This blog develops some of the ideas in our 6 May 2014 launch blog, LFaaS I.
In the IT world XaaS (pronounced Zass) is the new thing – anything as a service, whether software (SaaS), platform (PaaS) or network (NaaS). This is shorthand for getting your IT on a ‘one to many’ service basis from the Cloud rather than having your own bespoke stuff on-site. What’s driving this delivery model is lower cost: IT in the Cloud costs less than on-site software, servers and support, but you have to adapt what you want to what’s on offer. Law firms operating in UK commercial legal services (CLS) market have grown hugely over the last generation by offering highly bespoke legal services. What will be the drivers for the UK CLS market over the next twenty years and will it see the rise of ‘LFaaS’ – Law Firm as a service?
Figure 1: growth in GDP and numbers of UK solicitors in private practice, 1970 - 2013
Please click here to view Figure 1
The ‘Rule of 3’
Law firms live by the ‘Rule of 3’: charging fees based on 1 for direct (lawyer) costs, 1 for indirect (all the other) costs and 1 for profit. Clients can increasingly get the same thing done in-house for 1.x. (1 for direct costs and a bit for indirect costs). This, plus a glut since 2008, is reducing prices and increasing GCs’ buying power. These changes are fuelling the growth of in-house teams and the rise of new entrants like LPOs (legal process outsourcers), ODPs (on demand providers) and ABS/MDP (alternative business structures/multi-disciplinary practices).
The UK commercial legal services (CLS) market
Seeing where this will all lead to in 10 or 20 years’ time is tricky. Scoping and sizing the CLS market is difficult and predicting its evolution harder still. If you start with the size of the global CLS market as $300bn, then the UK accounts for around 10%. UK law is an amazing success story. Law firm solicitor numbers quadrupled from 1970 (22,000) to 2012 (87,000) (Figure 1). This back story actually makes it harder to gauge what will happen, especially now established patterns are changing, but the recent return of economic growth and business confidence provides clues. All sectors of market are growing again – commercial law firms, the commercial bar and in-house; and the new LPO, ODP and ABS/MDP entrants are on the radar for the first time but growing at a faster rate.
UK CLS in 2004 …
Figure 2 hazards a guess at supply-side evolution of UK CLS over the next twenty years. This starts from 2004, when there were around 6,000 commercial barristers and 7,200 UK corporate counsel, each accounting for say 10% of the total, with commercial law firms making up the rest.
… 2014 …
Today, the bar remains at 10% and in house numbers have doubled to 14,800, say 15% of the whole. The new feature is the rapid growth of new entrants, from a small but now appreciable base. ODPs, like Axiom, Lawyers On Demand and Obelisk, have maybe 1,000 lawyers all told on their books; LPOs, largely based overseas, possibly account for 1% of the UK market; and ABS/MDPs are growing fast (but as the CoOp shows, not all plain sailing).
Despite the return to growth, GCs’ buying power and the glut aren’t going away any time soon. This means that arbitrage between the Rules of 3 and 1.x will continue to fuel growth of in house teams, perhaps to 20% in 2024. The aggregate market share of LPOs, ODPs and ABS/MDPs may reach 10% by then.
People overestimate change short term and underestimate it long term. Seen from 2014, it’s after 2024 that all the changes at work now have a big cumulative impact. By then, the Big 4 accounting firms will likely be large CLS players (especially if they can crack the USA). Their combined revenues, at $120bn today, equal 40% of the whole global CLS market. If they’re going to keep growing, CLS is a natural – almost irresistible – target (perhaps in the next recession).
Second, CLS law firm demographics are changing. The solicitors’ profession is getting older. Average UK law firm partner age was 50 in 2013 and 45 in 2003 . Law firm qualifiers in the 1970s – the beginning of the expansion in Figure 1 – have started to retire. This grows to 1,000+ a year by 2024 and 1,500+ by 2034. Add to that higher attrition rates as solicitors join other CLS platforms, and UK law firm growth faces strengthening headwinds. These would normally be offset by an increase in new qualifiers. But in 2013, the 26-30 solicitor age group numbered 18,000 – 7,000 fewer than the cohort aged 31-35 (25,000). The combined impact of the changing demographics is that UK CLS law firm solicitor numbers will grow absolutely but decline relative to the market as a whole.
Figure 2: possible evolution of UK commercial legal services supply side
Please click here to view Figure 2
In twenty years’ time, the miracle of compound growth will likely see the number of UK CLS professionals at more than double today’s. But the landscape will look different: LPOs and MDPs may account for 25%, with the bar and in house steady at 10% and 20%, and law firms making up less than half the market for the first time.
Technology has the final word. In another miracle of compounding, Moore’s Law says IT will be faster by 16 times in 2024 and – if you believe it will still hold true then – 500 times in 2034. This means that whatever is available from wherever the Cloud is by 2034 will be unrecognisably more powerful than today. Couple this with continuing pricing pressures and supply-side change, and large parts of the demand for UK CLS will be supplied from commoditised, IT-based providers.
LFaaS (pronounced Elfass) indeed.