Advising small businesses

What is a legal need? This is a term very familiar to those of us who are concerned with improving access to justice, supporting the rule of law, and protecting and promoting the consumer interest. A legal need is a problem of everyday life that is amenable to legal advice. For small businesses, this might mean taking on employees, protecting intellectual property, expanding into new premises, accessing bank finance and, of course, more formal disputes. It is not that legal advice is essential for these issues, more that good legal advice can help firms tackle the issues of everyday life, manage risk and resolve disputes.

Research into legal needs allows an understanding of: how consumers, in this case business consumers of legal services, respond to legal problems; what drives their responses; and what prevents them from responding in certain ways. This is something we all have a stake in. Small businesses are the engine of the economy, employment and growth. This research deepens and broadens our understanding of the legal needs of small businesses beyond anything we have seen before. This helps move debates about these issues from the conceptual to the practical, providing the basis for law businesses (and competitors such as accountants, business advisers or other professional service firms) to design services, products and delivery mechanisms that meet the needs of small businesses more effectively.

In the absence of any prior evidence along these lines, the LSB commissioned initial qualitative research in 2010. This indicated significant unmet legal needs for small businesses, but was unable to provide a full picture. That is why we commissioned this current research – the first of its kind in the UK – to benchmark the existing state of play with a view to illuminating the impact of the reforms and changes in the market in the future.

What are the results? They range from the obvious (such as small businesses face many legal problems that affect day-to-day operations and growth) to the surprising (such as while 54% of small businesses agreed that legal processes are essential for businesses to enforce their rights, only 13% agreed that lawyers provide a cost-effective means to resolve legal issues). Over the 12-month period covered by this research, 38% of all small businesses experienced a significant legal problem. The rates of legal problems experienced vary by business sector. The highest incidences were in the transport and communication sector (43%); the lowest in the health sector (30%). They also varied by size of business and most significantly by diversity of ownership.

Legal problems related to trading (non-payment, disputes over quality, a supplier becoming insolvent or an issue with a public procurement exercise) were experienced by 25% of small businesses. Further, we can estimate from the survey that problems related to tax were experienced by over 430,000 small businesses; with regulation by over 330,000; and in relation to business structure by over 240,000. It does not matter how you cut the data: small businesses face hundreds of thousands, if not millions, of issues that legal advice can help resolve every year.

Sources of advice (more than one used)

Accountant 8%Other financial/tax adviser 1%Debt recovery service 1%HR/employment service 2%Loss adjuster 1%Other specialist support 2%Trade body/prof association 4%Chamber of commerce 1%Local enterprise agency 1%Other trade/business organisation 1%Business link 2%Other government advice service 1%Other 3%Firm of solicitors 12%Barrister 2%Other legal advice 2%

These legal problems affect small businesses in a variety of ways. The survey found that 45% of these problems had a negative financial impact on businesses, the average cost of each problem being £6,700. Extrapolated to all small businesses, this would suggest negative financial consequences as a result of experiencing legal problems amount to over £100bn a year. So legal problems happen frequently and have financial implications for small businesses.

Potentially this is good news for legal services providers, in that it suggests significant opportunities exist for those willing to adapt and take advantage. But what else does the research mean for providers? It suggests that existing legal services offerings fail to meet the needs of the vast majority of small business consumers.

As I have said, the bad news is that only 12% of legal problems resulted in demand for advice from law firms and 2% from barristers. In addition, small businesses took no action in response to 9% of legal problems, and a staggering 52% chose to handle their legal problems alone.

The fact that only 13% agreed that lawyers provide a cost-effective means of resolving legal issues is a wake-up call to anyone professing to deliver legal advice to small businesses. Clearly, the current methods of designing and delivering legal advice services do not satisfy consumer demand. Firms can argue that the research is wrong, that they know best what their consumers need, or they can stop and think: how can I use this insight to rethink my offer, grow my business and become the market leader?

There are also interesting findings concerning the role of in-house advisers and legal advisers within small and medium-sized enterprises. Only 5% of small businesses that responded to the survey have an in-house legal expert, while only 8% had legal retainer contracts. Just 2% have both.

Interestingly, having an in-house expert was linked to the small business experiencing more frequent legal problems with a bigger financial impact. Having a legal retainer was also strongly linked with legal problems occurring more frequently, though these legal problems had a lower financial impact on the business, which seems to suggest that externally delivered services can deliver costs savings. This points us to the real value to small businesses of legal services provided by external experts. A clear opportunity exists for the legal service provider which structures its services to meet the actual needs of small businesses.

At a time of contraction in demand for more traditional solicitors’ work, such as conveyancing and probate, those legal businesses that can deliver an attractive package have significant opportunities to grow. In consequence, they will expand the existing legal services market to their own benefit and the benefit of small business consumers, and in accordance with the regulatory objectives outlined in the 2007 Legal Services Act. But the competitive pressures are enormous.

New entrants are battling alongside those with more experience of the market to attract small businesses as loyal consumers. If these competitive pressures lead to more choice, better value, and rising quality and innovation, then the LSB will be content. After all, this is what access to justice, the public interest and the rule of law demand.

Crispin Passmore is strategy director at the Legal Services Board