It’s a well-worn saying that ‘history repeats itself’, and I don’t mind admitting that I have more than a passing interest in historical recurrences. In particular, Mayan philosophy and their beliefs in the cyclical nature of time. It was the job of the Maya priests to interpret cycles and provide a prophetic outlook on the future or past, in relation to their many calendars. A marketer can look to the past to identify future trends in a similar way. So whilst the professional service industry may be labelled – relative to other sectors – as generally laggard and slow to the uptake in many ways, this does give its marketers ample opportunity to learn from the mistakes of other industries, and to take inspiration from their successes.
If we consider the insurance industry, we see many similarities with the legal profession. Both supply ‘credence goods’. A term used to describe a good whose purpose is difficult for the consumer to ascertain, before and even after consumption. A credence good is provided by an expert who also determines the consumer’s requirements. It’s the natural complexities of law and insurance that makes it difficult for consumers to assess how much of the good or service they need, or assess whether the service was performed well.
Such information asymmetry between the parties can put consumers at a perceived (or sometimes actual) risk of opportunistic behaviour by the expert seller. This is the classic ‘distress purchase’. The ‘distress’ comes from a mixture of uncertainty and the inability to control the purchase. It’s in this distress that legal and insurance services are so fundamentally connected. It’s a shared pain.
Given these fundamental similarities, is it possible to predict the future of the high street law firm by looking to the history of its counterpart insurance broker?
High street insurance brokers: the story so far
The car ownership boom in the 1950’s ‘drove’ insurance broker growth in the 1960’s. For over 20 years, brokers controlled the distribution of commercial and personal lines insurance. By the mid 1990’s there were 10,000 brokers handling all types of insurance.
Soon after the early 90’s recession had ended, the ‘soft’ market begun. A market of excess supply over demand, driving down price. Brand development, TV advertising and the ‘sale by phone’ phenomenon by direct insurers transformed the perception of customer service. Insurance became accessible, cheap and it mitigated the ‘stress’. Conditions for brokers became difficult. Commission income fell as premiums reduced. Weaker brokers began to exit. With numbers falling 10% each year, by 2000 the number of brokers had dwindled to 6000.
Between 2000 – 2004, the market ‘hardened’. A greater demand over supply signaled a change in brokers’ fortunes. The brokers that survived the mid 90’s experienced the most successful years the market had seen. Premiums doubled for commercial insurance, producing higher commission levels. For some, this created the cash to bring forward a delayed retirement. For others, it created profits to invest and grow. By 2005, the broker market had used the growth opportunities to downscale involvement in personal lines, either exiting altogether or focusing solely on commercial clients.
Then came technology which, as with most industries, improved insurance by making the ‘manufacturing’ of insurance easier. Increasing communication between claims companies, actuaries and underwriters, and improved systems of data capture, revolutionised the industry. With improved insurance manufacturing processes came the ability to outsource. This led to the rise of the non-insurance brand retailers such as Saga or Tesco, and the commoditisation of insurance. Technology had created new distribution channels. Aggregator and comparison sites exploded via the internet (and soon mobile) to meet the rise of home internet use, illustrating that the consumer now dictated distribution, rather than the industry.
For commercial insurance, the high level of return started to attract outside capital. The market appeared to those with money as fragmented and in need of consolidation. Broker acquisition and consolidation by organisations such as Towergate, Swinton and Jelf further affected the shape of the market. By 2005, the number of brokers had reduced to 4000. A loss of 6000 brokers over 10 years. Between 2006 and 2012 saw the number of insurance brokers fall further to 3500. A significant reduction from its height in the 1990’s.
An eye into the future of high street law?
How does this translate to the legal profession? Well, similar to the numbers of brokers in the mid-90’s, there are approximately 10,000 law firms currently operating in the UK. The early 90’s recession and the subsequent ‘soft’ insurance market have distinct similarities with the current recession and the ensuing soft legal market.
New market entrants, changing consumer perceptions, difficult economic conditions, rise of technology and market consolidation. All sounds very familiar. And two specific developments that led to the vast reduction of insurance broker numbers can now been seen to emerge in the legal market.
The first was the emergence of RBS-owned Direct Line from behind the broker-dominated backdrop in the mid 80’s. Within 10 years, they had become the personal lines market-leader. Unpredictably, they had single-handedly transformed consumer behaviour. They had removed the paper and the insurance jargon to more efficient IT-driven processes. The parallel to draw here with Direct Line’s emergence is with the entry of The Co-operative into legal services. There are synergies with The Co-op’s plans to dominate the consumer-driven routine legal services market as a ‘provider of choice’, just as Direct Line did previously. Both organisations typify strong brand credentials, high levels of consumer awareness and similar intentions to provide clear, straightforward, good value alternatives to products sold through traditional distribution channels.
The second factor is the introduction of the Quality Solicitor (QS) brand into the legal market and the roll-out of its marketing network across its high street law firm members. This draws similar parallels to Swinton’s aggressive acquisition strategy throughout the mid 90’s, with the principal aim of becoming the leading UK insurance broker, largely at the expense of the independent high street broker. Of course there are slight differences. QS are not acquiring or owning firms outright. But nevertheless QS, backed by a strong private equity firm and supported by multi-million pound Saatchi & Saatchi TV advertising campaigns, seem to be treading a historical route to achieve a slightly different strategy. The domination of the high street distribution channel. Although initially supportive of the high street in one sense, the QS brand could well signify the end of non QS firms, as Swinton had shown in the broker market.
It is for these reasons that one could be forgiven for predicting a demise of the high street law firm in the same way as brokers had previously endured.
What happens next?
The logical conclusion is that the legal services market will benefit those with the scale and marketing nous to stimulate the clear latent demand that exists. Similar to insurance brokers, this competitive marketplace will see inefficient firms on the high street exit the market over the next couple of years. Stronger firms will adapt by re-developing their specialisms and down-scaling their involvement in the consumer-driven routine work to more commercial service offerings and non-standard advice.
For those that continue to operate in routine service lines, providing they can lower their cost base to withstand downward pressure on price, there will still be consumers who continue to choose them. There are always collateral benefits for firms derived from the marketing activities and awareness generated by advertising by the new providers in the marketplace. However, the battle will be fierce. There is a great latent demand opportunity that both QS and The Co-op are looking to take advantage of. This requires a heavy focus on demographics and its relevant marketing appeals. Societal campaigns will be implemented through sponsorship, trade shows and TV advertising. Promotions will be based more around pricing and great effort will be spent analysing their respective brands for predicted performance and social impact. Can the ‘independent’ high street firm survive this? Perhaps by emphasising the advantage of face-to-face advice? I’m not so sure.
Navigating a way forward
The demand for insurance products once meant the demand for insurance brokers. But as the old supply chain broke down, a series of new channels arose to replace it. We still live in the complicated, multi-connected global world with an increasing need for legal advice to successfully navigate a way through. But many routine legal tasks no longer justify the expense and expertise of a lawyer. The difference will be that the demand for legal services will be met by a wider variety of providers. But just as the changing market punished insurance brokers, it rewarded the survivors as well as the new entrants.
The need to be dynamic to survive the market of the future is paramount. Successful strategic marketing is as much about ‘capability’ as it is about meeting ‘consumer demand’. The best response is for firms to accept the changes. Accept consumers will dictate distribution. Accept that strong brands backed by multimillion pound advertising budgets will win. High street firms can compete by re-engineering their capabilities. Firms need to develop entrepreneurial spirits quickly, develop clear game plans and understand the markets they want to attack. They should be prepared to pursue small-scale consolidation on local levels and join networks that provide value.
The brokers that survived scaled themselves. They grew. They improved the quality of their businesses. They acquired so they could afford to invest in technology and could recruit and develop the brightest staff. They grew in specialist areas and brought in high quality management. They were skilled enough to segment their business, and they concentrated on growing profitable sectors. They developed expertise and grew their ranges of added-value services to compete in business areas previously the prerogative of the nationals.
It’s this blueprint that shows the path for high street law firms to follow. History is repeating itself. It truly is a case of adapt or die.
