A critical analysis of Sir Nigel Knowles’ article, “The end of the legal market as we know it is nigh”, as featured in The Lawyer on 16th June 2014.

24 Jun 2014

peopleConsultingIll

 

Sir Nigel Knowles is a highly respectable and experienced legal professional. He is the Co-Chief Executive Officer of DLA Piper, the worlds largest global business law firm. According to their website, DLA Piper turnover £2 billion with 4,200 lawyers located in more than 30 countries[1]. So, if Sir Nigel warns the legal community of catastrophe in the market, we should sit up and take notice. Should we be expecting “judgement day?” Is the present legal market “unsustainable?” Should we stop “burying our heads in the sand?”

Sir Nigel Knowles believes the fragmentation occurring in the legal sector will make it unsustainable. He makes the observation: “The sector remains fragmented: there are simply too many firms (and inevitably too many lawyers) offering services without any clear differentiation.”

One anonymous commentator on the article agrees with the “too many lawyers” element. He argues that lawyers are trained for cheap labour instead of training the numbers they actually need to meet demands, such as they generally do in the teaching and medical professions. In the long-term law students will suffer. This appears to be true already. According to the Law Society, out of the 13,850 law students who registered with the SRA in the year ending 31 July 2013 prior to completing the Legal Practice Course, only 5,302 new training contracts were registered [2].

So thousands of students, who have accumulated massive student loan debts on their quest to become a solicitor, aren’t being admitted to training contracts with law firms. In actual fact, it appears that 3,000 of these law graduates have no reasonable prospect of ever getting a training contract to become a solicitor [3].

In relation to Sir Nigel’s comment about too many firms, the law gazette reported at the end of 2013 that the number of law firms are actually the lowest they have been since records began in 2009, due to mergers and to firms struggling to obtain professional indemnity insurance [4].

However, when his comment is put into the context of the article, it appears that his comments are actually suggesting that he believes there are too many law firms because no single law firm has access to more than 1% of the $300bn global commercial law market. The market is very fragmented and that is likely to change.

Sir Nigel Knowles believes that “the firms that will emerge from this struggle will be either truly global or highly niche, [defining truly global as] firms that can offer a comprehensive suite of services across all regions… However there are firms that claim to be operating globally but are in fact thin on the ground in many regions. They will be found out.” If this is accurate, then many major profitable law firms that operate on a national basis such as Irwin Mitchell and DWF should consider themselves in trouble, even though their reported turnovers are over £180 million [5].

The “get big, get niche or get out” argument is not new but it is gathering force in the wake of the deregulation introduced by the Legal Services Act.

The major problem that the larger, but non global legal firms face is twofold:

  • A lack of differentiation means that there are few or no compelling reasons to use any one in preference to any other.
  • Reliance on panel work from large corporates or banks which guarantees downward pressure on fees and erosion of margins.

It may seem hard to believe that such successful businesses, who quite clearly thrive in the national market, can be derailed in the future as Sir Nigel Knowles believes. Having said that it is just possible that the evolutionary forces are so great that they will simply be swept away. In the USA they are also talking about the death of “Big Law” and if Sir Nigel’s prediction is accurate, law firms that don’t have a global presence had better work on getting one fast!

Firms should not be “deluded” by thinking the “recovering economic conditions, increased corporate activity and better markets [will rescue them].”

Knowles has seen the increasing pace of M&A activity. “For the [none magic circle firms], the pace of mergers will accelerate. Firms will merge to gain greater geographic exposure, [which could be a legitimate strategy] seen as part of a convincing growth story… While the walking wounded will merge simply to survive or cut costs… indicative of clutching at straws – and such deals are likely to be increasingly frequent.”

We are seeing examples of both types of merger. What will be interesting to see is how the merged firms perform.

Nick Hood, a legal blogger for ‘the future of law’, wrote an article earlier this year reporting on his view that “merger mania will end in tears”. He argues that partner clashes can be expected as well as the unhappy blending of cultures [6].

For Sir Nigel it is not all doom and gloom. “For the firms that survive there will be rich pickings. Who knows, it may be that by the end of 2014 some of the larger law firms will have finally secured that hallowed 1% share of the market.”

What seems clear is that deregulation will cause the UK legal services market to grow by value.

It is also clear that there will be global super firms like DLA.

The real question is what the market will look like below that level, what types and sizes of firm will thrive and what existing firms need to do if global reach is beyond them.

References

The Lawyer – Sir Nigel Knowles: The end of the legal market as we know it is nigh

[1] DLA Piper – Sir Nigel Knowles
[2] Law Society – Entry Trends
[3] Graduate Fog – Law graduates skint and jobless as training contracts dry up
[4] Law Society Gazette – Number of law firms dips to new low
[5] Wikipedia – List of largest UK-based Law Firms
[6] The Future of Law – Why law firm merger mania will end in tears