The LB100 debate – All change

David Patient, Travers Smith

In the shadow of Brexit, a general election and an uncertain global economy, we assembled law firm leaders to debate the outlook for the leading UK law firms

Rarely, if ever, has a 12-month period seen such a dramatic change in the prospects, opportunities and risks facing leading law firms. As we assembled a group of law firm leaders at the end of April to mark our annual Legal Business 100 report, the turnaround since last summer in business, legal and political circles is remarkable. The period has been defined by the Brexit vote, sustained political upheaval and the shock US election of Donald Trump, to say nothing of a looming general election and Europe’s largest-ever legal collapse in the shape of King & Wood Mallesons’ local arm in January.

Throw in structural and technology-driven changes gripping the legal industry and you may expect the typical managing partner to be transfixed as the City faces its greatest challenge since the gestation of the euro during the 1990s. Teaming up with Mason Hayes & Curran, we sought to gauge the mood of the industry and find out how leading UK law firms are facing the challenge.

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Mark McAteer, Legal Business: How has the 2016/17 year looked? Paul, it would be good to hear your thoughts.

Paul Roberts, Forsters: The year has seen an 8.7% increase in fee income, which we felt was a good result. It is our lowest increase for six years, but it was certainly as good if not better than expected. It was a year with quite a break at the end of June. Our business is about 55% real estate market, which had a shock from the referendum result. It started to come back in the fourth quarter and we had a much stronger fourth quarter. Our growth is driven by private wealth, which had a very strong year. The tax changes in April meant that group had a really strong end to the year. It has been our strategic aim to grow private wealth and we continue to do that having achieved 15% per annum in this part of the business. A good year but challenging.

Mark McAteer: Nick, does that chime with you?

 

Theo Savvides, Bristows: Our life sciences and TMT focus makes us bullish

 

 

Nick Scott, Brodies: I cannot think of a year in the last eight or nine when we have not had a banking crisis, an economic crisis, general election, independence referendum, or oil crisis. Now we have Brexit. The trick is to plot a path through the turbulence, based on a strategy which identifies the fundamentals of our economy and points to where you think growth can be found. Politics aside, individual sectors have been quite good and we have made progress. The oil price has come back a bit – there is more confidence in that sector. Disputes have held up quite well. Private client has been very good. On the transactional side, there is a lot of private equity. There has been less overall activity, but the quality has been very high.

Mark McAteer: Brodies is one of the strongest performers of the last five years in terms of revenue growth. Will that continue?

Nick Scott: All the Scottish firms have had a challenge this year in transactional activity, but we have had growth in a few places. I still think there is growth for us in the Scottish market.

David Patient, Travers Smith: We have an unusual financial year end, which is 30 June. So all of this financial year has been post the Brexit vote [on 23 June 2016]. Paul used the word ‘challenging’ and that is how I would describe the market. I would be surprised if many firms have significant revenue growth like-for-like. You will see certain firms that do have what appear to be strong results this year are largely boosted by FX gains. I am not overly confident for the next couple of years, either.

James Miller, RPC: It has definitely been challenging. We still have two or three days left. But the UK top-line revenue will be slightly up – low single digit. Most of our gain is in Asia, which has seen real growth, coupled with the FX movement. We benefit from having a heavy litigation focus and in some of our corporate sectors, particularly retail and insurance, there has been a lot of activity.

Chris Lowe, Watson Farley & Williams: When it comes to primary factors affecting financial performance, hours billed and headcount growth are key, not FX. As to the impact of FX, WFW is looking at a 17-20% increase in turnover this financial year. Our cost base has gone up and that will mean our profit line will not increase by the same percentage, but it will still show very healthy growth. We’re also at an advantage as we run most of our business services from London, so we’re benefiting from exporting services, which we account for in sterling. Hours billed are probably a more realistic indicator. They’re up about 12%, which is pretty good, and our strategic focus on the transport and energy sectors is working very well for us. We’re pretty bullish looking forward.

 

David Pester, TLT: There will be more need for firms to collaborate in future

 

 

Mark McAteer: In corporate, David, how do you see the next six months panning out?

David Patient: There is not a great deal of equity capital markets work at present. There is a good amount of M&A and private equity work. You have to find the sectors. Infrastructure is hot. What do I think it is going to do over the next six months, 12 months? Pretty much the same. I cannot see it improving dramatically.

Mark McAteer: Theo, have you noticed a marked effect on your business?

Theo Savvides, Bristows: We had a stellar [2015/16], partly driven by some big pieces of litigation in our competition and patent litigation departments, coupled with good growth in our other practice areas. This year is likely to be flatter for us. The transactional practice has held up well, but inevitably it has taken a little time to replace some of those huge pieces of litigation. Litigation makes up a relatively high proportion of our turnover compared to most other firms, so we are likely to have some spikes and troughs. The long-term trend, however, is good growth and we are feeling confident. We have a few challenges ahead, including the Unified Patent Court (UPC) hopefully coming in at the end of this year, but we see reasons to be positive. Our core sectors of TMT and life sciences are still generating a lot of innovation, and should generate some good work for us.

Mark McAteer: James, your firm has a heavy disputes contingent and private client. Is that going to be reflected in your numbers this year?

James Carter, Charles Russell Speechlys: Yes. Our private clients were facing significant changes in law in the run up to the tax year end and the work involved was huge; we had private client lawyers working 200-plus chargeable hours in March getting the changes through. There was definitely a one-off kick from those changes. Litigation has been busy across all areas – the litigators have had a very good year with some very significant cases in the Caribbean and the Middle East.

Mark McAteer: Ian, what about your firm?

Ian Jeffery, Lewis Silkin: We have had a good run over an extended period of years, having the dual specialisms of employment and creative industries. They have both provided a natural hedge against each other. We see those as being the long-term future.

 

‘After 8 June we’ll have political certainty so clients in all sectors will have to push on with projects.’
Ian Jeffery, Lewis Silkin

 

We will be flat this year in turnover so it is a pause for breath. There have been a number of bright spots. Business immigration is something we do a lot of and there has been a huge amount of interest from clients across all verticals around the future of their people. The transactional work for creative industries following the referendum last year has been more muted. The effect of the night of 23 June was pretty visible in the stats at the time, but I am a bit more optimistic about the next couple of years than some of the voices that I have heard. We are going to have greater political certainty after 8 June, and a very compressed timeline between then and the deadline for article 50, so clients in all sectors are likely going to have to push on with projects.

Michael Chissick, Fieldfisher: It was a terrific year for us – double-digit-plus growth. It is about being strong in certain areas, which I see as being a multi-service firm, multi-niche in effect rather than full service. Take data protection – we have about 25 lawyers working flat out. IP, litigation and tech have been strong for us. A lot of firms are getting a bonus from their non-UK offices because you have an exchange rate lift when converting into sterling.

Micheál Grace, Mason Hayes & Curran: The Trump tax plan may be challenging for Ireland. It was interesting to see the Irish government’s reaction to the announcement today and it was correct, in the sense they said that the real impact will depend on the detail. Certainly the most optimistic sentiment expressed was that it might slow down US FDI globally.

Quentin Poole, Gowling WLG: It is interesting that globally there is a race to reduce corporate tax rates.

David Pester, TLT: We are seeing a big change in some of the industries that we focus on, with new entrants and disrupters in areas like financial services generating new instructions.

 

Quentin Poole, Gowling WLG: In tough times it’s the firms with a strong culture that will pull through

 

 

Quentin Poole: The future is about winning market share. I have always thought it is more fun when you try to beat the tide. The competition between law firms will intensify, because the only way you can win work is to achieve growth at someone else’s expense. Then it becomes about strategy, where you price yourself, your strengths and how you play to them.

James Carter: It is arguably more satisfying to achieve 4% growth in a flat market than doing 10% when the rest of the market is delivering 8%.

‘Brexit might have implications, but English law, English courts and the practices we have will remain central to legal services in Europe.’
David Patient, Travers Smith

Quentin Poole: Scotland is a classic picture of this. If you look at the Scottish market, it has been very difficult for the last five or six years, but Brodies, and Burness as well, your performance has been transformationally different from all of the other Scottish firms.

Nick Scott: What you have to do at the start of every year or, indeed, now every three months, is work out who is going to play in our marketplace and are we strong in those sectors that are going to be active. If you get that done in those individual sectors, then you do get growth.

David Pester: The world is changing dramatically in the business and technological environment. That may drive demand for legal services, when clients are having to adapt and innovate. It may not necessarily completely consume any oversupply [of lawyers], but it may lift it for a period while people adapt. The real problems come for firms potentially five, ten years down the line as structural changes work their way through, if they don’t stay relevant and innovate. I am talking about technology and new entrants.

James Miller: It is very much all about market share. There will be little peaks – there is nobody who is not overexcited about GDPR at the moment, for example. Individual specialist areas will peak, but if you look at the wider portfolio, it is all about market share.

 

Nick Scott, Brodies: There are still growth opportunities to be found in Scotland

 

 

Michael Chissick: You missed off the accountancy firms from the list of threats.

Mark McAteer: Is that going to materialise?

Michael Chissick: PwC is the biggest threat to hit legal services in 20 years, followed by KPMG and EY. The reason I am positive is this discussion has been looking at legal services as a UK industry and many of us are getting a lot of work internationally. There is huge potential for UK law firms to grow on the back of growing their office network. London is still going to be a huge centre for disputes and arbitration. The world is getting more complicated and more heavily regulated. Brexit will throw up opportunities. If you look at the resilience of the UK legal industry over the last 20 years, we have weathered it all, we continued to grow, most law firms are managed by some of the smartest brains out there and we continue to innovate, adapt and thrive. We should be positive.

Mark McAteer: Will Brexit have a material impact on London’s status as a legal services hub?

David Patient: No, not a material impact.

James Carter: No.

Mark McAteer: Why?

David Patient: We have a very resilient industry here in London. We also have the infrastructure. Some jobs may move abroad and there might be some other implications around the edges, but English law, English courts and the practices that we have here will remain central to the provision of legal services in Europe.

Chris Lowe: Brexit is not as great a concern as other issues, such as the underfunding of the court system. Of course, there is the challenge posed by the US firms with whom we’re now in competition in the war for talent. Bigger issues are definitely facing the profession other than Brexit, but we should remain positive as the London legal market is, and should continue to be, very strong and attractive to investors.

Declan Black, Mason Hayes & Curran: To give you an outsider’s perspective, I think there will be tremendous resilience in the UK. But I cannot see Brexit as a positive for the UK in any way and there may be a gradual erosion of the primacy, for example, of UK courts if enforcement of judgments is not nailed very quickly. That will filter into the client community and may lead to optionality of now exclusive choices, which then may over time start diluting the primacy of the UK. However, it is an incredibly resilient sector and I cannot see a material change.

Mark McAteer: Will Dublin benefit from Brexit?

 

‘What worries me is where we are going to get the investment with the models we all run.’
James Miller, RPC

 

Declan Black: I view Brexit as a political tragedy with economic effects that are unforeseeable. The overwhelming consensus in Ireland is that Brexit will be bad for Ireland, but there will be a couple of potential upsides. I was at an event last night where Martin Wolf from the FT spoke. His guesstimate was that 20% of financial services might migrate out of London over three to five years and that there will be competition among the usual suspects – Frankfurt, Dublin, Amsterdam, Madrid – for that market, and if Ireland got between one tenth and one fifth of the financial services that migrated, that would be good. I kind of agree with that. Will that make Dublin a legal centre? It depends on whether [foreign] law firms want to come in and take a view on profitability.

Mark McAteer: Theo, you mentioned the UPC. Do you see there being a material effect?

Theo Savvides: The UPC is a single patent jurisdiction and court for patent litigation covering the European Union less a couple of countries formed by agreement between the participating countries. For the UPC to come into existence, the UPC agreement requires ratification by the governments of the three states where the central division of the UPC will be located – France, Germany and the UK. It looked like Brexit would put the kibosh on that and then last autumn the UK government indicated that it intended to ratify the agreement. The view is that if the UK ratifies it and it goes ahead before Brexit, it is likely that the UK will remain in the UPC post-Brexit. The latest complication is the general election, but assuming UK ratification goes ahead, we see the UPC as a real opportunity. While it will lead to increased competition, it will also create a high-value jurisdiction for patent disputes.

Michael Chissick: Brexit will have a minor impact, but we should not underestimate that people are saying community trade mark registration may need to take place in our non-UK offices. We get a lot of data protection work as the hub for the US, to do pan-European projects, and we are under attack from German, Spanish, Italian firms saying: ‘Britain cannot do that anymore.’ When you go around the City, the infrastructure and investment is already here. Even if Ireland wins, say, 10% of our banking work, there is not the infrastructure and related services to support it. Brexit will have a minor impact and I continue to be upbeat, but we have to keep innovating. I used GDPR as one example. Most firms find they do well by being absolutely expert in specialist areas. Focus and dominating an area are the ways you grow now.

 

Chris Lowe, Watson Farley & Williams: A sea change in mentality is needed for investment in business services

 

 

David Pester: There is always the question of investment capacity and scale. At least two of the big four accountancy consultancies have already been able to leverage large resource quickly so there is undoubtedly a question about investment capacity for [law] firms. To be relevant, there has to be significant investment. The mechanism for achieving that investment capacity will vary from organisation to organisation.

Michael Chissick: There is no mention of the dreaded AI, but we all know there is something happening in the next few years around automatic document generation, contextual search and AI, and that it will all take a huge amount of investment.

David Pester: Or you collaborate. Even if you are one of the largest law firms globally, you may have limited investment capacity compared to significant global consultancies and large corporates, and what they have already developed using technology. Deloitte have gone from 40 people to 400 people in Shoreditch developing technology services. I am not saying big is best, but the tension of scale and investment capacity seems to be flowing through much of what is shaping the market at the moment.

James Miller: The big players are not interested yet in investing in the solutions for lawyers, because we are just not a big enough market. Therefore, if you want to go out and purchase, say, a claims management system, at the moment you are always adapting something that has come from another professional service. What worries me is, where are we going to get that investment on the annual models we all run? It is going to be very difficult to see where that is going to be sourced from.

Michael Chissick: There are two ways this investment can happen. Either the big legal IT suppliers like LexisNexis say they are going to come out with solutions, which we will all buy, or firms think the future is to have their own proprietary systems and invest heavily in developing them for use just by themselves. That puts most of us around this table at a disadvantage compared to much larger global law firms.

 

Declan Black, Mason Hayes & Curran: Firm leaders are sceptical of AI as a replacement for good client relationships

 

 

Theo Savvides: Does anybody have a sense that managing partners in any other European country would be having a conversation like this in terms of AI?

Declan Black: My sense is that people who run law firms are remarkably similar jurisdiction to jurisdiction. They tend to be people who are technically able and aware that relationships matter hugely. They are often distrustful of things touted as something that trumps relationships. Take AI – a lot of law firm leaders will be suspicious that people will buy a machine-like output that will trump personal judgement and relationships.

Chris Lowe: Before an investment culture can come to life, there needs to be a sea change in partners’ mentality when it comes to recognising the importance of investing in the business services of law firms – not just AI or IT, but everything from finance to HR. This change in mentality is in many ways the biggest challenge to overcome.

Mark McAteer: Does there need to be a fundamental shift in mindset?

David Pester: There should be, in the business model from full distribution to retention for investment, but one has to ask why change is difficult and one usually ends up thinking about the political forces at play in a particular law firm. How might that ever change? Only if there is some shock to the market, such as the entrance of a highly-resourced, highly-aggressive competitor that takes a different approach. Right now, though, which firm is going to go first at withholding one third or more of its annual profits for investment in technology in a significant way?

 

‘Most UK law firms are managed by some of the smartest brains out there. We innovate, adapt and thrive.’
Michael Chissick, Fieldfisher

 

David Pester: I have seen recently some firms beginning to encourage a percentage of profit each year being deployed into capital. Our market tends to talk about a cash call. It is not that; it’s about building investment capacity.

James Miller: For outside investors in law firms, the track record does not look great. Whether it has been the banks, private equity, VC money, we can all think of quite a few examples where people have been burnt. I could see a VC investing in something that can be very highly commoditised or IT’d because they will understand that and can see the return on that capital.

Theo Savvides: It has already been done: CPA Global started out as an outsourced service for patent annuities set up by a patent attorney firm. Private equity invested in that.

Declan Black: It is a project-based approach to investment. If you take the offshore firms – their investment in fund administration businesses turned out to be very successful. Interestingly, data privacy is one place where it is open field for competition between the accountancy firms, the Accentures and the law firms, because it is really a legal-led discipline.

Mark McAteer: Are there any lessons that can be learned from KWM’s demise?

Declan Black: It is just another example of how culture trumps strategy every time.

Quentin Poole: When times get difficult, the sustainability of the firm comes down to the culture. The firms that will come through are those who have worked hard on creating a cohesive culture which holds the partnership together as it sails through choppy waters.

Mark McAteer: Does the KWM saga expose the problems with a verein-structured firm?

Theo Savvides: Vereins are a way of setting up an international network at relatively low cost and quickly, and managing risk. I just wonder if it comes at a price, in terms of buy-in to strategy, buy-in to culture.

Chris Lowe: One of the messages that is coming across from everyone around this table is the importance of a proper strategy tied to culture. KWM didn’t appear to have any strategic focus and hence was a little lost when it came to developing a proper strategy, which then affected its culture and vice versa. Basically, KWM lost its identity.

Mark McAteer: We have come to the end of our time. Thank you very much. LB

mark.mcateer@legalease.co.uk