Law firms feel pinch as clients curb fees

By Jane Croft Law Courts Correspondent |

Increasing pressure from corporate clients to force down legal bills is seen as the greatest risk to profitability at the biggest law firms, research shows.

About 58 per cent of finance directors at the top 100 law firms identified pressure from clients to discount fees as posing a risk to profitability, according to the study by Sweet & Maxwell, a provider of information to the legal market.

This is the third year in a row that the Sweet & Maxwell study has identified pressure on legal fees as the biggest threat to profitability, with some firms underpricing “fixed fee” work, where solicitors cap their fees on a particular project to win new business.

Law firms also singled out other threats to profitability, including a slowdown in corporate work and the introduction of the new legal services act, dubbed “Tesco law”, which has unleashed new competitors into the sector.

Some 19 per cent of finance directors surveyed cited changes that have allowed new entrants such as the Co-operative Group to offer legal services and outside investors such as private equity groups to invest in law firms.

The legislation is intended to make buying legal services as easy as buying a tin of beans – hence the nickname Tesco law, although the supermarket group has not announced any plans to launch legal services.

The legal services act did not merit a mention as a significant threat to profitability when the same survey was conducted two years ago.

At the time it was introduced, in October 2011, it was believed the changes brought about would mainly affect smaller high street firms who were focused on areas such as personal injury claims.

However, the study could signal that larger law firms are concerned that their practices could suffer if competition ripples through the market or if private equity money is invested in law firms and leads to greater competition for higher margin work.

Recent research by investment bank Espirito Santo found that half of insurers are considering setting up their own law firms, which could compete with “bulk” insurance practices of large commercial law firms.

“The legal services act is aimed at increasing competition and choice in the legal market, and some will judge the success of the act on whether it leads to a tangible increase in service levels or a pressure on fees,” said Teri Hawksworth, managing director, Thomson Reuters Sweet & Maxwell. “The big question is how high up the league table of law firms the ripples from the legal services act spread. While none of the Magic Circle firms we spoke to identify the act as a risk, we are seeing more firms outside the top 10 paying more serious attention to its impact.” she added.

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