When it becomes law, the Legal Services Bill (LSB) will be a watershed moment for the legal industry. The legislation, which is currently with the House of Lords, promises to fundamentally alter the shape of the UK legal market. Firms of all sizes, and in particular the small to medium-sized section of the industry, need to be aware of the upheaval that is about to take place and get ready now.

Preparing for this Bill is about more than just reading it – it is about deciding a future strategy and building your business and IT processes accordingly. The post-LSB world is going to be tough and you need to decide whether you are going to be a diner or dinner.

The Legal Services Bill

The LSB is an attempt to remove what some have perceived as a cartel structure in the legal industry through the introduction of open competition and private capital. Current rules prevent non-members of the Law Society from owning equity in law firms and this has enabled the industry to operate as something of a closed shop, with competition restricted to a members-only club.

The law will allow the opening up of the market to external investors who potentially have different motives to the traditional law firm partner. In particular, I know of at least two venture capital (VC) firms that are preparing to build funds to undertake consolidation in the marketplace – bringing together small to medium-sized firms to create efficiencies and build a formidable mid-market legal business. In the way that there are now national dental chains created from hundreds of smaller, local dentists, so a VC firm could build a national law business from bringing together groups of smaller, regional players.

The opportunities for external investors are obvious – many of us will acknowledge that, while lawyers are consummate professionals in their chosen field, business skills are not always directly linked to those abilities. Recent research suggests that, taking the UK legal market as a whole, something like 40% of law firms are technically insolvent and even those that are not can be horribly inefficient with, in some cases, 40% of a firm's clients contributing just 2% of revenues.

In addition, the asset-light nature of the law firm means that the value of legal businesses is low – some might argue the sum of its debtors list. This leads to the counter intuitive conclusion that firms with less efficient finance departments could be higher valued than better run ones.

By consolidating firms, private equity buyers will be able to cut costs through shared resources such as finance. They will be able to incentivise and retain the best staff through equity options; benefit from economies of scale and they will aggressively target profitable – and lose unprofitable – business. Most importantly, these VC-backed players will also have the resources to invest in the sort of new IT platforms that the small to medium enterprise (SME) market is yet to buy. The efficiencies possible with a properly constructed IT system alone could enable these new players to significantly out-perform the market.

What is worrying for the SME law firm is that inactivity is not an option. While you cannot be forced to sell your business, it is clear that in the future there is going to be a new breed of efficient, well-marketed law firms out there that are going to present a formidable competitor. Perhaps more worrying for the smallest end of the market is the possibility that the Bill opens for the entry of existing retail players into the legal market – does anyone want to compete against a Tesco Legal?

If this industry earthquake is inevitable, what can a law firm do? Given that the alternative business structures element of the Bill will not come in to force until 2012, it would be easy to do nothing.

The first thing that any law firm needs to do is to decide where it wants its business to be, considering the business impact of a new entrant to your market. There is no shame in recognising that perhaps the best place for your business is as part of a larger, VC-backed group. For many firms this route will open up a range of opportunities not possible within the existing market structure.

If you choose to be an acquiree then you need to look at your business and how you can use everything, including IT, to appeal to an acquirer. While they are not necessarily going to want to use your core applications, you do need to have your business fundamentals available for easy examination through a properly maintained accounts package. Additionally, you could think about investing in some form of business intelligence application which can highlight the particular areas of strength or profitability that would make you an interesting buy.

Most importantly, you need to institutionalise your business information – while your staff keep information about their contacts and clients in their head, rather than in an IT system, that information is of no value to an acquirer. By ensuring that all of the firm's documents, contacts and client data are kept in a properly maintained and managed system, you can prove to an acquirer that they are buying all of your intellectual assets in a valuable format. The concerns expressed in the private capital markets about investing in the legal sector centre on good governance. Being able to demonstrate clear management, influential non-executives, functioning committees for things like remuneration and paper trails for supplier contracts will all remove concerns. All this takes time to create and even longer to become entrenched – so you should start today.

If you see your role as a leading player in consolidation, then there is also much you can do with IT to maximise your effectiveness. The first thing is to make sure that your own ship is in order. If you are expecting to be integrating other companies' systems into your own then you are going to need to be certain that your own IT is robust, up to date, scalable and capable of integrating with other systems. Mergers are often made or broken on the wheel of IT integration; without the ability to bring your new acquisition into your systems then it is a merger just in name.

Once you are certain you are ready in that respect then you need to think about building an acquisition engine – using business intelligence packages you can quickly and accurately forecast the impact of integrating new business units into your organisation. In addition, if you are looking at regional expansion with new geographically-dispersed offices, you need to think about the practicalities – for example, are your mobile working technologies advanced enough for your staff to work across multiple offices?

The LSB promises to be a massively important development and one that no firm can afford to ignore. Everyone needs to recognise that IT is central to the way you fit into the new world, whatever your position is in it. Not only is the IT manager set to become a key player in the legal market, but lawyers from the managing partner down need to think about IT as a central part of their business strategy.

Christopher Young is senior business consultant at Tikit.