A couple of years ago I attended a conference hosted by one of the magic
circle law firms, examining what the likely impact of the Legal Services Act
would be. There was a very clear
consensus amongst most in the room – the view was that high street law
practices and ambulance-chasers would undoubtedly be impacted, with some big
name brands moving into these fields and investment spent on efficiencies at
the commodity end of the market. But there
was a very clear opinion that the loftier realms of corporate law would remain almost
untouched. The larger firms took the
view that they didn’t need cash from outside investors, that clients would
always be happy to pay a premium price for a premium product, and therefore that
life at this rarified end of the market would almost certainly carry on
unscathed by the changes.
It didn’t seem to occur to many that there would come a point when even the
biggest corporate clients would begin to baulk at paying £250 per hour for
someone to do photocopying.
Even before the LSA came into force, there were signs that the big law
firms were naiive in their beliefs.
Clients in some cases started to force law firms to outsource some of
their less complex work to cheaper, more efficient firms, (and firm such as CPA
thrived on hoovering such work up), so we perhaps shouldn’t be surprised that
someone is now looking at changing the way that corporate legal services are
offered.
It has been public knowledge for some time that DLA Piper had invested in
LawVest, a firm which was assembling a team of solicitors and barristers to
handle high volume fixed-fee legal work for corporate clients, but it is only
now that more detail is starting to emerge of how they see the model working. The business, which will be branded as
Riverview Law, proposes to offer a fixed-fee service with annual,
all-encompassing contracts covering a range of legal
matters including contracts, company law, data protection, disputes,
employment, finance, insurance, intellectual property, IT and property. The fees will vary
according to the size of the business but will
allow businesses with up to 1,000 employees to buy annual contracts from £200
per month for all their day-to-day legal support – small companies with up to five
employees will pay around £2,400 a year for their legal advice; firms with
between 5 and 24 staff members will pay almost £4,000, and up to 50 employees
it will be in the region of £6,000 per annum and so on. Fees for services to larger companies will
be quoted on a bespoke basis, with the larger corporates being encouraged to outsource
their entire legal function to Riverview.
Fixed fees are nothing new – they have been around for many years and
although less common in corporate work than in some other spheres, they are
certainly not unheard of. However, the
Riverview offering is taking the concept a big leap further – essentially they
are offering a fixed fee without knowing first what work they are being asked
to do. It doesn’t take a rocket
scientist to work out that if even a 4 man business becomes embroiled in
litigation during the course of the year then £2,400 would not make a dent in
the costs associated with properly servicing such a case. The business is not staffed exclusively by
low cost legal executives in out of town locations – although the majority of
its employees will be based in the Wirral, an area with an undoubtedly significantly lower cost
base than London, the payroll includes successful barristers and QCs, some of
whom will be employed exclusively by Riverview and some of whom will do work
for Riverview whilst remaining members of their own Chambers. Many of these individuals would normally charge
more than the average annual fee being paid by the Riverview clients simply to open a brief,
and therefore the proportion of Riverview clients requiring services at this
level needs to be low to make the business profitable.
Riverview will not know, when a company signs up for the service, what
legal issues may arise during the course of the year, and therefore they are
essentially taking an actuarial-type gamble that across their client basis as a
whole the pricing mechanism will work. This is similar to the way that insurance
companies price their policies – they win some, they lose some, but across a
base of hundreds of thousands of customers they take an informed gamble that it
will work out. If Riverview manage to
get this type of scale, then the actuarial approach to pricing could work, but
the risks will be high at the outset, when the business lacks the scale
required to make such calculations statistically sound. The other obvious difference between law
firms and insurers is that insurers recoup some of their losses on individual
clients by levying increased premia in the following years on those who have
had to claim on their insurance, a key mechanism in helping to tip the risk/reward
balance in favour of the insurer by ensuring that persistent claimants pay more
– I have seen no suggestion that Riverview intend to do the same, and indeed it would
be difficult to raise the annual charges too high, as in my experience clients inevitably take
an overly-optimistic view of the likelihood of them becoming embroiled in
expensive legal work (or the costs associated with it should it happen), and will therefore baulk at paying a higher up-front fee
when they may not need to use the service at all.
There are indicators which suggest that Riverview may indeed achieve the
scale it requires to make an actuarial price model valid. Protection from unexpected legal fees is
something which is likely to be attractive to firms during a period of economic
turmoil and it would be no great surprise to see many signing up at the
attractive price levels being quoted by the firm. However, the more successful the model is,
the more competitors are likely to copy what Riverview are doing, and that is
bound to result in downward pricing pressure and, perhaps, the emergence of
entrants into the market who are less concerned about quality of service than
profit. This could result in an
unfortunate price war, at the expense of quality. I
However, one of the most intriguing aspects of the Riverview experiment is
the relationship between Riverview and its major financial backer, the global
firm DLA Piper. There are 2 aspects to
the arrangement that are quite fascinating – firstly, DLA have themselves said
that they intend to refer some of the low-value volume work from their existing
client base to Riverview – undoubtedly a great thing from a client cost perspective
but surely something that will have an adverse impact on DLA’s own
profits? In taking this step, DLA appear
to be tacitly conceding that despite the “head-in-the-sand” attitude taken by
the magic circle firms at the conference I attended 2 years ago, clients are not going to
carry on paying big-firm prices for routine work, and that if they didn’t do
something like this, they would in all likelihood lose that business anyway. After all, if DLA could continue to recoup
premium rates for routine work, surely they would continue to do so? They are a business, and not a charity, and I
cannot for one minute imagine that they are doing this for any reason other
than to establish themselves as the market leader by jumping before they are
pushed.
The second fascinating issue is that DLA are not confining Riverview to the
solely smallest end of the corporate market.
Their fixed pricing mechanism accommodates businesses up to 1,000
people, but they are still targeting business from larger organisations too,
albeit on a bespoke pricing basis. At
this end of the market, it is hard to avoid the conclusion that DLA will be
competing head-on with its own offspring.
I am sure that many City firms will view Riverview as an interesting
experiment but of little relevance to them. In doing this I think they would be wrong. They need to wake up to the fact that the LSA
changes will not have an impact solely at the bottom end of the market, but are
likely to make profound changes to the way that clients choose to buy legal
services across the board. DLA should be
applauded for eschewing the head-in-the-sand attitude of some of its rivals and
trying to do something to offer better value for money for clients through this
initiative. Whether it works, and if it
does, what the long term impact on DLA itself will be, remains to be seen. In the words of the inimitable Humphrey from
Yes Minister “It’s a brave move, Minister”.
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