Legal Business

Comment: Things I would have said about the future of law if I hadn’t forgotten my notes

I was recently asked to speak on a panel debate for Georgetown Law at Freshfields Bruckhaus Deringer’s City office to discuss the big issues facing the profession. As the panel’s host, Freshfields managing partner Ted Burke, sent the speakers some outline topics and questions beforehand, I sketched out some points to help order my thoughts.

I doubt what I put down below reflects that closely what was actually said in a flowing debate – not least because I left my notes in my bag – but looking back at my scribble afterwards, it seemed quite an accessible off-the-cuff take on the major legal industry issues of the day. As such I have taken the liberty of turning the notes, in only slightly edited form, into a post for our relaunched website.

 

Question: M&A for the first quarter of 2013 dropped 76% against the previous quarter and March was the worst quarter in three years. Transactional activity, particularly in Europe, seems anaemic. How are firms keeping themselves busy?

AN: It’s not going to get better any time soon. My feeling is that law firms have to adjust to a fundamental shift, not only in work levels but also in the balance of their business. This means they will be deriving more from their contentious practice and less from transactional work for the foreseeable future and that’s a real cultural shift for City law firms.

Question: A lot has been written about changing client expectations, particularly since the financial crisis. What exactly has changed and how are law firms adapting to meet these expectations? Is the changing bargain with the clients, if there is one, temporary (perhaps cyclical) or structural?

AN: Client expectations haven’t changed that much. The paradigm shift in law is like teenage sex – more talked about than going on. Given the economic context, what clients want hasn’t changed as much as it arguably should have. Plc clients remain very conservative – which has been a boon to advisers. Not sure that I see a tipping point. The related issue that affects law firms is less clients driving a harder deal, it’s clients becoming rivals to external counsel via bulking up their own legal teams. Empire-building is a bigger threat to Big Law than alternative billing arrangements.

Question: Firms are increasingly adopting widely divergent geographic strategies – some wishing to pursue a ‘local champion’ strategy, some wishing to cover the world and some seeking something in-between. What is the best approach? Where should law firms focus globally?

AN: Commercial law firms largely have to go global. Now that’s easier said than done. The EU will remain crucially important to Anglo Saxon advisers, though in relative terms its appeal has obviously ebbed a little. But there is so much protectionism in many emerging economies that it limits their relative appeal. The big question remains the US. You could argue that too many UK practices are burning time in Asia, making relatively little money in the process, when they should be manning up Stateside.

Question: Law firms have grown in size and expanded geographically in an exponential way over the past few decades. And yet, the business model has not changed in any radical way. Most are still run as partnerships without outside investors. And most still refuse to bring in outside professionals to run the firms. Is it time for any of this to change?

AN: The law firm model has evolved – certainly more so in the UK than in the US where governance standards are generally still patchy. Some of the governance in the US is embarrassing. In the UK, the law firms that collapsed were basically uppity regionals that over-reached – in the US you have had a series of old-line, established outfits that have cracked. That’s a terrible ad for the US legal profession.

I don’t see much of a future for investors in a law firm – they’ll start from scratch more likely. I do think UK law firms should keep pushing to renew and update their model, otherwise there is a genuine danger that what currently works well could become unsustainable or excessively open to a disruptive challenger. You have the Peter Drucker question – are law firms excessively addicted to high margins? I would say they are and that has dangers because you’re giving a lot of space to new market entrants. A risky amount of space.

Question: The Law Society in England and Wales recently hosted an international summit that produced a series of recommendations with respect to diversity. These included introducing gender targets and embedding flexible working practices. Are targets and flexible working practices the answer? What else needs to be tackled to achieve gender and other diversity?

AN: On diversity the legal industry has moved on from not giving a fig ten years ago to feeling guilty and embarrassed but still not doing much about it – I don’t know if you’d call that progress. To be fair, the last two years have seen some progress in the UK with social diversity initiatives like PRIME, which is to be welcomed.

Nothing ‘needs’ to be done to tackle diversity in a purely economic sense. It’s an empirical fact the law firms don’t need to retain female lawyers to be financially successful. If they did, there would be a lot more women partners right now. It’s how the tournament of partnership works. As to ethnic groups, City law firms have no problem hiring non-whites – they like the cosmopolitan, global village sensibility. They have problems hiring less-privileged people who look and sound a little different to them.

But a lot of the debate about diversity starts from a false prospectus. When we pretend that law firms ‘need’ from a labour market perspective to tackle these issues we do a disservice to the profession. On a basic level lawyers sense that it’s not true no matter what they feel compelled to say in polite company. This is a moral decision – you either think that the status quo demeans what it means to be a lawyer on the basis of fairness and equality of opportunity or you don’t. That’s a debate for the profession to resolve, it can’t be resolved by the media or outsiders. As it happens, I suspect there are issues of enlightened self-interest in that law firms would benefit somewhat from a wider talent pool if they took a lead on diversity and social mobility but let’s not pretend they are central to financial success. I’m very free market in outlook but it’s a modern disease to believe there is a market-driven solution to every dilemma. One of the most interesting articles on business I have read this year was in the Harvard Business Review about the decline of statesmanship at major US companies. Sometimes, it just takes leadership to secure change.

Question: Recently, there have been some interesting and newsworthy reports on the culture of financial institutions, first the Salz report on Barclays and then the report by Andrew Tyrie’s commission on HBOS. But there hasn’t been much news about the value of law firm culture – should there be?

AN: I suppose the coverage of Dewey’s collapse contained a lot about culture and its role in the firm’s demise but, no, it is rarely discussed head-on. Law firms do have cultures but often not the ones they think they have.

Culture does matter in my experience. Firms with cohesive partnerships out-perform peers, all things being equal, and are better able to withstand the inevitable reverses that all major businesses face. The rise of lateral recruitment raises troubling questions in this regard as pretty much every major law firm that has collapsed in the last decade had multiple headhunters on speed dial.

One of the challenges with culture is that having one in a positive sense means avoiding hypocrisy – it means sometimes not doing things you may economically want to. Saying, ‘No’ is hard for anyone in business, doubly so for type A, insecure professionals that bill by the hour.

 

alex.novarese@legalease.co.uk