In five years' time...
What will legal services in Scotland look like as we go into 2020? The Journal asked a selection of practice leaders for their thoughts on what to expect – and how solicitors’ firms should respond
2015 The mid-point of the decade. Five years ago, most people were still hoping for a strong early upturn to put the credit crunch behind us. But – despite an eventual return to growth – the words “deficit” and “austerity” will be with us for some years yet, and the effects, direct and indirect, on the way law firms do business have been profound.
And five years from now? One lesson that should have been well learned by now is that to survive and thrive it is essential to keep up with the changing times. With that in mind, the Journal asked a range of law firm managers from leading practices, split between those based in Scotland and those headquartered elsewhere, for their views on what to expect by 2020, and how to ride the incessant waves of change.
Who will take the cake?
As Lorne Crerar, chairman of Harper Macleod points out, of the Scottish headquartered firms listed in the UK’s Top 200 in 2009, 40% no longer exist as independent brands. Further consolidation and mergers appear inevitable. Crerar for one believes that the Scottish market is still shrinking, and still over-lawyered. But who will dominate it in five years’ time – the home grown firms or the UK/multinational practices?
While continued consolidation is widely expected, no one predicts “domination” as such by either group – though different advantages are highlighted. Bill Drummond, managing partner of Brodies, the largest Scotland-based firm, believes that here as elsewhere, indigenous firms will be foremost, “in terms of lawyer numbers and market positions”. He continues: “That’s because they tend to understand their local market better and their investment priorities are very much domestically focused... the law firms that seek firmly to understand the agendas of their clients and the Scottish economy, as opposed to the more limited and often cyclical demands of a few sectors, should keep their clients happy and so prosper, employing more lawyers across the country – and doing a lot of business internationally partnering with similar top-tier firms in other countries.”
Crerar notes that the leading Scottish firms – Brodies, Burness Paull and Harper Macleod – “have made a virtue of having a strong focus on Scotland, while serving clients from and in many other jurisdictions. Rather than become distracted, all three have a clear, defined identity and a sure strategy. This has led to continued growth, and as brand becomes ever more important in the world of law, there is no reason to expect this to change in the near future.”
Richard Masters, head of client operations at international firm Pinsent Masons, sees it somewhat differently: “As Scottish businesses continue to grow and internationalise, they will want to be able to draw down services as seamlessly as possible across a range of jurisdictions. That’s likely to favour those firms that have a broader international reach and aren’t confined to the borders of Scotland.
“I am not sure either model will dominate as such – they are just likely to face into different parts of the market, with high end, high value work increasingly being undertaken by a smaller number of firms focused on the sectors their clients are operating in.”
Caryn Penley, executive partner Scotland, CMS, which last year took over Dundas & Wilson, comments: “While there will always be a healthy mix of smaller Scottish-based firms operating alongside bigger ones with a global network, I suspect we’ll witness growth in the latter for the next five years, given we expect to see further consolidation in the legal market.”
Chris Harte, chief executive of Scots practice Morton Fraser, expects to see “fewer firms of scale in the Scottish market, but those firms to have increased in scale”. He takes a neutral line: “I would not expect any single type of firm to dominate. Rather, as with other markets, there will not be a ‘one size fits all’ model for success and we will see a variety of firms succeeding across different parts of the legal market.”
Brent Haywood, executive partner Scotland at DWF, which now incorporates Biggart Baillie, does not anticipate any dramatic changes – barring unexpected economic developments. “In a finite market things can only go so far”, he observes. “If there are more ‘big name’ entries to the Scottish market, I think it will be more with an eye to a dot on the map, rather than to ‘dominate’.”
Some sectors may change faster than others, in Crerar’s view: “By 2020, the sector-specific consolidation being driven by clients’ requirements on a UK-wide basis, evident in areas such as insurance work and banking, will have changed these sectors beyond recognition.”
Competition from outside
With or without the much-delayed ABS (alternative business structures), our panel predicts rapid change in the wider competitive market. As Haywood puts it: “This is only going to go in one direction! To some it is an anathema; but I anticipate there will be a speedy erosion of the hold that law firms have had on the delivery of legal services.” Mirroring trends in professions such as medicine and accountancy, though the law has “hung on in there longer than some commentators expected”, he is convinced that as the knowledge (and IT-supported) economy gathers pace, “competition will only increase and market share will be eroded”.
Not everyone accepts the “erosion” view, though all agree that competition will increase. Harte points out that even now: “A number of firms are competing with non-law firm providers of services such as wealth management and estate agency. And so meeting these competitive challenges is already a fixed context for firms.” He adds, however: “Ultimately, competitive pressures are what help drive a business to optimise its performance and should therefore be welcomed rather than feared.”
Drummond remains to be convinced that non-lawyer providers will be able to match the top firms: “Those who get the service quality and consistency/value equation right may win some market share, but there are already signs of such models struggling to maintain the high standards that the buyers of legal services rightly demand. Some damage may be caused but, if firms keep their service focus, they will continue to retain the discerning client.”
Penley’s co-executive partner Stephen Millar agrees that higher value work will be harder for non-lawyer businesses to win: “I would expect we will see a rise in the commoditisation of certain legal services, which is the area of the market that non-law firm providers are likely to target. The challenge for firms like ours is to ensure they are operating at the top end of the value chain, offering clients high-level advice and services which the non-law providers simply aren’t geared up to replicate.”
Crerar foresees more of a challenge, as general counsel continue to shop around for “more for less”. The trend towards IT-led commoditisation will accelerate, “and firms who do not attempt to keep pace with this evolution may not see 2020”. He predicts: “By 2020 we expect there to be significant competition from non-law firms. The evidence from England & Wales, where there are large numbers of ABS operating in the jurisdiction, means it would be sensible to predict that they will continue to try and take market share in Scotland. Our legal offerings must be able to compete with them.”
Masters agrees that the impact of non-law firm providers will not be confined to the volume end of the market: “Over time, these organisations will prove a threat to higher value legal services. We’re also starting to see the accountants entering the market again in a meaningful way.”
ABS – still relevant?
As for ABS, of which he has been a strong supporter, he now believes: “Although the ABS legislation does not (yet) apply in Scotland, the reality is that it makes little difference to non-law firm providers of legal services penetrating the Scottish market, should they choose to do so... Personally I don’t think the formal position will make a great deal of difference, as entrepreneurial businesses with no legacy issues will find a way to enter the market in any event.”
Drummond remains a sceptic regarding the whole concept: “At Brodies we have consistently made clear that deregulation of the sort envisaged by some ABS proponents is unlikely to serve the consumer of legal services well – and any erosion of the professional standards of the legal profession is a thoroughly bad thing for the rule of law and, in the longer term, the economy. The examples of the sort of chaos that external influence over law firms can result in are still quite recent – and parallels can be drawn with other professions. As an independent legal sector, we must be recognisably such to other major jurisdictions, including the US.”
While unsure of the likely impact of ABS over the next five years, Millar continues to see advantages: “It does have potential to deliver benefits to our sector by diversifying the service offering of a law firm and enabling it to attract a broader pool of commercial talent.”
Similarly, Harte notes: “One can overlook the positive impact ABS changes can have on existing firms. For a large number of firms, non-lawyers make an important contribution to the success of the firm, and one can only see this contribution growing as we move forward. Such firms will undoubtedly benefit from those individuals being able to share in the ownership of the enterprise, as they would in other non-legal businesses.”
The evolution principle
ABS or no, when asked how law firms will have to adapt to deal with the changes they foresee, all our respondents emphasise responsiveness as the key.
Harte puts it this way: “The challenge for law firms will remain much as it is now – how to ensure that the talent and expertise within the firm can be consistently delivered in a way which is relevant for the client rather than simply convenient or habitual for the firm. Alternative feeing arrangements, project management expertise and collaborative technology will all be core drivers of the consistent, predictable value which successful firms will deliver for their clients. Ultimately, law firms can continue to thrive in a post-ABS world, provided the client experience remains at the centre of all the firm does.”
Crerar comments: “As the markets drive down legal spend and legal rates, only firms which are efficient, well managed and focused on high-value delivery will thrive.”
Drummond and Haywood both adopt Darwinian metaphors. “Law firms are not different from other commercial organisations, in the sense that all are subject to economic Darwinism”, Drummond states. “So ensure your technology is fit for purpose, your lawyers are hardworking, well trained and excellent communicators, your financial model is robust and you keep a strong eye on your cash flow, and you’ll be fine.”
For Haywood, the legal market will become “even more Darwinian”. “The financial model of a conventional large law firm is simple: if you are not delivering what is needed there is no wriggle room”, he observes. For the future, size is going to be less important than nimbleness, low overheads, flexible working and outsourcing. “I expect to see more partnering and freelancing, with some solicitors working together in loose confederations, akin to what was once a law firm. As this happens, we will see the atrophy of the old-style command and control partnerships that are anchored to their fixed overheads and inflexible management styles.”
Some can point to initiatives in these directions already. To Masters, agility in responding to change means “not being afraid to recognise that a large part of the practice of law is process driven, and being bold enough to start to systematically wrap process and technology around what we do”. At Pinsent Masons, he adds, “we are already doing this with our SmartDelivery system, which streamlines routine processes and delivers maximum efficiency and value for money. Without doubt, the relentless march of artificial intelligence will inevitably have had an impact by 2020.”
Similarly, on the theme of maintaining quality while managing costs, Penley points to CMS’s legal services unit, based in Glasgow and providing support for clients across the UK, as “an excellent practical example of an innovation in the sector”.
People needs, and people’s needs
Innovation and flexibility are also the keywords in response to the question, what will it mean for people requirements for law firms? Practices must respond not only to the impact of technology, but to more varied career choices and expectations as the traditional route to partnership falls out of favour.
Crerar notes the effect to date: “With the advances in the use of our knowledge, there is significant gearing within firms or service providers where you have one lawyer managing teams of non-lawyers. The traditional model of a legal career is already changing, and today’s law students should not enter the profession with the same expectations as generations gone by. This need not necessarily be a bad thing, but it is a significant change for those considering a career in law.”
Most of the others agree that expectations are indeed changing. Haywood sees this trend: “As business becomes increasingly flexible and the practice of law more fluid, people will be drawn to taking career breaks or even trying a portfolio existence. Technology and remote working make this much easier. Law firms are in a period of rapid transition and there are many different models being tried out.”
Masters sees an impact on what a normal working day looks like, through “agile and flexible working” using mobile devices that provide equal productivity to office-based colleagues. Another Pinsent Masons initiative that reflects the working preferences of lawyers themselves, as well as fluctuating client needs, is Vario, its “flexible resource hub” (to be featured in a forthcoming Journal), which engages lawyers who want effectively to work on a freelance basis, alternating between legal assignments and other interests. “That works for them, pre-empts a drain of talent from the sector and also benefits many of our clients who often need to supplement existing resource at particular times.” He adds: “Overall, I think the number of people in the industry is likely to stay fairly static, but we may see the makeup of those individuals change, and the roles and jobs that they’ll be fulfilling will look different from today.”
For Harte also, flexibility is a two-way street – covering what a firm looks for from its people and also what it needs to deliver for them. “From a firm’s perspective, it will need people who are willing to develop and adapt their skillsets to meet changes in client demands. Pricing directors and project management executives will become as central to a firm’s success as partners and associates... Successful firms will ask, ‘How do we fit good people into our business?’ rather than being blinkered by traditional career paths or structures.”
Drummond also highlights the need to invest in people to ensure the high-performing professionals he seeks: “Those working in the law need to keep their enjoyment and motivation levels up, so those running firms should embrace transparency, work hard at developing and communicating their business plans, invest in careers and be consistent, trusting in their partners and staff to do the right thing. In other words, empowerment within a solid framework should help deliver success – again, just as in all people-based organisations.”
Millar expresses faith in the continuing career potential of the Scottish qualification: “Scotland produces lawyers who have an excellent standing when compared internationally, and we do not expect this to change. The legal sector in Scotland can continue to grow its export of services to the City and internationally. A healthy legal sector devoted to servicing both the domestic market and growing its share in the international market will support many careers in Scotland.”
Haywood sums up: “The successful firms will be those led by people who understand the current paradigm shift and who can persuade their people to trust them to negotiate their way through it with integrity.”
Confidence? Yes and no
Prediction is always a hazardous business. As Crerar points out: “You only have to
look back to 2009-10 to realise how difficult it is to predict with any degree of confidence how the Scottish legal world will look five years hence. Back then, no one would have accurately predicted the shape of the Scottish commercial law scene as it currently stands.”
However, it does not appear that any of our panel would disagree with his summary: “What is certain is that by 2020 there will be different market competitors, new technologies and an evolution in service delivery which will demand a great deal of Scotland’s law firms.”
It can also be said with some confidence that practices of whatever type, which have shown they can succeed in challenging times, will share his view that the outlook for them is one of significant opportunity.
What role for the Society?
As part of our survey, the Journal asked for its predictions for 2020 from the Law Society of Scotland – and those of all our respondents for the outlook for the Society itself
Alistair Morris, the current President and himself chief executive of a successful practice, Fife and Edinburgh-based Pagan Osborne, began by transporting himself forward in time: “In general terms, it appears market confidence is back as we enter the new year in 2020, though the shortage of liquidity remains an issue due to strictly drawn bank criteria and with the economy still recovering from austerity.
“Successful firms have strengthened their balance sheets and reduced their cost bases. New legal services providers are also establishing themselves in the marketplace.”
As for the shape of the market, Morris sees this depending not on where firms are based, but more on market penetration and service delivery. “The size of the firm isn’t the most important factor – they must be focused firmly on the needs of clients and be really clear what they are offering to the legal services market. Firms that carve out a specialist service – a trend we have seen developing and expect to continue – are more likely to prove successful.”
He anticipates a high level of competition in all sectors, particularly from non-law firms providing legal services to the public, but also to businesses and corporate clients. As for ABS – on which, as 2014 ended, the Society was still in discussions with the Lord President and working with the Scottish Government on a charging regime – he says: “It is difficult to imagine there will be a dominance of this type of business by 2020. However, even if the uptake is slow, innovative organisations will be operating in our market and starting to take an increased share of the market.”
Law firms will need to “examine some of the fundamentals of their business model”, in view of pressures to reduce their cost base and to invest in delivering greater value for money for clients. “To ensure ongoing investment,” he comments, “firms will face more pressure to retain the capital in their businesses. Firms that innovate will be able to gain market penetration.”
Morris shares the view that individuals’ skillsets will continue to evolve: “We already see scope for law firm process planners, project managers and the increased use of partially legally qualified staff, such as paralegals and legal executives.”
Alongside IT developments such as remote working, he mentions the Society’s Smartcard, the professional digital ID which all practising members should have by the end of 2015, and through which new opportunities – such as secure document exchange and a number of other services – will have been explored by 2020.
The challenge to remain relevant
The Society itself, Morris recognises, will have to change alongside its membership, “for instance, offering different tiers of membership and regulating the entities that provide legal services as well as our individual members”.
Further: “We will have to be ever more relevant and continue to diversify to meet the needs of our, rightly, demanding membership. We will need to be more commercial in our outlook, running ourselves in much the same way as the many successful businesses we serve.”
Lorne Crerar echoes these comments: “As with law firms, in five years the Society will need to demonstrate that it delivers best value to its members. It must continue to help the profession evolve to meet the changes it faces and be able to demonstrate that it has been key to enabling them to do so, helping them build sustainable businesses.”
Brent Haywood calls for the Society to aim at being seen as a “champion of excellence”. He fears that the profession has not properly grasped just how vulnerable it is to the new ways of delivering legal services, and warns it to learn from the mistakes of others: “The banking industry woke up one day and realised it had lost many of its ‘real’ bankers. Despite appearance to the contrary, lawyers still need to know the law. Schemes such as the WS Society’s Signet Accreditation are pushing excellence and properly challenging our young lawyers to be the best they can be.”
Caryn Penley believes the Society will indeed play an important role to ensure high standards, adding: “There is also an opportunity for the Society to continue to promote the export of legal services from Scotland, thereby supporting an increased number of legal careers in Scotland.”
Chris Harte comments: “Assuming the Society has by 2020 become an approved regulator of legal providers, the question will be whether it can function effectively beyond that regulatory role. The challenge for the Society is much the same as that facing any law firm – to remain relevant to those it wishes to serve.”
Richard Masters sees the Society continuing to act as both regulator and representative. “But the providers of services in the market will have changed, and will embrace much more than just traditional legal service providers. Indeed the definition of ‘legal services’ is likely to become increasingly vague. From that perspective, it’s important that the Society continues with its current ethos of embracing change and helping the industry to respond to it in a positive but not protectionist way.”
For Bill Drummond, continuing professional standards are essential. “If the Society embraces the challenges we all face by following the sort of approach I have outlined in my other comments, it should flourish and see its membership and influence grow. If it allows a dumbing down of the profession and erosion of the core values that go to the heart of what being a lawyer means, it will become less relevant as a professional body and so less valuable to society as well as its current membership. That would be a shame – the rule of law in today’s world of invasion of personal privacy and cyber-attack on corporate and institutional activity is of crucial importance to society and the economy.”
Have your say
It is planned in February to run a similar feature covering the views of other sections of the profession, including smaller practices and in-house lawyers. Please contact the editor if interested in contributing: firstname.lastname@example.org