Transaction Costs, Information Asymmetry, and the Rise of Online Legal Services

In economic theory, transaction costs are the expenses incurred when participating in a market beyond just what the good or service costs. Transaction costs include finding information, negotiating the terms of the agreement, and enforcing the agreed terms.

Transaction costs have historically meant that small businesses could not afford to participate in the legal services market. Examples of transaction cost barriers include: finding the right solicitor, understanding what is included in your engagement, managing your retainer, bill payment processes and so forth.

Transaction costs are now significantly reduced as a result of the online availability of legal services. The standardisation of the consultation process, the ability to communicate via digital means, and the removal of the requirement for a formal retainer have created the opportunity for qualified legal advice to be provided on a per-question basis, making it economically viable for SMEs. The volume of unmet legal needs in England and Wales, according to the Legal Services Board, is in the tens of millions of incidents each year. For SMEs, unmet legal needs are usually reflected in avoidable disputes, regulatory penalties and inefficiencies in contracts.

Revolutionary services such as the consultantlm.uk legal consultancy platform provide a structural resolution to the failure of the market to connect small businesses with the qualified professionals able to provide legal solutions to their questions.

The economics of legal risk management follows a basic principle: prevention is cheaper than cure. For example, reviewing a contract before signing it will cost less than litigating in court when the relationship breaks down; auditing employment procedures before making an employee redundant will cost less than defending a claim for unfair dismissal. Obtaining advice from a qualified solicitor in relation to data protection risks and liability will also be cheaper than dealing with the fallout after a data protection incident. For businesses who have historically avoided the cost of seeking legal advice, the advent of digital consulting platforms will change the cost equation considerably.

There is also an asymmetry of information argument being made about the UK’s small business sector. Most small business owners do not have a sufficient legal knowledge base to properly assess their own risk exposure. For example, a standard supplier contract may contain clauses that are not enforceable under UK law and/or an employment contract may not contain provisions that comply with the Employment Rights Act 1996. Accessing a qualified consultantlm.uk consultant removes that information asymmetry; the business owner moves from an unknown risk to a known risk, and is therefore able to make an informed and rational decision on how best to address that risk if they choose to.

Market studies conducted by the Competition & Markets Authority in the UK have pointed to numerous areas of concern regarding access to legal services for both individuals and small businesses. The CMA has identified pricing transparency, the accessibility of legal advice, and the quality of legal advice and assurance mechanisms as areas where the legal services market is not functioning well for consumers and small business users. Online legal consulting platforms represent a market-level effort to provide consumers and small business users with:

• Increased price transparency
• Increased accessibility to legal advice
• Improved quality of documentation and advice compared with what traditional solicitor engagements are able to provide

From an economic perspective, the development and maturation of the online legal services market serves to provide a greater understanding of their legal position among businesses, leading to improved compliance with contracts, more efficient dispute resolution, fewer unresolved disputes, and greater compliance with regulatory requirements. The cumulative effect of these factors directly impacts overall productivity and economic growth.