The financial impact of SMEs' failure to take care of their Legal Business
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What’s this all about?
At LawBite we believe that law in the UK should be accessible, affordable and clearly understandable for the UK’s business owners. At the start of 2016 the Department for Business Innovation and Skills reported that 99.9% of all private sector businesses were small or medium-sized (SMEs) and that these businesses provide employment to 15.7 million people.
It’s unarguable that these businesses are the lifeblood of the UK economy, so as part of LawBite’s campaign to drive change in the legal industry we asked YouGov to conduct a unique, comprehensive and independent survey of UK Small Medium Enterprises to discover the financial impact when they fail to take proper care of the legal issues they face.
SMEs are losing more than £13.6 billion a year by failing to take care of their legal issues
The economic analysis of the YouGov results was carried out by the Centre for Economics and Business Research (Cebr) . We think there is an important message here for every business owner so we wanted to share the highlights with you.
The results are startling, with an upper estimate indicating that SMEs are losing more than £13.6 billion a year by failing to take care of their legal issues.
What are the risks to your business?
The survey has provided some shocking revelations that should make every business sit up and take notice. It’s virtually impossible to imagine what impact the loss of £13.6 billion might have on the SME economy so let’s break it down into real-world terms and look at the risks every business faces:
Firstly, we discovered that the average SME in the UK is likely to encounter more than 8 legal issues a year.
The business sectors that experienced the highest average number of issues annually were within Membership Organisations (21), Food and Beverage (18) and Business Administration and Support Services (13) sectors.
The average SME in the UK is likely to encounter more than 8 legal issues a year
Secondly, we found that of the legal issues SME’s experienced, 43% resulted in costs of £5,000 or more.
The highest average annual loss was found in the Business Administration and Support Services (£44,958), Food and Beverage (£36,011) Publishing, Broadcasting and Media (£17,499), Finance and Insurance (£15,976), Construction (£13,028) and Charity/Voluntary (£12,601) sectors.
What are the most common issues that SME’s face on a day to day basis?
More than half of all issues were found to be in five key areas:
- Disputes (13.2%)
- Employees and Key Contractors (12.5%)
- Customers and Suppliers (11.4%)
- Terms and Conditions (9.2%)
- Software (9.1%)
- Others (44.6%)
Across the UK SME economic spectrum the highest amounts are estimated to have been lost in the following three areas:
- Disputes (£1.7 billion)
- Employees and Contractors (£1.6 billion)
- Customers and Suppliers (£1.6 billion)
But it won’t happen to me… will it?
Given the number of incidences of these kinds of issue, SMEs are overoptimistic about the prospects of future losses occurring because of these problems - with only 12% thinking these issues are ‘likely to pose a significant risk’ to their business.
SMEs assume that risky outcomes are more likely to happen to other businesses than to themselves
Interestingly, this percentage more than doubles (25%) when they are asked to forecast whether these problems are likely to affect other businesses rather than their own. SMEs follow the typical trend in assuming that risky outcomes are more likely to happen to other businesses than to themselves.
Do SMEs think lawyers help reduce risk to their Business?
Having uncovered the number of times issues arise and in spite of the potential cost to SMEs of the losses involved, we found SMEs are remarkably casual about using lawyers to reduce their risks.
SMEs are remarkably casual about using lawyers…
We asked SME’s about their expenditure on legal expertise and tellingly 60% were not even able to say how much they spent on legal services last year. For those SMEs that did know, the majority (59%) reported spending less than £1,000 per year on lawyers.
However, paradoxically SMEs do understand that using lawyers is likely to make them better off. Of those SMEs who responded, 83% said that using a lawyer to deal with legal issues with commercial impact on the business had reduced the risk of higher costs, and 86% of those who responded (and didn’t use a lawyer in such instances) said that it could have reduced the risk of higher costs and losses if they had.
but SMEs do understand that using lawyers is likely to make them better off
SMEs were also asked to rank the possibility of commercial legal issues arising against the risk of typical SME problems arising such as: cash flow issues, supply problems, damage to reputation, problems from key staff leaving the business or data security problems.
83% said that using a lawyer reduced the risk of higher costs
The analysis showed that for every 10% extra an SME spends on legal costs, the chances of any of these other risks ranking ahead of commercial legal risks rises by as much as 90%. In other words, SMEs perceive that if they spend more on their legal budget then the relative risk of commercial legal issues arising for their business falls sharply.
Why are so many SMEs not prepared to spend money on lawyers?
Our results show that even though SMEs know legal issues affect them frequently and cost them significant amounts of money, they are reluctant to invest in lawyers.
However, SMEs do take out insurance policies against a wide risk of other contingencies (directors insurance, employer’s liability, public liability). Insurance companies typically report that only 9% of SMEs make an insurance claim a year, whereas this YouGov survey shows that on average SMEs encounter more than 8 legal issues a year with significant adverse consequences from commercial legal issues.
Yet SMEs are far less likely to want to protect themselves by taking out the simple ‘insurance policy’ of using a lawyer than they are by taking out an insurance policy against other risks.
A likely underlying cause for SMEs’ reluctance to use lawyers lies in SMEs attitudes to law firms, which the YouGov survey also covered. 70% of respondents say that legal documentation is not easy to understand, while only 8% say that legal fees are good value for money.
Even though SMEs know legal issues affect them frequently and cost them significant amounts of money, they are reluctant to invest in lawyers
Only 1 in 5 SMEs rate law firms as ‘good’ in terms of ease of access (how easy it is to contact a lawyer; how speedy their response is and how easy it is to get a situation alleviated).
Only 1 in 5 SMEs rate law firms as ‘good’ in terms of ease of access
However, the survey results indicate that SMEs are able to clearly articulate what they do want from lawyers and law firms. Of those who gave a response, over 4 in 5 ranked all of the attributes below as important:
Clearly, SMEs are not getting enough of these attributes from traditional law firms in order to persuade them to alleviate their risks from legal issues by engaging lawyers routinely.
What should SMEs conclude from this research?
As an SME business owner in any industry, your conclusion may be that engaging properly with your legal issues and guarding against them is going to potentially save you tens of thousands of pounds a year. You are far more likely to have a legal issue than any insurance claim so you’d be better off spending as much or more on legal protection and advice as you do on your business insurance policies.
The biggest issues (and most expensive ones) you’re likely to face are all often easily preventable. Simple matters like having contract terms and conditions checked or drafted properly to ensuring your employment or contractor terms are clear and up to scratch will de-risk your business rapidly.
The biggest issues (and most expensive ones) you’re likely to face are all often easily preventable
If you're not sure what you might need, one easy next step is to take our free legal health check - answering the same questions our respondents did. This will show you what issues you may need to protect yourself against. You can then have a free consultation with one of our expert LawBriefs to go through your results and identify areas of concern and what you could do about them.
If you’re reading this survey as a member or partner of a UK Law Firm then you should be shocked at how the industry is perceived by SMEs and how they’ve been underserved for so long. We urge you to join us on our mission to make the law more accessible, understandable and affordable for UK SMEs.
The survey asked SMEs to indicate their level of losses from a wide range of legal issues with commercial impacts. These comprised issues with:
- Customers and Suppliers
- Employment and Consultants
- Trading terms and conditions
- Intellectual Property
- Loans or investments
- Decision making in, or ownership of their business
- Regulatory matters
The survey covered over 20 business sectors including:
- Agriculture, Forestry and Fishing
- Arts, entertainment, recreation, cultural and sporting
- Business administration and support
- Charities and voluntary organisations
- Education, health and social work
- Finance and insurance
- Food manufacturing and distribution
- Food retail and wholesale
- Membership organisations
- Mining and utilities
- Professional scientific and technical
- Publishing broadcasting and media
- Transport and storage
- Travel and tourism
All of the findings have been extensively analysed by the Centre for Economics and Business Research (Cebr). The statistical highlights of the narrative above are only a portion of data collected and analysed. We welcome any requests to discuss the findings in more detail.