Is competition in the legal sector stifling innovation?

The global legal sector has undergone rapid transformation over the past decade. The rise of legal tech start-ups and alternative legal service provides (ALSPs) continue to challenge the traditional firm model. Increasingly, law firms are turning to technology and innovation to give them a competitive edge in a market that is all at once highly saturated, segmented and fragmented.

The 2025 Nobel Prize in Economic Sciences recognised the work of Joel Mokyr, Philippe Aghion and Peter Howitt for their pioneering research into innovation-driven growth. Their insights into how different levels of competition can encourage or stifle innovation offer a compelling lens through which to examine the current state of innovation in the UK legal sector.

Lawyers are known for being innately conservative, cautious and risk-averse, particularly where technology is concerned. One of the most provocative ideas from the Nobel laureates’ work is that too much competition risks stifling innovation. In a sector like law, which is home to a wide range and variety of firms and where tradition and precedent dominate, this counterintuitive insight deserves serious attention.

In the UK, even the largest full-service firms have just a tiny fraction of the market share. No single player has sufficient clout to innovate effectively and drive meaningful and lasting change across the sector. And the wide range of areas in which law firms could innovate – in specialist practice areas or facing different sectors – can lead to even an innovative firm only innovating in a small proportion of its overall practice.

What’s more, as clients rein in spending and law firms feel growing pressure to reduce their fees, those market players that are focusing their energies on technological advances, with the investment cost that involves, may find they are increasingly being undercut by competitors.

There is a growing chasm between how some traditional law firms are approaching innovation compared with more agile, ambitious disruptors. Bizarrely, this is not creating a competitive urgency for firms to innovate or radically rethink their delivery models.

Despite the noise around innovation, 97% of the legal market remains traditional law firms and in-house legal teams. Alternative legal service providers (ALSPs) may now be considered mainstream, but they still only have around a 3% share in the global legal services market.

By contrast, the ‘Big 4’ has dominated the accountancy sector for years, ensuring that these four players are continuously under pressure to innovate and stay on top. This has also given them the necessary agency to bring change and edge out smaller competitors that may be snapping at their heels. The legal market has no such incentives as no firm has the scale or urgency to achieve let alone retain market dominance.

However, historically, attempts by the Big 4 to gain any significant presence in the legal sector have largely failed. Legal functions have remained a relatively small part of their core advisory practice. More often than not, internal blockers stymie these departments, meaning their lawyers are regularly conflicted out of work. This has severely limited their ability to attract top-quality lawyers and clients and make their mark on the legal sector.

A lot has changed since Coward Chance and Clifford Turner joined forces in 1987, introducing the first 'mega firm' to the UK's legal landscape. From A&O Shearman in 2024 to Herbert Smith Freehills Kramer earlier this year, international mega-mergers are now the norm rather than the exception. However, there is still limited consolidation potential at the top end of a market that is dominated by a relatively small number of firms servicing the largest corporates.

Below this lies an abundance of national, regional, high street and boutique law firms as well as sole practitioners that are chasing smaller, often more niche clientele and individuals. The private equity-backed wave of consolidation in law firms has created ripples across the legal market. But this is likely to remain limited to specific regions, practice areas or types of clients. Opportunities for private equity-backed firms like Lawfront Group or Knights to target the small and medium enterprises (SMEs) segment, for instance, are there for the taking.

While the market continues to evolve, law firms must be realistic first and foremost about the potential impact of generative AI and other technologies on their business model. Only then will they be in a position to look at how they can use innovation to make them more efficient at what they are already doing. Indeed, the generic AI tools available in the market are primarily only being used for incremental efficiency gains, the effect of which will become equalised once their use is ubiquitous. Any innovation gap is unlikely to be sustained.

Therefore, it will be critical for firms to think more strategically about what work in-house teams will increasingly take on themselves as a result of AI. This could influence whether firms remain full-service or re-focus their efforts on specific sectors, with the potential to apply different business models for different types of legal work. Managed legal services works well for some areas, but there's still clear demand for high-quality, tailored advisory work in other practice areas. Gone are the days that one business or delivery model fits all. Law firms need to recognise this to ensure their growth is sustainable in the long term.

There's great potential for the tech-savvy, digital native generation of lawyers that are rising through the ranks of law firms to turbocharge innovation across the legal sector. Like AI itself, however, this generation can be perceived as a growing threat to law firms’ old guard.

Regardless of age, an enlightened leadership that understands AI's full potential, its impact on resourcing and delivery models and has the necessary vision to identify a clear sustainable technology strategy will be much better placed to bring about radical change in a way that satisfies all generations.

The Nobel laureates remind us that innovation is not inevitable – it must be focussed and deliberate. For law firms in the UK, this means acknowledging that staying still is not an option, regardless of which part of the legal sector you are competing in. Deploying a careful balance between tradition and innovation is the only way to drive sustained growth.