DLA Piper/Riverview - A brave step into the unknown

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”.