THE GROWTH OF START-UPS IN THE LEGAL SECTOR

9th May 2018

It is no secret that the legal market has become more and more price driven in recent years. The consumer, having formed their own opinion (rightly or wrongly) on the complexity of a particular legal issue, will frequently look to find the cheapest available quote. The availability of free, and of course unfiltered, legal advice online has clearly been a key factor in this trend.

Price will always be a critical factor for the traditional firm which provides a wide range of legal services, but for more niche offerings, reputation, both in terms of the firm supplying it and the individual professionals involved becomes more important.

Where the consumer is looking for more specialist advice, the overall firm reputation often takes second place to an individual professional’s reputation. That can be a hard driver to resist for the professional who feels that they are contributing to their current firm’s success more than others and there is no longer the automatic assumption that the ultimate aim of a fee earner is to become a partner in the firm with which they trained.

The work types that niche firms focus on can be relatively high risk, from both a financial and professional liability perspective, so it is common for new firms to start out as either a Limited Company or Limited Liability Partnerships (LLP). Over the last two years, the percentage proportion of law firms operating as limited companies has increased, while the percentage of unincorporated practices has decreased (source: SRA Regulated Population Statistics as at March 2018), and there is nothing so far to suggest that this trend will slow down or change anytime soon.

We see common characteristics among the individual professionals setting up new practices, especially the niche firms. They are often highly focused, entrepreneurial and well-connected individuals, frequently breaking away from large city firms, and who genuinely feel they can give the big firms a run for their money.

New practices frequently have a lower cost base, operating from smaller office spaces, with fewer support staff, and they encourage flexible, agile working. This means that, rather than focusing on serving the local market, they are better placed to serve the wider national, and sometime international, market. Niche start-ups are a growing trend, but by no means a new phenomenon. However, the next round of ‘deregulation’ which is due to hit sometime next year, when the SRA’s new regulatory handbook comes into effect, is bound to send further ripples through the industry, especially in the way that lawyers are able to offer their services to consumers.

Innovation and flexibility are messages that the SRA has been championing, most noticeably since the 2011 Code of Conduct changes. These messages will continue to get louder. We can expect to see lawyers offering services in new, more creative ways.

However, the growth of start-ups is not necessarily all about reward, and individuals shouldn’t sleepwalk into setting up a new practice without first mapping out all of the risks. Getting the regulatory ‘must do’ actions in order at the start is critical, and the cost of getting it wrong can be even more critical.

For individuals who have worked as employees in larger firms, they may find that they have been protected from the harsh financial reality of owning and operating a business in a competitive industry and the learning curve can be steep. The competitiveness is exacerbated for new firms, so detailed financial modelling and stress testing, backed up by a realistic business plan is crucial.

Of course, all firms should be trying to compete with all other businesses operating in their specialist fields, but perhaps the greater focus for the large firms should be on retaining the talent that they have and making the option of staying where they are harder to resist.

This article was published by Crowe Clark Whitehill on 24.04.18