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Opening up to competition

LEGAL EXPENSES are a big cost for many businesses and often a bone of contention. Frequent complaints from businesses include the high rates many lawyers charge, the opacity of fees, and high charges for standard products, such as employment contracts and leases. However, it is a brave business that forgoes the cost of getting the legals right in the modern world of widespread rights, regulations and compensation claims – last year £23bn was spent on UK law firms’ advice, much of it by businesses.

The good news is that impending changes to the legal market in October will bring enormous benefits to business of all sizes allowing them to take more control of this expensive area of overhead. The Legal Services Act (LSA) has been nicknamed “Tesco law” because the changes were primarily aimed at consumers, but businesses also stand to make dramatic benefits – whether they are large internationals, mid-market or start-ups.

While larger firms have in-house counsel to manage their legal firms by keeping rates competitive and their time under control, for many businesses it falls to the finance director to make sure legal costs do not run out of control – whether through having operational control or simply through keeping an eye on areas of high legal spend – such as employment-related issues.

It is typically pretty lucrative being a business lawyer, and recent belt-tightening has hardly dented the rates that have arisen from continued legal price increases over the past 20 years. Top flight lawyers in big City law firms charge over £1,000 an hour for their expertise and hourly rates of £700 are not uncommon, although there is a big gulf between such London rates and those of the large regional firms. At the other end of the scale, at high-street firms rates outside London are in the £100 per hour ballpark.

Already established brands such as Co-op and WH Smith are opening legal arms and a whole range of companies are starting to either build national brands or provide online services to business and consumers. Most established law firms have yet to make any announcements – reflecting the characteristic caution of the sector that may well be their undoing.

However, as an example of the near future, personal injury legal giant Irwin Mitchell has announced it is taking advantage the LSA to get a £40m war chest from outside investors to buy other practices and take on the mid-tier corporate firms that most businesses of any size use. Another example is Pannone’s Affinity Solutions division, which has signed deals with an unnamed big retailer and insurer to offer its legal services, white labelled, to their customers.

Other firms are expected to follow suit with private equity investors, and we could well soon see many mid-sized corporate law firms disappearing as they are bought and merged. Your favourite partner may survive, but probably not: this new breed of law firm will cut costs and increase profits through automation and leverage – the opposite of the small partner-led teams that are the norm.

Another big change is that soon anyone can go directly to a barrister for specialist advice and litigation, whereas currently you have to be a sophisticated professional. Going direct to barristers, where appropriate, wipes-out a whole range of duplicated costs from having to brief a solicitor to brief the barrister. You can increasingly expect to find many entrepreneurial barristers marketing themselves directly to your business too. So while I wouldn’t recommend going to a barrister in a lot of circumstances, for sophisticated buyers it is a good option.

Another way the LSA is benefiting businesses is through unleashing a wave of competition with new businesses and brands entering the market. One upshot of this is the arrival of lots of legal firms offering fixed fees for basic bits of work: for instance £600 for a directors’ agreement or website terms & conditions. I know many businesses are paying many times this for basic legal paperwork from larger law firms. A good question for an FD when next reviewing a steep law firm invoice is “why are you charging me £6,000 for this when other law firms are quoting £600?”

Another change to look out for the future is the LSA also allows law firms and accountants to merge. Those with good memories will remember the then Big Six accountants tried this and failed, but it would be a better fit for those advisors targeting SMEs. If you are buying a business or selling a division why wouldn’t it be more beneficial to use one professional firm to handle all aspects of the transaction, rather than separate ones for the financial and legal issues.

Increased competition, greater choice and improved efficiency in law firms themselves will be the outcome from the Legal Services Act and financial directors should be using the opportunity right away to start exerting pressure on their legal suppliers’ costs. The legal sector may not change overnight when the Act’s provisions come into force over the coming months, but it is changing and the changes will eventually be profound.

Michael Welsh, is a solicitor and director of legal price comparison site

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