. It really does the legal professions no credit to ignore the 'terms of art' around consumer/customer/client that commerce understand. To assume that SMEs, and especially micro firms have no buying power in legal services is simply wrong. The fact that lawyers (from the Lord Chancellor downwards if need be) don't understand or even see the alternatives, does not mean they are not there. The problem is that in the real world, micro firms would rather use almost anyone other than a law firm - and the range of alternatives for them is growing.

It is an unpromising start - can we please see real evidence of how the perception of the profession has been transformed by the LeO operations to date?

If it was that easy - we'd all do it..

Anyone who tells you what will happen in the next 3 years - or the next 3 months for that matter is lying. Fibbing. Disingenuous, at best.

No really - it needs saying - the more you search for certainty - the less you are going to find it. Maybe in some parts of the public sector you are able to decide what the plan is and simply make it happen, take a salary and go home. Actually I doubt that - even there. Everybody else has to live with uncertainty. People on the front line in business, actually get comfortable with risk - sometimes Big risk - really quite quickly. It's a beautiful thing.

Tough times for a forecaster then? Well, no, actually. At RBP we leave horoscopes to the credit rating teams. We deal in ’character’. Long term stickability; guts; chutzpah. It’s how it actually works. Nobody really knows what's going to happen. The 'spreadsheet jockeys' least of all, and even more so when they start guessing 9 months ahead of the period being forecast. Its just not real. My favourite definition of entrepreneurial spirit is the 'unreasonable conviction of the improbable'. It's what makes it fun.

Way back when I had the biggest corner office and the biggest whiteboard, I asked the US CEO how he managed over 34 P&Ls. ’Simple’, he said, ’only three are out of plan at any one time, and I know how they’ll react before I even have to place the call’. (He still placed the calls mind - and they were challenging to be on the other end of.)

All we do at RBP is replicate that. For the 87 teams that make up the UK’s legal practice, case and matter management supplier market, for example, we go to town on what they have done and could achieve. Some surprise us - usually positively - but we’re much more often right than wrong. Others will tell you the tech issues - we ’Do’ the numbers.

And No - this is not some Marxian dialectic where the predictability of the economics makes us all pawns in a futile rat race. Quite the reverse. Economics is like history - it can tell you what you stubbed your toe on in the dark last time - not what the flashing lights and alarms mean this time around. You'd be mad not to be better informed - but the wisdom still has to come from within. What we do know, is that over the long term, a company will display its financial 'character'. Some are brave, some are cautious, some paddle slowly on the fast river, some pick fights for the sake of picking them... It matters.

We also know the competitive intensity of the various market sectors and levels. We know some areas need tough guys, and some can coast (comparatively speaking), some need patience, some a good shake, and some are up to their proverbials in alligators. We know what a market share means - and we don’t do ’group think’.

We put it all together and see what this bunch of disparate, individualistic, committed, skint, overstretched, over worked, underestimated and visionary people could and should achieve. We know that there are no green fields. We know that there is no magical better mousetrap. With one bound Jack usually lands in deeper poo, rather than escaping to save the world.

Based on that brick built, micro assessment of each team - looking back to 1995 over 2 business cycles including 2 other dips or recessions - Dotcom fevers and Y2K distractions, .Net, ABSs, Web2...3 etc - we then take an experienced and informed view.

And we are delighted to be able to share it with you and the market overall. It is normally the preserve of global strategy teams, VC researchers, credit algorithm wonks and a handful of paranoid sales directors. Finally - at last - it is available for you and all your top team in an easily accessible format.

So we hope our new approach to business intelligence is refreshing. We aim to tell it like it is. We've been in charge of the P&L(s), we've had unreal targets imposed unfairly, we've had the wind on our back, we've screwed up, we've excelled - and we've built bought and sold companies in all the markets we cover.

If it was simply a matter of finding out what the market will do and pushing levers to get our chunk of it - frankly most of us would go home and find something much more fun to do. It's hard. Its challenging. We hope our approach to the market character and potential achievable is instructive.

When I needed it in the mahogany play pens, it didn't exist. Well, for the markets covered by RBP - it does now. Try the Legal IT Financial Fundamentals Report for size - it's different.

Legal Market Consolidation? Look Again.

The only set of numbers not coming from the Law Society about the number and value of law firms, come from HMRC [i] essentially the statistical estimates used for VAT purposes. They have their problems[ii], but there are lessons on the shape of the profession which are, frankly, surprising.

Market consolidation?

Received wisdom is that the legal market is consolidating, but it really is worth unpacking that a little. Yes, the market overall is growing – but consolidation normally suggests fewer suppliers doing more work. This in turn would then pose problems for suppliers and buyers of their services alike. The problem is, however, that the market is growing both in volume and value terms over the long term – ie there are more firms generating more revenues.

Ah, the argument goes – ‘but not all sectors are growing – the large firms are growing faster than the small ones’. True, but the implication is that the large firms are growing at the expense of the small firms – and this is far from clear. Global pressures and opportunities mean precisely nothing to micro High Street law firms. In competition terms, there is a chain of substitutability – but frankly the span between a consumer law one man band and a global panel law firm is simply too wide now for comparisons this stretched to be meaningful.

So the next time someone says – firms have to spend £50k on marketing or market consolidation will kill them – ask them precisely why. If firms spend more it is not because of consolidation (although, yes, there may be other reasons). There are more mid market firms making more money than ever before – it’s just that the Magic Circle are – well – magic.

This is great news for vendors to leading smaller firms such as Perfect Software, DPS, Pracctice, Peapod and Quill – rumours of the death of the High St are highly misleading. The economic picture for firms with between £1-4m in sales is that since ‘98 (ie the beginning of the last Big recession) there has been an increase of between 869-1040 more firms. A firm with £4m in sales should have 8 partners or over 20 fee earners, so this is not so ‘small’ really. It is great news for consumers of law services - or should be - and if there is genuine disquiet about why law firms are not seen by clients as well as they should be, it means you really have to look harder elsewhere and stop trying to blame the weather.

Global expansion is a good thing for some, but not all.

The market appears to be ‘consolidating’ more through global expansion of the magic and silver circle firms than any significant contraction of the mid market or small firms. This is not a bad thing – someone doing well is good. Comparing their growth with others who happened to attend the same College thirty years ago and implying that these others are somehow wrong is nonsense. They may be missing out somewhere, but they almost certainly are not missing out on the opportunity to be on the panel to do Smith Kline’s Brazilian IP work from their 8 strong regency brass name plate in Bury.

There is a scrap, as there always has been, between the silver circle firms punching above their weight and using technology to do so, but this is not ‘consolidation’ - it is normal hostilities or intra-industry rivalry. For vendors to very large firms like Elite and Aderant, however, there is always the dichotomy of whether to embed more deeply with 25 clients or spread the risk to 250. Stretching to do both is only getting harder, especially as it increases the risk of someone in the top 25 doing something for themselves that works and spawning another credible competitor in due course in their heartland.

Micro firm market contraction is not a problem.

There is contraction both in numbers and value among the very very small part of the market. The VAT definition of this is £0-49k (effectively sub registration thresholds). These are usually small office/home office (SOHO) one man bands. At best they are retiring or ‘life-style’ solicitors stepping back to run a few favours for a handful of long standing clients – probably doing less than 1 day per week in harness. At worst they unfocused, unsupported generalists and the largest source of claims on the indemnity funds. There are 1045 fewer of them now than on 1998. Bear in mind that any self respecting individual solicitor/fee earner should be aiming at minimum billings per year of £150k, and probably over £250k (each) and you get a picture of both the size of these firms and the likely service sector they focus on. The market changing to have fewer micro firms and losing c3.6% market share in relative terms among these micro firms overall is no bad thing.

The numbers in SOHO firms probably also disguise a different trend whereby the rise in capable individuals running micro practices could well be growing, whereas the regulatory framework is stamping out high risk generalists in low growth sectors. The micro sector should be declining more than it is in relative terms – firms with £100-250k sales (ie a full timer 'going for it') grew overall since ’98 by 3% - ie there are 2.2-2.9k more of them now than 10 year ago. This suggests a growing market for experienced sole practitioners for whom the SaaS and cloud based systems from Legal IT vendors will be a God send. Reducing barriers to market entry through reduced or negligible set up costs, and enabling sole practitioners to compete with other specialist teams with comparable facilities will be a growing niche within this an addressable market of 17.6-19k individuals.

So Keep Calm and Carry On

The global race continues and is good news for those that can hack it up there.

The mid-market is growing and will continue to do so irrespective of the legal services noise around franchises and ABSs. The example to watch here is actually the Connect2Law solution – similar versions of it remains alive and kicking even in the much more consolidated accountancy sector. The acquisition of teams and firms to build scale and competitiveness will continue, and frankly would have done with or without the Legal Services Act.

Allegedly franchises (whether ABS driven or not) will consolidate the market, especially among small firms; but there is a problem with this. Law firms tend to be distributed more along supply lines than demand ones. In essence they tend to be sited near courts, not clients. The logistical scale economies behind franchised dentists, opticians and other distributed professional service providers simply do not have as much sway with law firms. And make no mistake, franchise margins can be very tight and if scale economies are not there, few succeed. It would also mean at least 3 of them succeeding on the level of firm take up they themselves project to begin to erode the number of 'firms' overall in the small and medium size categories. We'll see.

The other basic challenges we already know, and frankly have little or nothing to do with ‘consolidation’. Consumer work on the High St is not a legal services market, and hasn’t been for some time now – it is an insurance services market. The Legal Aid market is unsustainable in its current form for basic inefficiency reasons, not contraction. Ironically good firms coping with systemic governmental confusion have no option but to automate or die. The insurance led (ATE and BTE) sectors will get tougher still, and frankly the disruption of the wills and probate market is both inevitable and already well progressed.

Even the (real) sole practitioner market is growing (up 527 firms since 98). The small firm market is growing. There are 2305 more firms making £100-249k a year now than in '98 and over 1500 more firms making £250-£1m. That it’s not growing as fast as Allen & Overy is neither here nor there. So - apologies for raining on the impressive and noisy parade around legal services currently. But the HMRC statistics simply do not back up the hype.

[i] Source: Office for National Statistics: UK Business: Activity, Size & Location Reports 1998-2011

[ii] Rebasing of SIC codes in 2007 appears to have had a significant effect on the number of firms included within the definition; adjustment for this has been made, but it inevitably clouds the precision required around the height of the recessionary impact in 08 to some degree.

The High Water Mark For Regulatory Hubris

The Government spent over £1m last year finding out if there was market failure in advisory compliance services for SMEs. Nice of them; and the short answer is – ‘nope’, nada, nowt, nine, rien, no way. Having made this ‘investment’ they’ve then buried (‘archived’) their findings in the communications equivalent of Outer Mongolia, which is odd. The detailed findings are important, however, so here’s the headlines.

The research team put a big spotlight on non-lawyers doing compliance work for SMEs. A sceptical, some would say a biased spotlight, should be revealing, so what was the result?[1]. The findings are relevant for the regulatory consultancies (who come out well), and the regulators, quangos, lawyers, insurers, and banks, who, frankly get taught some lessons.

The New Labour administration set a lot of hares running in the legal services arena, and in this instance the Anderson Review[2] concluded that something should be done about compliance advice for SMEs. Quite why they asked a recruitment entrepreneur to assess an area tangential to her core competence at best is unclear, but neither the intentions of the initial reviewers nor the competence of the subsequent teams is in question. It now appears to be more of a high water mark for an administration that simply saw no boundaries to their competence or calling. Until the RSI (The Regulatory Standards Institute) intervened and put the regulatory consultancies front and centre, no-one seemed prepared to argue that Mr Browns’ finest seeking to be legislator, regulator, inspector, insurer, advisor, certifier, prosecutor, defender, expert witness, judge, jury and bailiff all at the same time could be a tad over-reaching themselves.

Two pilot projects and a nationwide research effort were undertaken delivering significant empirical results:

- From an addressable prospect base of 22,500 firms (5% of the North West SME population) one government pilot research scheme (aka ‘no wrong door’) secured interest from 447 firms, 253 of whom registered for a free trial. From these, after the 6 months free period, 12 firms took up long term contracts[3]. Take up of a ‘free’ service for 6 months was therefore notable at 1.12% of the prospects, and 4.74% of those went on to take up a full service. Overall the take up was 0.05%. Frankly no direct marketing B2B services business would find these levels of take up remotely attractive or cost effective.

- A sister project (‘Open Market Campaign’ – OMC) started with direct mail to 30,407 firms, emails to 9,700 and telemarketing to this 30k base, ie 3 hits. They were offered £50 off an existing service. They achieved 1483 registrations: 4.8% take up for a free offer. No firms took up the offer or used the vouchers, that’s right – none, zero. Not being able to effectively give away £50 notes is an odd outcome.

- The cost of the research pilots in total was £1,104,313[4] resulting in a cost per sale of £92k which should pay back in just over 30 years. Even allowing for a direct marketing cost allocation only, the costs for the pilot which generated some sales after the 6 month trial was £74,516 generating a cost per sale £6.2k; this would render each contract heavily loss making from inception on normal commercial parameters. The best that can be said is that it was nice of the Government to prove that direct marketing (as opposed to sales force led) approaches in this market are rarely cost effective. Sadly, this lesson did not need learning – not at any rate by those in the market already.

The other findings from the research are, strangely, not being widely disseminated or trumpeted, despite their relevance to the legal service debate raging currently. Here are the key lessons:

Compliance is a stress purchase: The most common reasons for not taking up even free pilot offers can be paraphrased as (a) ‘not now’, and (b) ‘maybe later’[5]. Timing is all in stress purchases for compliance. This is easy to forget, but it is absolutely fundamental to understanding the appeal of compliance, and especially outsourced compliance. Entrepreneurs simply do not get up in the morning deciding to really crack on with compliance today

Awareness among SMEs is high: It should come as no surprise surely that 81% of businesses with no employees are not aware of these services. Awareness is highest among 10-19 and 20-49 employee firms and in effect over 70% of firms in these categories know all about it. Basically those who need to know - know.

Clients want certainty, insurance is secondary. The government’s research focus on ‘insured advice’ effectively put the cart before the horse by focusing on a prescribed solution. Most SMEs want certainty and whether the advice is insured or not is irrelevant. That some respondents’ expected ACAS to offer insured advice simply illustrates the confusion.

Awareness does not predict likelihood to purchase. An important finding was that increased awareness of the solutions did NOT make the SME more likely to buy the service. None – yes, None – of those most aware, converted to pilots or policies in this research. The research is open minded about the implications of this, but there are some basics at play: (a) SMEs only very rarely buy weapons in time of peace, and (b) it's noisy out there - upwards of 200 active sales consultants nationwide backed by even more telemarketing staff cycle through over 13million calls a year at present, so even the largest estimates of SME populations mean each firm is called probably 3-4 times every year already.

Very Satisfied: ‘Overall there was a high level of satisfaction among businesses that have used insured advice with the quality of the advice they have received.’ This finding is startling. Not because it tells it like it is, but bear in mind that there were several vested interests lobbying hard behind the scenes here to prove that law firms must inherently be better than the ‘differently qualified’. Simply put - SMEs like what they’re getting from the regulatory consultancies and their choice is an informed one.

Never Mind the Quality…: ‘Amongst those businesses that were aware of insured advice but have not used it, quality was the least frequently given factor affecting their decision not to use this type of advice.’ Another startling finding. Strip away the double negatives and basically quality of advice is Not the paramount issue for SMEs – it is not even a major concern – it is the LEAST concern. Frankly this nails the protectionist arguments of the legal lobby in particular. SMEs want the ‘poo’ gone, not polished. It is this mind-set that lawyers almost always get wrong.

Timeliness First, Cost Second: The issues which are more relevant to clients include: (a) cost (and in this market perceived cost risk and fixed fee elements are writ large); (b) insurance was not seen as a primary issue for end users at all, (all it delivers is a mechanism for fixed fee pricing); and (c) timeliness is key. Basic points all – the Market is saying: ‘Get rid of the problem for a fixed fee – insure if you must (that’s your call as the supplier) – and get out of the way, we’ve got a business to run’. This is the ‘I don’t check the Highway Code when I pop into the car to go to the supermarket’ point. Compliance takes itself too seriously and regulators always confuse their desire to change behaviour with their ability to do so.

Sour Grapes? Satisfaction was ‘high’ and only 4% were dissatisfied with the quality of advice. This is important as it means the likelihood of breaking into this market by simply offering fantastic advice quality is very low. Quite where the allegations of poor quality come from is a mystery, and maybe the definition of ‘quality’ is revealing here. It is also worth acknowledging that within the regulatory consulting industry there is already much self flagellation about the advice being compromised or not by the insurance backing; they are far from complacent even about the issue the 4% may point up.

Renewal benchmarks: 8% of the sampled SMEs had used the service in the past and were not using it now[6]. This translates into a 92% renewal rate, which over a 3 year contract (the industry standard) is 78% (of renewables). These are benchmarks the market knows and polarises around. There are good reasons why the annualised renewal rate is 92% and not 97%, mostly inherent in the fact that SMEs merge, liquidate etc more than most, but also that by definition firms facing compliance growth pangs face a higher attrition rate too.

Tick Box Fatigue? Clearly the efficacy of kitemarks is wearing thin when the desirability of a quality assurance program was raised. What should have been a resounding ‘yes’ or at least a comforting ‘it can’t hurt’ was a very equivocal 50/50 ‘maybe’ or ‘if you must’ response from clients. Noticeably in relation to prospective clients the impact was that only 38-43%[7] would be more likely to use a kited supplier. Again, satisfaction with the choices already there is clearly very high in relative terms.

Pricing is Personal. Research on pricing is notoriously misleading and basically very few people do what they say they’ll do when it comes to pricing. Economic models rarely manage to cope with the emotional baggage, especially when in a stress purchase situation. So ignore the average price expectation of £450pa; the average of free and £3k skewed among firms with no employees is probably in reality lower than £450pa, but equally tackling a discrimination claim at tribunal for £450 would be nonsense – the average figure is meaningless. Average fees based on a firm’s payroll are the norm and after a determined attempt to cull competitors over several years by the market leader with price competition, if anything prices are now rising again and averages for SMEs are probably now over £175 per month.

Industry Competition: Comparing costs to other advisors, notably banks, insurers and accountants is also largely meaningless as these are often transactional and commoditised services (usually costing significantly less than £1k pa). An SME is not going to stop paying their audit fee because they sacked someone this year and got it wrong (unless it bankrupts them). Compliance is structurally different – when it happens it can kill a business, and it is inherently an ‘infrequently occurring but complex’ event[8], often disciplinary and redundancy based. The only finding of note was that “where it was found that cost was less of an issue, use of insured advice increased’. This is a backwards way of saying that an insured component simply delivers fixed price certainty for clients – something they value.

The addressable market: Having identified that awareness was irrelevant to take up, the research still maps both and usage/awareness is highest in the 20-49 employee size category, followed by 50-249 and 10-19. The only rationale for keeping the 'no employee' categories in play would be their propensity to become employers, but the take up is miniscule; clearly the vast majority of sole traders typically remain sole traders. There remains a problem with this research, however, in that 30% penetrations at best simply do not tally with empirical research on the number of organisations and the contract volumes for the 70+ suppliers in this market. Underlying confusion over what ‘insured advice’ is may account for it. Many may simply not know that they have cover through their trade associations etc, but it would be dangerous to assume that there is a massive untapped market lying in wait in the 10-50 employee sector; there isn’t.

Who’s asking? Funnily enough when asked by a government sponsored research project how confident they were in their compliance, over 97% of SMEs said they were ‘fine, thank you’.

Freebies. When the category ‘external advice’ includes everything free via Google as well as free services from government web sites, HSE, ACAS etc the resulting statistic that only 23% [9]of users of external advice use paid for services is meaningless. The fact is clients use several overlapping free services and it is not a zero sum game. People use free stuff when it doesn't matter; when push comes to shove they use 'proper' services and bin the freebies.

Industry competition: When a ‘paid for’ service is used, it replaces the need for external (often free) advice – probably because that’s what ‘outsourcing’ means. Overall it is seen as ‘better’ than other paid for alternatives. In particular, 40% saw it as directly replacing solicitors, 34% banks, 15% ACAS and 9% HSE[10]. Research stating that regulatory consultancies are seen by 40% of the market as better than or negating the need for resorting to other legal sources such as Solicitors is important. Substitutability rankings such as these on multiple options rarely get over 20-25%, so the solicitors sector is actually taking a pounding here. Regulatory consultancies are equally favoured over bank services and once lost to a regulatory consultancy the bank will lose the two most productive hooks into SME risk reduction and legal services on-selling. To be clear, banks usually do not offer employment advice, but they will be the only source of covering a perceived £3-7k unforeseen risk - so a service transmuting this to £175 per month from now is very welcome. It is notable that whereas RBS Mentor has built a top 3 market position with a full service, few of the other increasingly innovative advisory and referral services have proved sustainable. Banks may be happy to see others manage their client risk and simultaneously lose the benefits of a £2-3k pa service, but it is puzzling why only one has decided to break the eggs in this market.

Assurance, not insurance. Attitudes to insurance within the industry vary increasingly. Some view the insurance of the advice as a guarantee of quality, some see it as an incentive to actually act against the client's best interests. Significant players offer guarantees and other variants on a self insuring theme, while more and more players are extending from profit shares into captive insurance partnerships. The BIS research suggests that 29% do not see insurance as justifying a premium (which is not why it’s there in the first place, anyway) and 24% didn’t see the need for advice to be insured at all. To what extent these are the same constituencies is not clear, but arguably between a quarter and a half do not see insurance as a major positive or negative.

So what?

Simply put – there was no market failure. More to the point, the winners in this market have shown a degree of innovation, client empathy, commercial risk management and perseverance that simply could not have been predicted. It certainly could not have been designed by government as it stumped the brightest and the best from the legal and insurance industries as well. Lawyers should have won here – they haven’t. Accountants, banks and insurers should have claimed this territory as core to their risk profiling – they’re well behind the pace. Publishers and other SME brands should have diversified – they are generally doing too little and far too late.

Safety and employment law compliance is now an established market with its own internal complexities and mores. The high water mark of the last Administration’s pride revealed one of the legal services industries best run markets – probably just where they least expected it. It should be noted, however, that it was not because the FPB and Peninsula co-operated with the pilots that the project foundered. It was a credible threat of a class action from the RSI and one aggrieved firm in particular that made the Administration choose the road it should always have been on anyway. Technical breaches of EU subsidy and competition rules leading to high profile High Court litigation would ultimately have had to be resolved at Cabinet Office and wasted considerably more than the £1m already sunk here. Normal hostilities have been resumed.

The lesson for incumbents and newcomers alike are clear:

1. Offering free stuff – however erudite - simply will not work here; plenty sell it, clients discount it. There’s a glut of free advice, much of it duplicated and increasingly devalued – few dare say it, but the quality of free and quango advice is not high and usually needs double checking.
2. Of Time, Cost and Quality – Timing is key: when SMEs need help – they really Need it. Until then, you are more likely to annoy than help if you persist in teaching people what they don’t want to know.
3. Being a brilliant lawyer specialising in employment law or safety guarantees nothing and may actually be a hindrance. Professional brands have negatives as well as positives – this market thrives on ‘not’ being lawyers, regulators or insurers.
4. For banks the issue is not giving free advice on some web gizmo like the Halifax's latest pitch, or free shrink wrap software that's never used from Barclays, it is missing out on thousands of small loan opportunities for SMEs while simultaneously actively reducing the client's risk profile.
5. It’s not about cost – it’s about agreeing a fixed price to cover a lumpy risk. Insurance helps here, but it’s not essential or much of a selling point even.
6. Quality is defined by the customers’ expectations, not some legal qualifications checklist – regulatory consultancies are consistently meeting or exceeding the expectations that matter.

Competition is not about getting 'mad' or getting 'even' - it's about getting better. This latest attempt by some vested interests to hobble these legal services upstarts failed - there may well be more. For those who want to play it straight, this is a high growth, recession resistant B2B legal services market well worth the effort.

The advice and insurance components of the regulatory consultancy service are only the tip of a complex iceberg, however. You need to be able to offer on-site installations, bespoke documentation, compliance event diary management, employee administration and safety software, dispute resolution, case management and advice from experienced professionals from industry (not just law graduate 'speaking books'). You need to be able to get people in front of troubled SMEs nationwide to explain the solution at the rate of dozens a week if possible. Insurance may help you get a fixed fee for the package, but either way take the outsourcing long contract approach of 3 years as a minimum. Match that and then find how to better it in a way busy small businesses will thanks you for and it is game on.

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[1] Employment Relations Research Series No 120: Insured Advice Pilots: Evaluation: July 2011 http://www.bis.gov.uk/assets/biscore/employment-matters/docs/I/11-1080-insured-advice-pilots-evaluation

[2] The Andersen Review: http://www.berr.gov.uk/files/file49881.pdf

[3] Table 3.12 and page 37. It should be noted that the take up was with either the Forum of Private business (a white labelled service) or Peninsula – two firms which do not truly represent the range of service levels in this industry, but significant players.

[4] Freedom of Information release 21/06/10: Insured Advice Pilots

[5] Table3.11 No Wrong Door Pilot registrees by reason for not taking out a policy.

[6] Page 22: ‘Quality’

[7] Page 22

[8] Page 25

[9] Page 30 Use of External Advice

[10] Page 31 2.3; Page 32 Summary

Watch Out For The Small Print

Is there room in the UK market for a Legalzoom or is the consumer/SME legal documents sector just too compacted? Surely everyone needs easily accessible legal documents?

The US has been having a speculative frenzy around the value of LegalZoom for some time, fed no doubt by their VC backers. And to the uninitiated, cheap web-based legal documents feels like a no-brainer for legal services deregulation. But - like we keep saying in legal services and compliance - "there are no green fields".

In the UK we have a civil service that genuinely thinks every time it publishes a web site it is saving us all money (sigh). We are not short of entrepreneurs trying to make legal documents widely available - the most successful being "those guys who do shrink wrap leases and wills in Staples" (LawPack). Jordans, IQ, Judicium, Compact Law and a vast amount of free stuff from institutes and insurers all play a part. Much of it is good stuff, much of it is kept up to date well, and much of it never gets out of the actual or web based metaphorical shrink wrap.

The core issue remains: documents are only part of the "process", and the process is complicated and carries penalties for being amateurish. So professionals use their own, industrial strength sources, while end-users get hand holding elsewhere. The dominant players in legal documents (for SMEs anyway) now are the regulatory compliance consultancies, especially employment and safety based ones. This is not odd. Publishers, and even professional publishers have been underperforming the wider stock markets for some time now, while technology and professional services firms out-perform the market. This macro trend is being retold at a micro level by the "free" content inherent in the regulatory consultancy packages.

So will Thomson Reuters make much headway in the UK with their recent acquisition of Cleardocs - a successful player in Australia? If they keep it in the accountancy solutions sector - yes. If they hope to use it to radicalise the legal services sector, frankly - no. In the UK they came out of the SME documents market when they sold Gee to Croner back in '08; a shrewd side step. And frankly, until the government stops drowning the market in free web sites it will remain an intriguing but fringe activity.

Meanwhile, a highly respected UK legal publisher expressly charged with "providing free or inexpensive public access to legal texts and commentaries of all kinds" has just seen exceptionally strong sales growth from 09-10 of 27.5%. Bailii, the British and Irish Legal Information Institute, has just seen sales rise to £178k pa.

Do Not Feed Another DotCom Bubble

The last thing you need in recessionary times is a bubble. Those of us who ran large P&Ls, budgets and fought hard to keep the mortgages of hundreds and thousands of staff paid through Y2K, the Dotcom bubble and the ensuing recession a decade ago frankly take a very dim view of Wiki/Web2.0 hype right now.

The legal industry owes Richard Susskind a considerable debt in getting past the technology averse slow adoption years - but that job is done. His core concept of the progression from bespoke to commoditised drives his belief that web based information solutions have a transformational role to play in future legal services. It may be heretical - but I simply don't agree with the basic model. Having spent many years in possession days in Wandsworth county court, duty rotas in Bristol and running teams in tribunals nationwide I think he is missing a trick frankly - there is nothing bespoke about the 15th drunk in custody on a Sunday morning, the umpteenth Wages Age scrap, or the benefits cock-up behind yet another possession order. And there is nothing inevitable about a progression to standardisation or packaging either.

So forgive me - when I see exhortations to populate deserts - my advice is that it's usually a desert for a reason: think again. This is the Christmas tree market in February conundrum; usually it is a solution looking for a problem.

Consumers do need help with the law, and the solicitor profession has been uniquely poor at dealing with "justice" for the lower middle earning families; broadly speaking "consumer law". The last decade has been all about offloading much of that responsibility to the insurance industry. They've done "well" with some areas, notably conveyancing and PI, but they struggle with inherently personal stress purchases, and even wills are proving harder than they thought. Can the Co-op do divorces in bulk? It's not in their top five.

And the reasons are simple. Divorce is complex. Yes, form E can be automated, but are we really expecting couples to go on-line, share documents, questions and answers with other divorcees, use guidance from the government and lawyers on what to do when, and maybe call a law student in a Belfast call centre to double check at 3am?

Well, good luck with that. Complex consumer legal work needs a more creative solution. Web based document automation is not the right place to start. It may well be part of a successful solution in due course, but at best it is the carburettor, not the engine, and certainly not the driving seat.

The problem is that buyers of the consumer services most in need of help are inherently unstable, financially jeopardised, highly emotional and deep in denial. Faced with a maze of complex "stuff" that they really don't want to become specialists in - no amount of facebook camaraderie is going to stop them piling into anger - long before the bargaining ever calms down enough to get realistic. Very few lawyers "get" this. End users do not want to become lawyers, and God knows we have enough barrack room ones already.

The concept that there is some latent market of hundreds of thousands of consumers who will beat a path to your door for some WrongedEx.Net is misguided. You can already get "managed" divorce solutions if it genuinely is a clean break for around £250 from web savvy firms. No emotion, no decisions, no road blocks, no kids, no property? - no problem, pay and wait - but these are not where the access to justice problem lies. Government guides to all this are frankly a waste of public money; they are great at designing a web service for a new regulation, but they are uniquely bad at keeping it up to date and relevant to changing circumstances. All government achieves in this situation (and frankly Institutes are no better usually), is to suck any chance of profit out of the market and dissuade the professional information teams from bothering.

There are examples from commercial law sectors of how packages can be constructed which combine both better solutions for the advisor and the end user. Firms like Practical Law, ECA, AdviserPlus and Ellis Whittam are more likely to illustrate how business models can work well in a web environment. Lawyers should look there, not the US, before diluting their pro bono efforts, trashing document banks or throwing more costly app developer time at phantoms. Especially now, the US is in a large Wiki bubble. I'm happy to be a lone voice saying that neither Facebook or Twitter are really worth that much. Mr Susskind exhorts the profession in the Times (June 9th) to build a Wiki free, and ofcourse the publishers will donate their know-how free too. And this is "attractive". We have been here before, and it was a side show.

First Contact - Rules of Engagement in M&A

Some three and a half years after the debt markets got paralysed - that's 15 quarters now - there is a realistic chance now that the raft of VCs running around - especially in UK legal services markets - can finally stop "fishing without hooks". Trade buyers have been trundling along at a tick over level, but largely unchallenged, until now. So if a deal flow is to re-emerge, a reminder of the rules of first contact would be timely:

The problem with "first contact" is that it is usually botched, so here are some lessons from an old soak who's seen most of them (and been guilty of quite a few).

1. Do the homework first. Deals do come out of the blue, unsolicited, or from a chance meeting, but they usually only show that you don't know as much as you need to. These are the deals which typically result in "impairment reviews" a year or two post completion. If you don't know the firms you would like to acquire or be acquired by, you are effectively abdicating your strategy and enterprise valuation to strangers (to you and the market). Know what is known as your "addressable market", your role in it, and why you are better/different - and have the numbers to prove it.

2. Advisers advise, principals decide. The corporate finance world is full of experienced deal makers, rain makers, thought leaders and assorted other grand terms for commission junkies. Unless you are in the business of making dozens of deals a year, however, you are simply the next burger to them, so be realistic. These "escorts" through the maze can be charming and cost effective, but they probably won't even recognise you, let alone respect you in the morning. Its your baby, its your cash, it's your call.

3. "Who" makes the first approach is important. Everyone likes to keep their big guns until the last stages, so the initial contacts from trade players will often be from other directors. The best (and the worst) of these are line directors with a "real" job, not group special projects or business development roles. They're best when they have some humility and know what they don't know. They're worst when they are simply too rough and think running a big established business model is the same thing as entrepreneurial ability. Precisely what makes them a great executive director can make them a very poor M&A leader, especially when looking at competitor deals. Group directors and VC introducers can be good, but there is still a stage to be gone through after this where you get to know the real culture of the contacts.

4. Talking at all shouts loudest. Letting the VC telemarketer in or agreeing to a first meeting offsite, is not non-committal; it says your hat is in the ring. If you are not for sale, don't take the first step. If you are - do your homework on who buys what, how often and why. (Some smaller firms use this process as a cheap valuation exercise. It has repercussions though, as you will be seen as damaged goods or unreliable thereafter. Dabble if you must, but crying wolf cuts your multiples and/or serious bidder list when you do get serious.)

5. Mind the gap. Owner managers are usually living in the numbers for the 12 months ahead - the last set of published accounts are ancient history. For buyers the last 2 or 3 years of numbers gives a hunch of what's where, but if these are abbreviated balance sheet reports, they really are guessing. The difference can be significant, especially in growing companies in growing markets - usually the ones you try to buy into. Be patient with what is effectively a 3 year data gap. What looks like a £1m business to the researching buyer, can turn out to be a £3-4m one by the time you get there (and vice versa). It matters. Disappointment is as easy to display as excitement.

6. Forget the fag packets. The headline deal numbers of the latest super deal are almost always an irrelevance. VCs tend to forget that even if they don't use DCF valuation approaches, vendors certainly do when calculating the cash impact on their lifestyle post deal. The multiples issues is not that secret (See RBP's Briefing Note: VCs - What Are They Good For (and how much)?). So stick to realistic numbers and aim for a win/win deal. Simple really.

To see exactly the sort of information VCs and trade buyers use in assessing the M&A landscape of the Legal IT market, see RBP's "Legal IT: M&A Perspectives 2011 Q1 report

http://www.rbponline.co.uk/rbpsectors.asp?sector=LTS