The Global 100 debate – Will stars or institutions define the law’s elite?

Alex Novarese, Legal Business: Ten years ahead, what will a global elite firm look like?

Charlie Jacobs, Linklaters: I don’t think it’s going to go the accountancy way, where you just go bigger and the Big Four dominate. A lot of focus seems to be around profitability and if you are driven by that metric, you get a certain type of firm. When I started, it was the Magic Circle in London and a certain category of US firms. We have seen lots of change. But I don’t see just one model prevailing.

Alex Novarese: What will be the revenue range for the global elite in ten years?

Charlie Jacobs: Bookends of $2bn at the bottom. I don’t see a $20bn firm. Even $10bn gives major conflict problems.

Alex Novarese: Maybe the $7-8bn range?

Charlie Jacobs: Yes.

Jonathan Field, SSQ: From a recruitment perspective, partners come to us for analysis on the criteria to be considered part of the global elite. First is revenue/size – you need to be at least $1bn+. Partners are also looking for strength in the US, both east and west coast, London and Hong Kong. Finally they look at profitability of at least $2.5m PEP. Apply those filters – you will be surprised how few firms tick every box.

‘I don’t think global and elite are synergistic. You can be global, but you may not be elite.’
Suhrud Mehta, Milbank

Alex Novarese: You have just written off the Magic Circle.

Paul Maher, Greenberg Traurig: Think about what Amazon and people like that are doing in other industries – it would be a bad idea to assume we will be in control of our own destiny.

Stephan Eilers, Freshfields Bruckhaus Deringer: Technology will not take the specifics of our work, which is privilege, protecting clients and having knowhow in legal matters.

Paul Maher: Why?

Stephan Eilers: There are principles of education and the regulatory framework that it will be difficult for AI to replicate.

Sebastian Rice, Akin Gump Strauss Hauer & Feld: Among the firms that maintain huge numbers and massive global footprints, there will be those that reduce in size because AI will take away the need for loads of people. However, we will be much more efficient; profitability could go much higher.

Alex Novarese: Is it realistic to think major firms will get smaller? I don’t know of other industries that followed that path.

Sebastian Rice: Yes, because clients will be demanding greater value. They are not going to pay for lots of junior lawyers.

Richard Price, Anglo American: I worry about the implications of technology. How are you going to train junior associates? What will the pipeline look like for trainees, associates and, ultimately, partners? That puts the law firm model under stress.

Alex Novarese: Can’t a law firm have multiple structures? You have what is a traditional law firm structure with a partnership, but they could build large complementary businesses, perhaps out of hubs like Belfast with different skills and structures.

Richard Price: I think that will be essential.

Alex Novarese: That suggests you may have an $8bn law firm and the conventional law firm is half the revenue and then there is a huge professional services operation that uses a whole range of other skills.

‘Throwing junior lawyers at things is not happening any more. We have to invent other ways to serve the client.’
Mike Francies, Weil Gotshal

Suhrud Mehta, Milbank, Tweed, Hadley & McCloy: I don’t think global and elite are necessarily synergistic. You can be global, but you may not be elite. AI is not going to hit elite firms first.

Paul Maher: Do you not think the elite are going to invest in [IT] the most?

Suhrud Mehta: It is very difficult to see how AI competes with what David Higgins does.

Paul Maher: It is just a part of the process.

Steven Davis, Proskauer Rose: If you look at AI and disruptors, say an Amazon or Apple, the technology in law is not disruptive. It is not like in diagnostics, where you hear how they can better diagnose what illness you have. Therefore, part of what the clients are looking for is the trusted adviser.

Craig Pollack, Covington & Burling: I agree with what people have said subject to this caveat: our ability to predict is not great. However, I think there will be a law firm that has $7bn in revenue. I doubt it will be an elite firm. We are going to have firms that are elite but are super focused on areas they are really good at. It is going to be difficult to attract the kind of talent we want into huge factories of lawyers. Elite and niche will be the way forward.

David Higgins, Kirkland & Ellis: I don’t think there is a one-size-fits-all solution. There will be firms that will be very global, very large, doing lots of different products and methods. Equally, there could be niche firms doing very high-end work on a very profitable basis in one or two geographies. [But] you have to stick to your model.

Alex Novarese: Kirkland has a tightly restricted model, but that is an outlier. Most lawyers never saw revenue they didn’t like the look of.

Charlie Jacobs: I do not think there are many firms trying to be full service anymore. You do not want to be caught in the mid market, because you get hammered.

‘I do not ask to see the numbers. I can work out whether I want a partner or not with four questions.’
Charlie Jacobs, Linklaters

Alex Novarese: But huge amounts of what top firms do is in the middle.

Charlie Jacobs: I do not think so, because people have a price threshold in the same way banks have. GCs have so much choice nowadays you do not need to go to the same person to do everything.

Mike Francies, Weil, Gotshal & Manges: To think technology is not going to affect our business goes against history. A lot of what we did, throwing junior lawyers at things, is not happening any more – we have to invent other ways to give value and serve the client. It is just becoming a more competitive world. What clients want is top quality and service but also efficiency.

Alex Novarese: What are the strengths the Magic Circle should play to over the next ten years?

Stephan Eilers: It is going to be one market. What Magic Circle firms bring to the table that clients like is global regulatory reach.

Alex Novarese: But is there not an elephant in the room wearing a Stetson, with American regulatory agencies and the US law issue?

Stephan Eilers: The winning element is when you understand the regulatory arena on both sides of the Atlantic. That is an advantage of the European firm like ours and that is difficult to replicate.

Charlie Jacobs: It is phenomenal to think about the firm as an 180-year-old brand. We have always found it easy to recruit the best talent. We feel very strongly that you have to get your culture right. Law firms have become so wrapped up in themselves and comp, which clients find offensive. Go back to these questions: is it a place you are proud to work at? Is the culture great? We do a lot of that stuff well.

Richard Price: Clients put a lot of emphasis on culture and the things Charlie is describing more than you might think. We see a difference between firms that are more traditional and firms that have an eat-what-you-kill structure in terms of collaboration.

Craig Pollack: I would have stayed in a UK firm my entire career, but what prevented me moving to a US firm 15 years ago was concern about culture. It turns out it is not [very different]. However, I do agree traditional UK firms have something special in the way they treat and train people. That should not be lost.

‘I do not understand what is so different about our industry that people will not float. Everyone else has.’
Paul Maher, Greenberg Traurig

Mark Rigotti, Herbert Smith Freehills: Compensation, though, is heading one way: towards more flexibility. It is a question of extent and how you keep the best of the culture. Compensation is not a killer app, but it is an untold chapter for the UK-origin firms at the moment.

Mike Francies: I agree with Charlie, but I am not sure it is a differentiator. We have the same issues and aims at our firm, just it has a US headquarters. Culture and how we treat our people is just as important to us.

Stephan Eilers: Culture is more than just a pleasant working environment. We also focus on a culture that can succeed and that is where the US firms are superior to European firms. Freedom to succeed enables people to deliver results without the consultation of 20 partners and two committees.

Paul Maher: The firms that have succeeded over the last 30 years have mobilised a sufficient number of partners to invest. This is true of both sides of the Atlantic, whether US law firms coming to London or English law firms that convinced a generation of partners to invest for the benefit of future generations. My point about Amazon was that nobody knew who they were 15 years ago. If you are looking for the DNA in an organisation, a law firm that will succeed in future is going to need that kind of vision. That is not an English or American thing; it is a sine qua non for firms that have succeeded.

Alex Novarese: I agree. The model of Magic Circle firms from the mid-1980s to 20 years later was based on smaller, centralised firms with charismatic individuals who galvanised the firm – they begged, borrowed, stole and threatened to reshape these businesses very quickly in ways that were remarkable. The Magic Circle is currently in flux between that model and… something else.

Hamish McNicol, Legal Business: Will a major law firm float?

Steven Davis: I do not think it is going to happen in the next ten, 15 years. It has been mainly law firms around the process end of the industry. However, it’s an interesting dynamic when lots of other professional services businesses have availed themselves of capital markets.

‘One thing that is going to impact the market, perhaps even more than technology, is the emergence of the gig economy.’
Jonathan Field, SSQ

Suhrud Mehta: I firmly believe elite firms are not going to be funded by the capital markets. Those firms have very little debt. Strong firms with a strong P&L are going to be comfortable acquiring talent without the pressure of the markets breathing down their necks.

Stephan Eilers: The real question is takeover by the Big Four. When does one of the Big Four [say to] 200 law firm partners: ‘You will make the return that you would make in an IPO situation.’ With all the regulatory attacks on the Big Four, splitting up their businesses, the conflict situation might change so their whole advisory business might go away.

Suhrud Mehta: Will they make the same kind of profitability as the huge law firms?

Stephan Eilers: No. They will not get into that league and therefore have to try to buy it.

Paul Maher: I do not understand what is so different about our industry that people will not float. The fundamental point is maybe people do not know what to do with the money. I still query why we think this industry will not go in that direction, since everything else has.

Charlie Jacobs: Law firms do not like that level of disclosure about their client business and neither would their clients. Law firms like to run themselves on a longer-term basis, not quarterly reporting. Sometimes the hardest decision is not taking on business, for conflict or commercial reasons. Banks had to IPO because they needed capital due to their business model. People will try and will get it wrong, but I do not think there is any firm here I could see doing it.

‘Millennials are interested in the work, interested in the prestige, but don’t necessarily want to be in the office long hours.’
Melissa Butler, White & Case

Paul Maher: Suppose your business plan is to become the largest law firm in a region. Why would you not take outside investment? Would that not be the right thing to tell the next generation? ‘We are going to deploy that capital to build a business that would take us 35 years and do it in three to five years. That is in your best interests.’

Charlie Jacobs: That is a rollup model.

Paul Maher: No, that is a business plan model. That is: we need to be big over here.

Alex Novarese: You may get investment into an LPO-style model and if it worked, it’s improbable it would not impact major law firms. One reason capital flows are termed ‘liquidity’ is that money is like a weight of water pressing down: it only needs to find one bit of a barrier to leak through. Do we think the dam will be watertight over the next 20 years? I do not believe in that kind of exceptionalism. Law has certain things that would make it difficult to combine with outside investment but not enough to completely stop it.

Hamish McNicol: Rapid expansion is one catalyst why you would look at it. Are there any other reasons?

Suhrud Mehta: We have seen it with firms that did shoot for the stars. They were borrowing to buy the stars.

Charlie Jacobs: AI is an interesting one. You might not need a huge amount of money, but more money than the partners are willing to put in. I would still be surprised if people did that.

Gareth Quarry, SSQ: Maybe floating will also give you retention tools. One of the biggest issues is you are not going to have enough high-quality talent for the growth you anticipate. Large droves of Millennials want to leave private practice. Those who [remain] will become ever more expensive, because you will all be racing to get the top 20% onto your books. If you had stock, you could say: ‘Stick with us. The aim is we are going to triple our money,’ particularly if we have a change of government and we are all back to paying 98% income tax…

Melissa Butler, White & Case: I do not agree with that assessment of Millennials. They are interested in the work, interested in the prestige, but don’t necessarily want to be in the office long hours. They want to go home and work; maybe leave at six but log on at eight once the kids are in bed. They are interested in diversity and the softer stuff firms have not taken seriously.

Judith Seddon, Ropes & Gray: I have heard young lawyers say: ‘I do not want to be document reviewer number 52. I want to get involved in the substance of the law,’ and that is why they are targeting the smaller firms. Since joining Ropes, I have had approaches by any number of associates from larger firms tired of being a cog in a large machine.

‘You are all committed to diversity, yet it is not really improving and we have to ask why.’
Richard Price, Anglo American

Alex Novarese: Is it not partly an issue that law firms make up very small numbers of partners and push the decision later? Does that not impact on engagement?

Suhrud Mehta: All the points are interrelated and yours is an interesting one. Millennials are going to shape the future of the law firm, so if the best talent declines to participate in the world’s best training regime but says ‘we would rather go to the boutiques’, that will impact on the way law firms evolve.

Sebastian Rice: Millennials want lots of different things. Twenty, 30 years ago, everyone wanted to work ridiculously hard, become a partner. Now you have everyone wanting a wide range of things and there will be different career paths within law firms. We need to adapt.

Judith Seddon: There remains to some extent a culture of presenteeism impacting on the numbers of women prepared to go the distance. You have less of that in a smaller firm, where you are more the master of your destiny.

Craig Pollack: Richard, law firms are trying to embrace flexible working. To what extent are clients willing to accept this from their key providers if it impacts on service delivery?

Richard Price: Legal is way behind just about every other industry [on diversity]. You are all committed to it, yet it is not really improving and we have to ask why. Increasingly, companies like mine are looking at diversity and extending that to our service providers. We recognise it is a journey – things are not going to happen overnight – but we want to see firms take action that will result in improved diversity, particularly gender diversity. We are keen in partnering with the industry to advance the cause. It is happening in the US, Australia and Canada. It is not happening quite yet in Europe, but it is coming.

Jonathan Field: One thing that is going to impact the market, perhaps even more than technology, is the emergence of the gig economy. What we’ve seen in the last few years is an increase in the number of senior lawyers who want to jump into a project, be on call 24/7 and then jump out and do something else. If corporates and law firms can adjust to this model, it is the future.

Gareth Quarry: That also ties in with what the big law firm is going to look like in the future. I am convinced that a Linklaters will go from being 90-whatever-percent perm/10% temp at the moment to that virtually being flipped on its head. A few years from now, Charlie will be leading a firm that is predominantly just-in-time labour.

Alex Novarese: Richard, you often hear GCs say they like flexible working until it is their matter. Are your peers following through?

Richard Price: They are. It is something GCs are discussing more these days.

Alex Novarese: I know they are discussing it, but are they doing it at the coalface? I hear: usually not.

Richard Price: There are things we can do as individual in-house teams and we are doing those things. For example, we ran a roster, where we encouraged firms to have at least one woman as a relationship partner. That sends a signal.

Alex Novarese: Turning to the theme of star vs institution, Mark, will increasing rewards for high performers continue? Is there going to be a $20m partner or is there a theoretical limit?

Mark Rigotti: Having a rigid approach to compensation is just limiting your ability to (a) attract the talent and (b) keep it. I am a believer in flexibility. That is where the market takes you if you want a business model that allows you to organise different types of people. Where it ends, who knows?

‘Having a rigid approach to compensation is just limiting your ability to (a) attract the talent and (b) keep it.’
Mark Rigotti, Herbert Smith Freehills

Alex Novarese: Take a guess.

Mark Rigotti: Over time, it will probably be smaller firms that pay more. They have more to lose.

Alex Novarese: Does anyone feel the star culture is damaging law firms?

Sebastian Rice: Law firms are relationship-driven. Clients go to lawyers they think can do the very best job and if those lawyers are generating greater numbers of client relationships, they are going to be increasingly rewarded financially for that. Yes, the star culture is wrong, but I do not think that necessarily is the same as the relationship culture.

Alex Novarese: There is much analysis on the securities industry that found that in many contexts they were paying out more money than was generated in underlying value creation. There must be a limit to how much you can rationally comp partners.

Judith Seddon: You cannot just look at the individual. It is the people whom that individual may bring with them and the revenue they may generate. I do not know if the statistics looked at that.

Mike Francies: It’s a bit simplistic to talk about star power. Most firms now have strategies and are recruiting to fit those strategies, and paying in accordance with what people in their firms earn.

Alex Novarese: You still need an appropriate framework. Is any multiple acceptable? Is it acceptable to pay your top of equity 25 times your entry level?

Mike Francies: I do not think people look at it like that. People look at where it fits in their strategy.

Suhrud Mehta: Let’s say an institution could be a constellation of stars who work together and collaborate. That would be pretty powerful.

Alex Novarese: It would, but the last time I checked, Cravath, Swaine & Moore is in decline and that is supposed to be one of the strongest institutions law has ever created.

Paul Maher: It depends on your culture. If you are Watford and have the opportunity to get Dele Alli, maybe your dressing room is prepared to pay whatever it takes, because they will all do a bit better.

Judith Seddon: That is the point, provided there is sufficient buy in and, if there is not, it creates discord and disharmony. People can have different views as to the relative stardom and the merits of paying someone very much more than other high-performing partners. It can be very damaging.

Alex Novarese: Do we think the star culture in law will continue?

Paul Maher: It is the way of the world.

David Higgins: Law is not an individual game. It is a team sport. Successful law firms are all about groups.

Alex Novarese: But the team is made up of people. I do not know of any law firm that could withstand, without severe damage, losing half a dozen of its best people.

Paul Maher: That is true.

Jonathan Field: Partner moves [are a] proxy for how much more successful US law firms are than UK law firms. There is a bundle of partners in US firms who are all earning materially more than UK counterparts, not because they’ve all been hired on big packages but because these businesses are more profitable top to bottom. They are more focused, have higher margins and make sure partners are working harder. The fundamentals of these businesses mean they are more successful.

Alex Novarese: If you took any elite law firm, if they lose half a dozen of their best people, that is a severe problem – maybe an existential problem. Does anyone disagree?

Craig Pollack: I talk from experience and completely agree. That is what led to KWM in Europe collapsing. It lost too many high-performing partners in quick succession and became unsustainable. If you are inside a law firm, discussions about compensation can be the most disruptive and you need a high-trust environment, which is what lockstep law firms in the past had.

The football analogy is interesting, because we see it played out in the Premier League all the time. You bring in a high earner and it is disruptive, but if this player brings you to a higher level collectively, maybe you tolerate it.

Charlie Jacobs: On people leaving law firms, people worry, but it is often interesting and refreshing how often the youngsters fill the space.

The other thing is on the comp model. What is in the best interest of clients? I had a difficult conversation with a partner today where they had to turn away a material piece of work for a conflict. That is an easier conversation in a lockstep firm, because it is right for the client. I like that I spend none of my time having to decide what everyone gets paid. All I have to decide is who needs to move on and some strategic stuff.

Alex Novarese: Charlie, about a year ago Linklaters was making assessment less about metrics, and more about things involving judgement and how the team works. How has that gone?

Charlie Jacobs: If you said, ‘What is morale like among partners?’, it is lot stronger, because people know they are being assessed on overall contribution. There are four questions I ask: ‘Who are your clients? What have you been working on in the last year? What have you cross-sold around the network? What is your reputation, externally and internally?’ I do not ask to see any numbers. I can work out whether I want someone in a lockstep environment or not with those four questions. People are having to operate in a collegiate way but also having to think about the firm’s brand and everything else.

Let’s see – I may be proved wrong. With a lockstep firm, the danger is people say, ‘How much do I need to do not to get fired?’ and you want them to do more than that.

Alex Novarese: Richard, are global law firms doing enough to give clients value?

Richard Price: Firms are really striving to provide value. The proposition is changing and, increasingly, we are looking to the firms to provide us with high value-add. The lower value-add stuff that might have been done by firms around this table ten years ago is being done elsewhere or in-house. Clearly, the trend is insourcing. Every GC I meet talks about how much more they are doing internally.

Alex Novarese: Are there any thoughts on what could give a real jolt to the market? When O’Melveny & Myers and Allen & Overy merge, is that going to have an impact?

Suhrud Mehta: I do not think so.

Stephan Eilers: An organised Brexit without disruption to the markets would be a good development for the next year. That would take a lot of tension away.

Alex Novarese: Imagine PwC bought Axiom three years from now. How would people feel about that?

Sebastian Rice: I don’t think it impacts on the elite.

Jonathan Field: Technology is going to develop more rapidly than most law firm partners acknowledge.

Paul Maher: If in the common law jurisdictions, the governance of transactional work, which principally has been a combination of English law and US law – if that were to change, it would be a seismic change and you would have to re-gear a lot of things in law firms to deal with that.

Alex Novarese: Surely English law is already taking damage from it.

Paul Maher: Yes, it has taken a hit and will continue to do so. If the UK became much more of a protectionist market, that would be really detrimental.

Mike Francies: We talk about ourselves and forget the most important person in the room is that man [Richard Price]. That is what we really need to focus on.

Alex Novarese: Mike has gone for the classic ‘butter up the GC’ tactic.

Richard Price: Amazon has come up a few times in the conversation and when they have senior management meetings at Amazon they keep an empty chair in the room for the customer. They look over at the empty chair and ask themselves what the client would want.

Melissa Butler: A lot [of the opportunity ahead is] about change. We have already talked about it around the Millennials, but that creates opportunity to change the way we do things, the way we interact with clients. Technology is exciting. A lot of people look at change and it seems scary, but we see this as an interesting opportunity and a lot of things to come.

Alex Novarese: Thank you for your time.

alex.novarese@legalease.co.uk