How struggling SME law firms can innovate to survive a perfect storm

Small and medium sized law firms are currently facing a perfect storm of factors which are putting intense pressure on their business models. These include increased regulatory and compliance burdens and the fraught economic conditions that we all now face, plus the dramatically increasing cost of professional indemnity insurance (PII) premiums.  Small firms and sole practitioners have been especially badly hit, with some unable to secure PII cover at all or reporting that their premiums had doubled in a year.

Add to this the difficulties caused by the coronavirus pandemic and it is not surprising that a recent report by Viv Williams Consulting warned that as many as 3,000 smaller law firms could be forced to close or merge over the next few years. In total, 210 law firms were interviewed, with an average turnover of between £2 million and £5 million. The report found that almost half (45%) of them had already permanently laid off back-office personnel, while just 20% thought their law firm would remain unchanged by the pandemic.

The immediate reaction of firms facing financial pressures is often to cut costs with the initial focus on letting support staff go. Yet this kneejerk response can create inefficiency, as it often means that more senior staff are then required to do such tasks. Similarly, when lawyers are made redundant, the remaining team is often left in the stressful position of managing higher levels of work.

Although the government’s furlough and business support schemes have clearly been a lifeline for firms going through a very tough 12 months, those schemes will inevitably end. This will leave many smaller law firms needing to carefully plan for the future survival of their business against a continuing backdrop of challenging economic conditions.

Review of overheads

A strategic look at removing unnecessary overheads should be a prudent part of annual budget planning, but at times of crisis it can bring some relief in terms of managing cashflow.

Office and equipment costs should be a primary target, rather than people. Several options exist: checking break clauses, renegotiating contracts, considering moving to a smaller space (serviced office landlords can be very flexible, preferring to keep a tenant than lose one completely), renting out any unused space or co-renting with other professional services or introducer/partner organisations such as accountants and IFAs – increasing opportunities for referrals and presenting wider team experience to clients.

Many businesses increasingly outsource functions that are not their core expertise. Most, if not all, of the back-office support which a SME law firm needs can now be provided seamlessly and more cost-effectively online and the pandemic has certainly moved the profession forward in leaps and bounds as to use of technology and successful remote working.

From payroll, recruitment, HR, paralegal, admin & secretarial, to finance, IT, marketing and compliance – such services can be expertly outsourced and managed by professionals, often with a legal background themselves, to relieve the day-to-day administrative burden on partners and senior teams. This leaves lawyers to do what they do best – to focus on client services, build client relationships and drive profitability.

The Law Society publishes a useful practice note which examines the regulatory issues relating to outsourcing urging firms to choose reliable service providers, providing compliant, high quality services.

For many firms it is far simpler to use a smaller number of service providers, or a one-stop-shop which can provide all the services required. Another advantage of this approach is that firms can then have a single, secure IT interface through which they can access all the services they need.

When I set up Excello Law as one of the UK’s first agile law firm models over a decade ago, my focus was on providing a platform for experienced lawyers to work in a more liberating way. In a sense, they are outsourcing their practice’s back-office functions to us enabling them to focus on delivering the best service they can to the client.  In turn, we take a very strategic and agile approach as to what we manage in-house and what is outsourced.

Mergers and restructures

Many firms have been forced to take radical action beyond internal efficiency and cost-cutting drives. A recent article in the Law Society Gazette noted that many new law firm mergers “are the product of one firm needing a quick exit after the insurance renewal bill tipped them over the edge”. Due to the escalating cost of PII, we are now seeing more smaller firms and sole practitioners merge to form medium-sized firms, which are better able to cope with economic conditions.

For some, this is the only way forward, although it can bring considerable angst in the form of merging different cultures, teams and duplicate services and the inevitable restructuring that follows.  For other firms, a solution to work within a specialist network on a fee-share basis can help to retain culture, branding and a sense of team within a more supportive and flexible regulatory infrastructure, supported by a full range of back-office support services.

It is also clear that we are now going through a fundamental step-change in how UK legal services firms operate. This is driven by economic conditions, technological development, and wider cultural changes in how we want to work and live. The pandemic has radically accelerated the trend towards home-working, while IT innovation and AI are driving systems and processes towards greater automation of previously labour-intensive and volume tasks.

Compared to other professional services, such as accountancy, law firms have always been notably late adopters of technology – for example, many firms initially resisted using the Internet. Historically, the risk adverse nature of legal practice, the billable hours model and the typical partnership structure have all contributed to a cautious mindset making law firms comparative laggards when adopting of new technology.

At some big firms, there have also been fears that deploying AI systems might reduce profitability, making them nervous about building or acquiring software. But there is no need for such anxiety: properly deployed, AI systems should potentially allow every law firm to lower costs and win new clients. Even before the pandemic further accelerated virtual communications, a recent report by revealed that the lawtech sector is growing at 6% per annum.

As part of this, an increasing number of law firms of every size are now using AI software to streamline administrative tasks and repetitive processes, while an army of innovative service providers focused on the legal market compete for their attention.

Indeed, for the smaller firm, AI can bring huge benefits in streamlining due diligence, document automation and billing, transforming admin-driven processes for both legal teams and clients, but the true scope of AI in the future – from litigation prediction technology to IP insight – is exciting and all firms can benefit from research and horizon-scanning in this area. Often under client pressure, more law firms are also testing the market for cloud-based solutions to replace existing case and practice management systems.

Flexible working

A series of lockdowns have provided proof-of-concept for flexible working, even for those firms which might have frowned upon the very idea just a year ago. Staff have also come to appreciate the flexibility homeworking offers, and many will expect a significant element of homeworking to be maintained in the future.

This helps save on office and other overhead costs, but the challenge comes with retaining the culture of the business, developing relationships, supporting training needs and keeping a more informal, social element within a firm, which, even after lockdown restrictions lift, may take many months to get back on track.

Excello Law was founded on the principle of agile working – our lawyers can work from wherever they choose – but it can be a challenging transition for some people and we have also asked the same questions as to how we retain a sense of community when social events, conferences and popping into an office is restricted?

Virtual networking spaces (like Collab, Kosy or Sococo) first embraced by technology and media companies are now starting to be adopted within the legal profession.  These are worlds away from the company intranet or weekly Zoom quizzes offering a fully-interactive virtual office – within a series of online rooms or cubes – for co-working, meetings, training sessions and social events – some can even replicate your normal office layout and design. For firms going through radical change, merger or restructure, this can offer a cost-effective way of keeping or building a sense of ‘team’.

After a fundamental look at overheads, structure, resources and people, the clear focus must be on keeping the business coming in. Although the legal profession remains one that is used to networking with established contacts, building followings and encouraging client referrals, the focus on marketing and business development has never been more important in our online world. This is no time to hibernate until the worst is over.

Focus on marketing

In short, do not abandon your marketing efforts. The average law firm spends roughly 2% of its annual revenue on marketing, much more if they are in active growth mode. The natural temptation to cut that budget can be costly in the long run – and if your competitors cut their marketing budgets, then that creates an opportunity for you. As Covid-19 restrictions still apply, think digital. That means content marketing, such as blogs, which keep your news feed up to date with topical advice and tips in your practice areas which are designed to get more hits.

Small firms need to develop all the elements of a comprehensive digital strategy – not just a website – but a full rolling programme of content development fed through social media, business listings on key browsers like Google and Bing (particularly important if you have a strong regional presence and provide services like family and private client which are not repeat purchases).

So be active with eshots, virtual seminars and updates, working with like-minded business and networking groups – to keep you front of mind with clients and prospects.

Look at trends in the SERPs (Search Engine Results Pages) that relate to your practice areas and create relevant content, thinking about titles and keywords that can benefit from Google and other search engines. You might also want to update your SEO, use Pay Per Click to benefit from an increase in online traffic or add a chatbot to your website that allows you to make contact with visitors.

The salient features of our future legal landscape are already clear. Lawyers and firms will increasingly collaborate and work through online networks and digital support platforms. The firms whose mindset is most open to making the necessary financial and cultural commitments, including permanent changes in working practices, that are genuinely beneficial for their clients, their staff and themselves, will both survive in the current crisis and flourish in the long run.

Published in Solicitors’ Journal – 23.2.21


Disclaimer: Nothing in the Legal Insights section and this blog is intended to provide legal or other professional advice and, if readers are interested, they should consider taking separate legal or other professional advice accordingly.