Why things stay the same

A common refrain amongst those interested in improving the way legal services are provided is that there is too much similarity in the market. Few law firms differentiate themselves fundamentally from the rest, and there are only a handful of different business models available to select from. The assumption that novel business models will improve competition for the benefit of clients surfaced again in a policy paper published by HM Treasury at the end of last week, “A better deal: boosting competition to bring down bills for families and firms”:

2.10 According to a recent survey by YouGov, 62 per cent of adults have used a law firm or solicitor at some point in their lifetime and the cost of legal services is now considered the most important factor when searching for a legal representative.⁷ The government wants to ensure that innovative businesses are able to enter the market, providing greater choice for consumers. Alternative business models are around 15 percentage points more likely to introduce new legal services than other types of regulated solicitors’ firms.⁸

The policy paper has been analysed in more detail by Nick Holborne on the Legal Futures site and by Dr Steven Vaughan at the University of Birmingham, so I just want to raise an eyebrow at the idea that new business models will deliver what the government seeks.

Law firms: inevitable isomorphs?

Earlier this week, prompted by a blog post on a completely different topic, I read an article from the American Sociological Review of 1983: “The Iron Cage Revisited: Instutional Isomorphism and Collective Rationality in Organizational Fields” by Paul J. DiMaggio and Walter W. Powell. I suspect that this is a well-known piece in the right circles, but I had never seen it before. As the authors state, they set out to answer the question why there is so little variation between organisations in the same field.

Once disparate organizations in the same line of business are structured into an actual field (as we shall argue, by competition, the state, or the professions), powerful forces emerge that lead them to become more similar to one another.

This similarity is termed ‘institutional isomorphism’. As one reads further into the article, it becomes clear that law firms and other providers of legal services are under the same pressure to conform to a particular model, which thereby limits the variation between them. DiMaggio and Powell point to three types of pressure acting on organisations in the same field:

• Coercive isomorphism — resulting from both formal and informal pressures exerted on organisations by other organisations on which they are dependent and by cultural expectations in the society within which they function.
• Mimetic processes — in conditions of uncertainty, organisations may model themselves on other organisations.
• Normative pressures — these arise from professionalisation, especially when (a) there is a common cognitive base derived from universities and professional training institutions and (b) strong professional networks arise, spanning organisations.

It seems clear to me that these three components exist in the business of law. DiMaggio and Powell’s work appears to explain why differentiation in the sector is minimal, and why changes in form tend to spread across the sector fairly rapidly. It may even suggest that new entrants will be only temporarily distinct from their more traditional competitors.

Whither competition?

The government’s policy paper seems to suggest that deficiencies in competition are causing the public to be poorly-served, particularly in areas such as probate, conveyancing and litigation. Conveyancing is singled out for particular criticism:

2.20 The government wants to consider and address the way the real estate and conveyancing markets have developed around the existing regulatory frameworks, encourage greater innovation in the conveyancing sector and make the legal process more transparent and efficient. The government will therefore publish a call for evidence in the New Year on home buying, exploring options to deliver better value and make the experience of buying a home more consumer-friendly.

As a former competition lawyer, it is a little surprising to hear legal services mentioned as an example of poor competitiveness. Competition law is concerned broadly with agreements between entities that might reduce or eliminate competition, and with situations where markets are (or might become) dominated by one participant. My instinctive view is that neither of these situations prevails at the moment.

In political terms, however, I understand that competitiveness has a different complexion. Even in this more general sense, though, I am far from convinced that traditional legal services providers are the right target.

The policy paper follows an Autumn Statement in which the Chancellor announced restrictions on small claims in cases of personal injury and on damages for whiplash injuries. These changes make it harder for firms specialising in this kind of work to be confident about future income levels (as shown by a sharp drop in the share price of Slater & Gordon — one of the largest such firms). It is difficult to imagine that such fiscal uncertainty will tempt many new providers into that market. Instead, it is possible that the pace of consolidation will increase. This is one situation in which size may be a safeguard against changes in the market. Without close examination of the market, my hunch is that PI work is one area in which legal services comes closest to being dominated by a small number of very large firms. Consolidation will only worsen the competitive position.

Turning to conveyancing, it is interesting that the Treasury’s view is that the problem is a lack of innovation and low levels of transparency and efficiency in the legal process. It is a long time since I bought a house, and I was never a real estate expert, but my impression is that the last 25 years has seen a significant change in conveyancing services. The cost of conveyancing fell significantly when it ceased to be the exclusive preserve of solicitors in England & Wales. Domestic conveyancing services were also in the vanguard of developing legal technology. It is still the case that conveyancing systems tend to be much more sophisticated than those in other areas of legal practice where the volume of work is lower and there is less price sensitivity.

The hidden player

Returning to the DiMaggio and Powell paper, it is interesting to note one of their hypotheses about the factors determining the extent of isomorphism in any given field:

The greater the extent to which the organizations in a field transact with agencies of the state, the greater the extent of isomorphism in the field as a whole.

All legal services providers engage with the state in some way, even if it is only to apply or comply with laws or regulations. Litigation and conveyancing, however, require a deeper engagement with state agencies. Litigators are accustomed to working with the courts and their rules, whilst land transactions will often involve agencies such as the Land Registry, HMRC, local authorities and so on. The behaviour of any or all of these bodies will have an impact on the way related legal services are provided to the public.

A policy paper, such as the current one, which examines only the private actors in a process without considering the way state agencies might affect quality of service must be a flawed one.

Isomorphism amongst legal service providers will probably persist. Where changes are successfully introduced by new entrants into the market, it is likely that they will be rapidly copied by traditional firms. Even in this homogeneous market, the number and variety of participants means that there is almost certainly no risk of market dominance. If competitiveness is considered more broadly, the public sector plays a significant part in those areas where service failure has been identified. It seems facile, therefore, to assert that the answer to all our problems is more variation in business model.