The power of niche
Has finding a niche been the source of the SME market’s resilience in the face of massive disruption from bigger, or alternative, players? Richard Hill, chief executive of Stepien Lake, comments.
The advent of alternative business structures back in October 2011 saw the tagline ‘get big, get niche or get out’ brandished around as the future of law firms – suggesting that if you were not the biggest (or failed to grow) or the best then you would struggle. Of course, this hasn’t quite played out with the ‘squeezed middle’ and SME legal businesses learning to adapt. And despite market consolidation still gathering pace there are still plenty of diverse legal business thriving in the market. While niche law firms are not a new phenomenon, their capacity and ability to compete with the big boys with their expert knowledge and nimble approach has seen an upturn in their ability to eat into the market share and clients normally reserved for the bigger firms. LexiNexis’ Bellwether Report back in 2014, identified ‘a ‘new breed’ of lawyers who are ‘networked, innovative, often niche specialists who’ve set up their business to compete directly with major industry players’.
Razor like focus, impressive client followings envied by other SME firms envy, a wealth of experience and operational flexibility have provided an attractive prospect for those wishing to exit big firms and build a firm in their own vision dedicated to client service without any red tape hindering their aims.
Niche firms have been successful for years with their lower overheads and agile structures that see them generate healthy profit margins. Their ‘best in class’ credibility can mean that they don’t necessarily have to compete on price as much (yet, they still face the ‘client wanting more for less’ dilemma) and focus on exceptional client service built on personal relationships, expert knowledge and senior-level lawyers from start to finish. Their message is clearer because it is easier marketing and focusing on one area of expertise than, say for example, a regional general practice law firm trying to find a unique selling point to differentiate from the other firms of similar ilk. This is a very difficult proposition, which is why you see so many law firm’s websites looking the same by stating “we are different because…”
With employee welfare more important than ever, niche firms can develop and foster a healthy culture and atmosphere more easily in smaller numbers, and clients can enjoy premium expert advice tailored to their needs in a more relaxed and informal atmosphere with no less professionalism.
The power of niche firms can grow further as new options are explored outside the usual traditional law firm thinking. Opportunities can be jumped on quicker without layered decision making and the emergence of more flexible working, the option to bring in or offer ‘non-lawyer’ ownership (through an ABS) and an investment in professional management roles is creating not just expert law firms but well managed and innovative businesses.
Alternative investment and ownership models not only finance growth but provide new channels of work, other professional expertise and resources. Examples include a niche ABS advising on professional negligence claims being set up with investment from corporate investors from the insurance and finance sector, or a boutique firm advising FinTech clients being funded by tech entrepreneurs forming part of a tech forum group.
Niche firms don’t have to take external investment to build referral networks as they are often referred work from other general practice law firms – they are not seen as competitors (in an ever increasingly competitive market) and actually provide a useful option for firms in being able to refer their clients to and become advisors to the law firm itself.
The lockdown undoubtedly accelerated the change in working practices and interaction through IT. Firms are exploring and collaborating with new start-ups, while the more affordable and better availability of software and tech (outside the long-established legal providers) is leading to smarter ways of working, driving better efficiencies, and enabling easier ways of interacting with their clients’ business and help solve their problems. An example here is a family law specialist partnering with a university to develop tech tools to tackle problems for their clients.
Agility works not just to the benefit of clients as more firms are now considering employee ownership/bonus schemes to retain and attract talent – still the biggest headache for SME firms. This could be a useful defence against the larger firms looking to poach their solicitors with inflated pay increases, the so called Great Resignation, and managing the challenging pay expectations with the current cost of living crisis. At the same time, the ability to outsource office functions and support is now just as readily available to smaller firms – reception, finance, HR, secretarial and IT are all functions that can be supplied or integrated with providers allowing the leaders to focus on core work and business development.
But while the power and potential of niche firms is growing, it is not all plain sailing. The tough professional indemnity insurance (PII) market conditions and a multitude of compliance considerations continue to weigh heavily on smaller firms. Being reliant on a narrow area of law and lacking diversity of work could increase the risks of economic or market turmoil impacting that area. The daily pressures of maintaining a top-level service, the increased admin during legal work, finding the right lawyers and managing the business in uncertain times requires resilience and a determination to succeed.
Niche firms can also be a victim of their success with the lack of succession (and sometimes faltering growth plans as they are nervous about diluting their specialism) as the goodwill and credibility is heavily linked to the experienced principals. Yet due to their status niche firms are becoming a top acquisition target for other law firm’s growth and expansion plans as they look to buy in expertise and geographical presence. This is despite smaller firms’ priority being organic growth (65% prefer organic growth compared to only 16% for growth through M&A) according to the latest LexiNexis Bellwether Report 2022 (Transformation troubles: responding to a new era of change).
The Bellwether Report 2022 also found that confidence was back to pre-pandemic levels for smaller firms having shown their resilience but the legal SME market is now more competitive than ever. Leaders of niche firms that can navigate these uncertain times and those that can manage the risks and promote their unique position will continue to attract new work and remain profitable. For this to happen they will need to invest in professional management roles such as practice directors, operations and finance managers and COOs to continue to grow their power in the market.
