Firms willing to specialise and differentiate themselves will gain a competitive edge, says Deloitte's Jeremy Black

The legal sector is undergoing a period of fundamental change. Law firms are navigating a tough financial climate, suppressed growth rates and the introduction of groundbreaking legislation.

Previous recessions have been transitory, as the industry has been able to recover within a few years.

However, this recession has transformed the legal landscape and the sector is not expected to return to preceding levels of growth for a long time. Such challenges are demanding change.

Up until relatively recently, many law firms operated as general practices, providing a broad range of services across a variety of industries.

But in recent times, demand has weakened. A stagnant domestic market is suffering from a lack of M&A activity and pressure on rates from cost-conscious clients.

Difficulties are compounded as new players are in the process of entering the market as alternative business structures (ABS).

A variety of consumer brands, including banks and supermarkets, are developing 'off the shelf' legal products, increasing competition in an already oversubscribed market place. Under such pressures, law firms must look to specialise and differentiate themselves from their competitors.

Thus, over the next decade, many firms will undergo a strategic shift leading to more clearly defined service offerings.

They will need to position themselves as leaders in their chosen fields, to secure a healthy client base and protect profit margins.

Consequently, three prominent and defined business models are likely to emerge over the next 10 years: elite, corporate and boutique.

The elite model

The elite model will primarily be pursued by leading international firms, including UK magic circle and US top-tier law firms. These are the only firms likely to retain a similar business model to the one currently operated.

These market leaders will limit the range of services offered to high-end corporate clients; to include M&A, capital markets and litigation services.

A number of tasks are likely to be outsourced to lesser-skilled, lower-paid staff who do not necessarily need a background in law to carry out the work.

Cost reduction will continue to play a key role in a strained economy to maximise profit margins.

Elite firms will continue to invest in an international footprint and will be located in key capital markets such as London, New York and Singapore. B

ecause of the size and profile of the work they undertake, these firms will generally be more profitable than those operating a boutique model.

The corporate structure

Meanwhile, new players are set to enter the market providing off-the-shelf products focusing on low-value, high-volume services.

They are more likely to adopt a corporate structure led by business executives rather than a traditional partnership model.

Various existing corporate businesses are investing in an attempt to fully exploit this new opportunity, as the Solicitors Regulation Authority continues to authorise a variety of businesses.

Corporate firms will be found in key business locations throughout the UK such as London, Birmingham and Manchester, with some larger organisations having an international presence.

Depending on the scale of operations, it may be possible for such firms to generate higher profits than both their elite and boutique competitors.

Boutique firms

The crucial challenge for the rest of the sector will be to develop a specialism to carve out a profitable client base. Firms will be looking to specialise in either a practice area (eg, intellectual property) or an industry (eg, energy and resources).

Boutique firms are likely to primarily target businesses rather than individuals, with the exception of some firms that will seek to serve high-net-worth individuals.

These firms may suit Generation Y graduates, as they are likely to offer increased flexible working practices and a more desirable work/life balance. They will reduce their own property portfolios as virtual working becomes more common.

New challenges inevitably produce new opportunities. Those able to develop a defined service offering and deliver it to market in an effective and efficient manner will reap the rewards.

Irrespective of the business model, survival for many firms will depend on a successful strategy that targets a specific client segment.

While the evolution of the legal sector will inevitably depend upon external factors, including the fluctuating financial climate and the development of emerging markets, it is certain that the next decade will bring unprecedented change.

Jeremy Black is a professional services partner at Deloitte