In his memoir Editor, journalist and author Max Hastings mused on the difference, as he saw it, between readers of the Daily Mail and the Daily Telegraph. Mail readers, he observed, woke every morning and opened their paper of choice to find that the world had altered irretrievably for the worse overnight; Telegraph readers awoke to find the world as they knew it pretty much unchanged.

Solicitors reviewing coverage of the legal services market may feel they have less choice. Most recently a headline in The Times business pages (10 October) thundered: ‘Perfect storm "spells the end for thousands of solicitors".’

The Times story was based on a report by Espirito Santo Investment Bank. And to be fair to our great paper of record, it had not cherry-picked the most alarmist line in an otherwise measured read. In lawyer-consultant Professor Stephen Mayson’s foreword, headline writers were spoilt for choice. ‘The tectonic plates of the legal services market are shifting,’ Mayson noted, and the ‘rupture’ is set to accelerate in 2012. ‘The certainties to which firms have been used have gone,’ and many practices would be ‘confined to the dustbin of history’. ‘Fortune will favour the brave,’ he concludes.

Such bold claims are now commonplace. But upon what are they based? When did Trotskyite geology enter mainstream business theory, chasing professionals who were naively advising clients in the wrong place at the wrong time into a great refuse sack of denial?

What we know

For many practices this is a difficult time, and depending on the instructions they rely on, that has been the case now for a matter of years. Practices that have preserved their profitability have done so by cutting the numbers, or remuneration, of partners and fee-earners (often both); streamlining processes; and clarifying their client strategies. Many good lawyers have struggled to maintain the viability of their practices. Decent conveyancing solicitors have lost places on bank and building society panels, and good commercial lawyers at Halliwells saw their firm fail through no fault of their own. The 2011 annual LMS Financial Benchmarking Survey, published by the Law Society’s Law Management Section, showed a fee income increase of just 0.2% for 2010/11, following a fall the previous year of 6.5%.

Badly hit

Property practices have been especially badly hit since 2007; cuts to conveyancing panels have been terrible news for many practices. Last year, the Law Society funded counsel’s opinion for Herts law firm Judkins, as it contemplated suing Santander and Lloyds Banking Group for removal from their panels, though no case has been brought to date.

The market has also been challenging for larger commercial firms. As the Gazette reported at the start of this year, a survey of 95 managing partners in UK-based commercial firms reflected a pessimistic mindset. ‘The economic outlook among firms was predictably downbeat, with half of those questioned expecting "stagnation" or worse in the UK economy. More than half of firms believed that their insurance costs would go up, while 30% also expected an increase in bad debts.’

Against that background, the licensing of alternative business structures (currently for conveyancing work overseen by the Council for Licensed Conveyancers, and later for the full range of activities regulated by the Solicitors Regulation Authority) feels badly timed for many practices. Greater competition looks unwelcome.

So it is the economy, combined with regulatory reform, that leads the authors of the Espirito Santo report to conclude that ‘the perfect storm is brewing’. Practitioners should probably breath in as ‘potent competitive pressures are squeezing the market for legal services’. Ouch.

But it is also the case that such statements about the legal market, made in trade publications, reports and research, start to reinforce one another on points that remain unsubstantiated. The Espirito Santo report introduces new unsourced lines that could become the citations of someone else’s future report. ‘The legal profession has been considered as the last of the cottage industries’, is one such example. True, ‘85% of firms have four partners or fewer’, but GP practices, many of a similar size, are poised to take control of NHS commissioning. Many dentists also work in small practices.

Through brands like Specsavers, opticians have changed, but why are they the only professionals wheeled out as a case study whenever the issue of branding is discussed?

Another obvious reason to put the futurologists into context is that some of what they are predicting is already here. As the Espirito Santo report itself notes, a survey by accountancy firm Baker Tilly shows that 29% of law firms with fewer than 26 partners believe they have lost market share to non-lawyer competitors. ‘New’ ways of working, such as the use of fixed fees, capped fees and fixed pricing by ‘stages’, are also common.

In 2010, Winmark research among managing partners, focused on 95 commercial law firms, noted that 33% used fixed fees ‘frequently’, and a further 59% ‘offered’ fixed fees and used them ‘occasionally’. The same report notes: ‘At the start of the downturn, ITV made fixed fees compulsory for all panel firms and this approach has been replicated elsewhere.’

Consolidation is another big theme – and is part of the ‘perfect storm’. Again, with or without market liberalisation, this is happening already. As the Gazette has noted, consolidation was continuing at a steady pace even before the downturn. The firms that constituted the top-100 in 2002 have become 81 firms.

Historic highs

At the upper end of the market, that process has even slowed against historic highs. Hildebrandt Baker Robbins, consultants to the legal industry, tracked 12 completed mergers involving US firms in the first quarter of 2011, ‘a significant uptick from Q1 2010, when there were only four’. But ‘merger activity… still lags behind prior years which saw 33 completed mergers in Q1 2009 and 22 mergers in Q1 2008.’

Among smaller firms, the pressures are mixed. In line with other industries, the impetus to achieve ‘scale’ has changed. Most notably, both practice management and client service solutions centred on the use of IT are increasingly within reach for smaller legal practices. These firms outsource many support and back-office functions, from answering the phone to typing letters, even billing and invoice-chasing. As Joanna Goodman noted in the Gazette, the increased affordability of both software and hardware can be seen in the way that ‘some of the most advanced technology is hitting the high street before it reaches the enterprise’.

In the mid-market, financial benchmarking research earlier this year by accountancy firm Crowe Clark Whitehill (CCW) underlined the changing considerations regarding scale, with figures showing that law firms with a turnover of more than £5m often struggle to turn further growth into greater profitability. The figures, observed CCW chair David Furst, go against the received wisdom that mid-market firms are struggling because they lack the critical mass to achieve economies of scale, and therefore need to find merger partners to maintain and improve profitability.

Finance and marketing

There is clearly interest from firms in outside investment, as opposed to standard bank finance. Irwin Mitchell is known to be particularly keen, but the legal market as a whole remains ambivalent about the potentially market-changing sums involved. The most that can be said is that new ABSs might have a structure and a way of offering investors an exit strategy that better suit investors seeking returns of 20%-70%.

But new entrants to the market also seem to be playing a ‘wait-and-see’ game. ‘Big brands’ that are known to be targeting a liberalised legal market, including the Co-op, are few at present. As SRA chief executive Antony Townsend told the Gazette in an interview last week, the 50 serious expressions of interest the regulator has received do not represent an army of 50 major brands sent to challenge all existing 10,000 law firms: ‘They range from the likes of Co-op at one end right down to the traditional family firm that just wants a bit more flexibility. ABSs should not be thought of as something for high street multiple chains; in fact it’s a very flexible model that can be applied to a tiny firm too.’

One area where larger spends are attracting attention is in marketing. The public has a limited attention span as consumers and, so the argument goes, spend on ‘brand’ is less scalable. TV adverts, national advertising campaigns and the use of ‘brand ambassadors’ are all steps that QualitySolicitors can take, but which individual component firms could not achieve on their own.

As we report today, the investment QS has secured from private equity business Palamon Capital Partners will fund a brand and marketing drive - rather than the purchase of legal practices as such. National Accident Helpline is a longer-established collective effort that individual firms sit behind. As the Gazette reported earlier this week, claims management companies have signed contracts that would see them become the ‘advertising wing of ABSs’. It is in this area, marketing and business development, the more dramatic announcements have been focused on.

Other types of marketing spend, though, can be achieved for far less. For a firm with a £1m turnover, outsourcing the marketing function, in particular web-optimisation, to keep the firm’s name prominent and to monitor effectiveness of marketing efforts, can save 40%-50% of the marketing spend. That does not create a big brand, but does enough to maintain and grow a practice.

Figuring it out

  • £14bn: estimated size of the retail legal market. Espirito Santo

  • 92%: commercial law firms that offer and have used fixed fees. Winmark Research

  • 81: the number of firms into which the UK top 100 of 2002 have consolidated. Gazette

  • 12: number of US-linked law firm mergers in Q1 2011 – there were four in the same period in 2010 and 33 in 2009. Hildebrandt Baker Robbins

  • Two years: the usual time taken to prepare a business for significant outside investment, flotation, sale or full merger. Various

  • £5m: the threshold above which law firms struggle to turn further growth into greater profitability and efficiency. CCW

  • 30-35%: the annual return expected by private equity investors. Espirito Santo

  • Serious ‘expressions of interest’ in becoming an ABS received by the SRA to date. SRA

  • 12-20%: the annual return expected by investors in public companies. Espirito Santo

Challenge of change

Is tomorrow or the next day truly scary for legal practices of any size? Change and challenge in legal practice has been significant in recent years - but much of that process of change is here already. There is no restriction on consolidation between existing firms and it has been happening; though the rate of consolidation is currently decelerating. Fixed fees are a reality in all parts of the legal market and large sums are being spent on consumer-facing advertising.

Both software and hardware have changed legal practice, and outsourcing of major and minor pieces of work are also part of the mix. Smaller practices can now do many of the things that only those with much higher turnover could achieve 10, or even five, years ago.

Traditional consumer advertising is expensive, and having an impact in this way is one accounting line-item that has not come down in price. But expectations of business growth, and increased returns from different business models, are not just dependent on ‘inefficiencies’ or the idea that firms are ‘lagging behind technologically’.

The Espirito Santo report also asserts that a closed regulatory environment has led to consumers who have ‘unsatisfied pent-up demand’ for legal services.

Investors and lawyers would be right to question whether pent-up demand will be released from 2012. Not least, the supply to meet paid-for advice is anything but constricted at present. And while many more people could and should make a will, public policy, to the cost of individuals’ rights, is clearly set on reducing consumer recourse to the law in many areas.

There’s another point worth bearing in mind too. Writing reports which declare that nothing much is going to change - or at least not yet - is unlikely to propel you into the national press. ‘Simplify then exaggerate’ is a dictum which can apply as much to those who provide the source material for journalism as the reporters who write up the story.

Eduardo Reyes is Gazette features editor