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Comment: A self-deceiving return to business as usual

In 2010, Georgetown University, under the direction of Professor Milton Regan, held a conference of academics, practitioners and leading thinkers on the profession. To delegates, the atmosphere was heady; change was palpable in the room.

There were no dissenting voices. People knew that there was no turning back for the legal profession. Legal services would be unbundled, equity structures in law firms would change, clients would exert their buying power and demand radically different fee arrangements, Chinese law firms would stride onto the global stage and new technologies and service providers would fundamentally alter the law firm business model. It was going to be, as the title of the conference predicted, a brave new world.

Roll on four years later: the economy has picked up and most of the premium law firms are breathing sighs of relief cloaked in well-worn phrases of ‘cautious optimism’. Growth is back and, in strategic terms, for many of the top law firms, this is all that matters.

Earlier this year, I co-hosted dinners in London and New York with the Financial Times (FT) for the top 20 law firms in each jurisdiction. For the first time since 2008, the conversation was not about change. The senior partners attending were sanguine as the ‘new normal’ turns out to have reassuring similarities to the old one.

One US chairman commented at the New York dinner that the legal profession is merely subject to the laws of supply and demand and adjusts accordingly. Therefore, now we are in a better economic place, the premium firms can relax into their usual ways of doing business.

Friedrich Blase, a legal commentator, recently bemoaned this reversion to type in a blog on the Bucerius Center on the Legal Profession. Sitting in New York, he feels that the talk of change has been exaggerated. ‘A small downward movement,’ he writes, ’causes disproportionate instability in law firms.’ For a profession used to double-digit growth, a prolonged period of flatlining, or drops of a few percent, simply felt like frightening change. In fact, he says, there have been far fewer law firm failures than were predicted and the firms have weathered the perfect storm remarkably well. And this is perfectly true. Some of the top firms had great fee-earning years during the crisis and many reported doing some of the best work of their lives.

This is not to say that there hasn’t been change in the legal industry since 2008. The recession has got rid of some of the more glaring law firm inefficiencies. In the UK in particular, the Legal Services Act is giving forward-thinkers and alternative providers entry and leverage in the market. The improvements that law firms have made are well-documented so I won’t repeat them here. And the majority of premium firms have sharpened up their strategies. All well and good. So what is wrong with operating with the same business model as before, but armed with greater efficiency and clarity?

In a way, the enormity of the credit crisis and the recession has hidden the impact of deeper but more transformative market trends. This is where Big Law’s ability to ride the perfect storm has made them somewhat myopic. What are these underlying trends? I believe there are five critical ones. They include technology; the speed and way in which business is done; the real cultural impact of globalisation; the entrance of new players, particularly in the UK; and the evolution of the in-house lawyer role.

The list will not surprise anyone. Many firms have considered these trends, but few extrapolate them to see what they amount to. My ‘supply and demand’ US chairman believes that while these trends may threaten the status quo, when they become pressing, law firms will have the time to adapt. I wonder.

At both our FT dinners this year, the senior partners attempted to imagine how new technologies would alter their working lives or those of their younger lawyers in the near future. Thinking software, contract management tools, intelligent search functions – these developments tend to be seen as affecting the segments of legal work in which premium lawyers are not all that interested. Yet a serious look at other industries shows that technologies are already transforming the way in which we work. We recently surveyed 2,000 Generation Y lawyers working at premium law firms globally for a report. One of the main critiques they made of their firms was that the technologies used in the workplace were significantly inferior to those of their peers working in other sectors and even to those they used at home.

Take another example. Over the past decade, the number of in-house lawyers has doubled in the UK. Now, one in five lawyers practises in-house. Over time, private practice has lost up to 20% of its market share to its clients. Yet who notices it?

Perhaps it is easier to see the possible impact of current trends through a specific example. The Enterprise Solutions division of Verizon (its B2B business) recently overhauled the way in which it goes to market, works with its customers and uses its lawyers. Initially the task of standardising its commercial interactions with a variety of clients, ranging from small-to-medium enterprises to bigger businesses seemed impossible. But the lawyers, alongside their business colleagues, were instrumental in reducing the time it takes for Verizon to contract with its customers from an average of seven days to a matter of minutes. Lawyers are now no longer required in many elements of the commercial process. In effect, Verizon’s own competitive pressures have changed what its lawyers do and the way they work.

In all our innovation reports, it is as though there are two worlds that exist: one for private practice and one for in-house lawyers. The former can still say they are immune to the trends, but the latter are in the vanguard of them. Over the past nine years of publishing the FT reports, the biggest changes have occurred in the in-house arena.

The legal chiefs in companies such as Google, Monsanto, Nokia, Vodafone and many others are different beasts to private practice partners. Kent Walker, Google’s senior vice president and general counsel (GC), says his job is to ‘look around corners’. You could view GCs as the lawyers of the future – entrepreneurial, legally-based business advisers. Their roles have expanded from problem solvers to encompass problem finders.

Taking their changing role together with other transformative trends raises questions as to the shape, role and value-add of the premium law firm of the future. Few private practice partners can pre-empt problems in the way their in-house counterparts can. Will it be enough for them to be the problem solvers to in-house counsel scanning the horizon for risks and challenges before they occur?

Where will their value be in the future? Outside of specialist legal knowledge that does not reside in the internal legal team or the ability to marshal bodies for a major matter (and the necessity for the latter is in question), where is their value-add?

How appropriate is Big Law’s business model to answer these challenges and respond to these trends? For most rational businessmen, a commercial model that focuses on winning rare but lucrative bet-the-company work would be precarious. This model relies on personal chemistry, relationships and IP that is vested in individuals. It is not easy to manage and reinforces short-term thinking. Worse still, in a premium market where there are 100 international law firms jostling for position, it does not allow for much differentiation.

Currently, Big Law is in groupthink. Their strategies are similar. They try to differentiate themselves by being strong in different geographies or practice areas, or focusing on industry sectors. But how is it differentiating when nearly all focus on financial services and 29 of them have just opened in Seoul?

It is hard to see how differentiation is going to get easier with globalisation. Once the scramble for geography is over, there will be a point where jurisdictional differences and first mover advantages iron out and the answer to ‘Why us?’ becomes even more difficult to answer.

My feeling is that, except for a few members of the Big Law fraternity, being sanguine about growth as a panacea for long-term strategy is a dangerous path.

There are ways to ride the trends, but they require rethinking. Instead of using role models such as McKinsey and Goldman Sachs, firms might do well to take a look at other industries such as telecoms or brands such as Apple. These businesses have in various ways rebundled their services and reinvented customer loyalty. They use big data to push intelligence out to their customers and draw them in; Apple has answered the ‘Why us?’ question more effectively than most. They are adapting to real-world pressures.

Most importantly, the top firms need to listen to their clients, but not from the point of view of ‘what’s in it for me?’ There is already an appetite for single-firm advisers but at the moment the strategy of the premium firms is still to eschew the middle-tier market of business-as-usual work. They do this at their peril. For while the siren call of being an adviser on a $100bn AstraZeneca/Pfizer deal is mesmerising, there is a middle-market worth $200bn in legal fees they are ignoring.

Law firms may want the world to return to what they see as normal. For a few more years it may seem that it has. But for the longer term, I seriously doubt such wishful thinking can sustain their empires.

Reena SenGupta is the founder of the legal research consultancy RSG Consulting