Last month I had the pleasure of being on a panel in Europe with Joe Longo, the general counsel for Asia-Pacific of Deutsche Bank. Joe had some particularly thought-provoking and hard-headed observations about the changing dynamics between law firms and clients. I thought it would be worth drawing Joe out a bit more extensively than was possible on our panel, so we found time recently to chat across the 12-hour time zone difference (Joe in Hong Kong, me in New York).
First, a bit of more what/where/when background on Joe.
At Deutsche Bank, Joe is responsible for the direction and coordination of legal support for the Bank’s businesses throughout Asia-Pacific. Before moving to Hong Kong in 2002, Joe was special counsel at legacy Freehills in Sydney and before that was national enforcement director at the Australian Securities & Investments Commission.
I started by asking Joe to describe at a macro level some of the changes he’s seen since the Global Financial Crisis (GFC). What follows is my synopsis of our conversation, understanding that unless phrases are in direct quotation marks it’s not Joe’s words verbatim:
The buy-side/sell-side dynamics have changed very dramatically, although some of the trends were in place earlier. Remember that 2005-7 were really boom years for the legal industry. With the GFC, the power shifted to buy-side in a big, and permanent, way. Everything changed in 2008-10, accompanied by lots of debate about whether this was the New Normal.
We now all accept it wasn’t a short-term dip but a long-term change in the dynamics. In-house departments are no longer growing and indeed are being restructured. Joe thinks that Deutsche Bank has a reputation for being a bit of a leader in how it goes about retaining law firms and get value for money (‘frankly,’ as he put it).
But across the corporate world, at most sophisticated corporations and major banks, the legal department is not being left to its own devices in retaining law firms. There’s far more accountability for the financial aspects of retainers or relationships. Finance departments, auditors, and others, are a lot more interested in why we chose particular firms, or one firm over another, and what did we do to satisfy ourselves that the fees are competitive.
An effective approach to this, requires one to enter the world of ‘procurement’ with appropriate systems, processes, and documentation. Most in-house lawyers have had little experience with this until quite recently; things have become quite a bit more sophisticated with competitive tendering, processes for getting fees paid, standardized terms and conditions for retainers, setting out, for example what the Bank will and will not pay for, and defining standards, for example, with respect to data protection.
BM: How do law firms react to this?
Most law firms are cooperative and it’s not as though all the changes came at once; they’ve been incremental. Most firms, frankly, wanted to continue to get work from Deutsche Bank and therefore wanted to cooperate. Sure, a few firms Deutsche Bank wanted to work with were resistant, but in general firms have cooperated.
It’s a rapidly changing area but one thing that is not changing is there’s constant downward pressure on price and fees. I don’t see any relief from that. In practical economic terms, firms wanting to obtain inflation-adjusted fee increases, without having achieved efficiencies in service, will not be given a sympathetic hearing.
BM: Is the pressure limited to fees or does it go beyond that?
It’s not just about the size of the fee for service, but Deutsche Bank and others are interested in the law firm’s business model: Where the work is done, how document reviews are done and by whom, what is the profile and background of the lawyers (in terms of seniority and price) that are being put on our matters. Deutsche Bank wants to understand who they’re going to work with, and that can often be in India or elsewhere – wherever data and document analysis can be done.
Deutsche Bank and other corporations are experimenting with unbundling, with contract based providers, with using secondments more frequently, and other initiatives designed to promote efficiency. It is a learning process for everyone. Frankly, Joe suspects the vast majority of the work is still done in the traditional way, approaching a single law firm to get the work done, but not for too much longer: In-house counsel are being pressured to be more innovative.
In short, while it’s true today that the bulk of work still goes to traditional law firms, it’s likely that an increasing share of the Bank’s total legal spend will go to non-traditional legal service providers.
BM: What about the high-end work?
Well, it’s true that a lot of Deutsche Bank’s legal work will be performed by the world’s leading global and regional law firms, particularly regarding complex, cross border transactional work, serious regulatory investigations, government-counter-party litigation and contentious regulatory matters. Those matters which have global impact, and so require global reach to properly manage and handle, are likely to go to a top global law firm with the commensurate resources and platform.
But, Joe queries, whether 5-10 years from now there will be so much of this type of work still. For the time being, there does not seem to be any slowdown in the large matters that have a global or regional impact. However, the market should be prepared for the possibility that large scale contentious regulatory work will at some stage begin to abate and the question then arises what is going to replace that work. I’m not saying this work will dry up but it does seem unrealistic to think that it will continue indefinitely.
For the next five years it does seem that complex regulatory work, particularly with respect to financial services, will continued to be a growth area. Moreover, on the transactional side, we should expect attempts to standardize documentation to continue and this will in turn affect demand for bespoke external legal services.
However, as a general proposition, the volume of complex, bespoke work that top law firms are geared up to do, and are fantastic at doing, is not growing as fast as the capacity of the firms to service this work. There is a ‘sliver’ of work that is truly complex and commands high fees. Every top law firm wants to work on highly complex, high-value, cross-border matters. Complexity of the matter and significance to the corporation justify substantial legal fees. But many of the Joe’s of the world are thinking that this type of work isn’t growing. ‘There are a lot of good lawyers out there and they’re not all in the top 20 law firms.’ What will differentiate firms and how they price legal services is going to continue to evolve.
GDP vs. legal spend
Joe suspects no one has collected data on this, but he strongly suspects that the correlation between domestic GDP and the size of the market for legal services of the kind offered by top international law firms is overstated.
Rather, Joe would propose that total country legal spend depends far more on something akin to a ‘rule of law’ quotient in the given country. A strong institutional environment, where policy and rule makers are active, and there is a culture of judicial or quasi judicial enforcement through strong administration and regulation, promotes an environment where lawyers have a vital and practical role to play. Clients are far more likely to require, and be prepared to pay for, sophisticated legal services in such an environment.
In countries like this, the legal profession is expected to be a key player, as systems based on the rule of law generate a lot of work for lawyers. However, the ‘wallet’ for international law firms is not likely to be as large in those countries which do not have a vibrant rule of law.
Moreover, the legal profession itself is at various stages of development and maturity.
Every country in APAC takes a very different approach to practicing law, to documentation, to providing legal support.
Make no mistake: Clearly there are major opportunities, but the way people think about legal services depends so much on culture, the tradition of the rule of law within the country, and the attitude towards lawyers. In places like China there’s a respect for lawyers but that doesn’t mean clients in China are willing to pay the kinds of fees clients will in the US or the UK.
Dealing with a part of the world that has two-thirds of the world’s population means encountering some extremely able , highly educated, very ambitious multilingual people, saying ‘we can do this work’—maybe not today or next week, but in the near future as technology and knowledge transfer goes on. Moreover, governments are encouraging and supporting the development of the local legal profession. Major Indian, Japanese, Malaysian, Korean law firms are becoming regional players, and consequently another source of competition for the global incumbents or firm aspiring to become global.
As the macroeconomic phenomena of nation-building, development, urbanization, and infrastructure growth continues, people are moving upmarket into law, medicine, engineering, manufacturing, and so on. Joe has met with lawyers from all around the region, and the forces of globalization, technology, and other demographic forces are all driving the growth and ambitions of local law firms. Clients also drive demand. This won’t happen overnight, but it will happen.
‘Western’ law firms’ role
All these phenomena play into Joe’s telling top law firms coming into AsiaPac to be very specific and focused about what they’re doing in the region.
Absolute law firm size matters only in terms of global investigations—LIBOR, FX, other matters with a global component—in these contexts you have to deal with people, systems, jurisdictions, and material that could be anywhere in the world. So a law firm with a geographic footprint to match really does matter. There are so many people to be interviewed, so much data to be collected, and decision makers are scattered all over the world.
In some other contexts, highly complex, bespoke work often requires expertise found only in the larger firms because they have the ability to support it.
For other matters, you care about individual expertise and in many countries, while local firms may be quite small—5-10 partners, the expertise required for particular transactions or matters can be found there. From a client perspective, the local expertise is what matters if that is what is required to achieve the best result.
BM: So do you hire the lawyer or the law firm? I’m asking, frankly, about lateral partner movement
Individuals matter when you’re talking about the ‘sliver’ work; that has to be the case almost by definition. There are some issues or matters or kinds of work where you can fairly say that in that market there are four or five, maybe seven or eight, ‘go to’ people.
In those situations if those teams start moving around to another firm, you’ll follow them. Deutsche Bank has done this, in Hong Kong and elsewhere, because we had a lot of confidence in that team and those partners.
But it’s more nuanced because Deutsche Bank would also be close to the firm they left and remain close to that firm; depending on how agile and nimble the firm is they can build a fresh team and recover. So yes, it’s true that work can follow a team around but it’s a very competitive, agile, innovative market. The firm that lost a team can recover its share of our legal spend leveraging an existing and likely long standing institutional relationship.
What’s my take on all this? A few points in particular struck me as particularly salient and worth keeping in mind as we all—law firm partners, corporate GC’s, and our business-side clients—navigate the post-GFC world.
GDP is not correlated with legal spending, the density of the legal infrastructure, or, needless to say, the rule of law itself and the role of lawyers in the economy. Too often, those of us in the US and the UK—and countries such as Canada, Australia, and many more that are part of the great British Empire diaspora—tend to ignore or forget this. Just because our environment is different doesn’t mean it’s the only environment.
As fast-moving as our world is (how many times did Joe use words like ‘agile,’ ‘nimble,’ ‘dynamic,’ and so on?), law firms and clients are in this together and we need to cooperate on ways to increase productivity and efficiency together.
That said, the hard business reality is that law firms need to deliver compelling value as determined by the client; the days of tailoring engagements to suit the preferences and strengths of the law firm, sometimes by digging more deeply into the client’s wallet, are ancient history.
Above all, did you notice how Joe approaches the world from the perspective of business and not of law? I didn’t ask him about this but in reflecting on our conversation it struck me. As far as Joe is concerned, Deutsche Bank doesn’t have legal problems; it has business problems.
Law firms talk a good game about understanding their clients’ businesses. It seems to me most have barely scratched the surface.
Bruce MacEwen is the president of Adam Smith, Esq. You can read his blog here.