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‘The question is do law firms have the guts to change or just wait for their own giant killer’ – LB’s head talks future of law with Lex 100

Alex Novarese, editor-in-chief of Legal Business, sat down with Lex 100 recently to discuss the current state of the legal industry and its potential future for those considering a career in law.

Lex 100: You said during your Legal Business Awards speech this year that the UK has some of the most interesting law firms. Does that still stand?

AN: Yes, and for a number of reasons. UK law is ahead of the rest of the world as a legal market in that it adapts quickly. In that sense it’s ahead of any other market by a long margin, including the US, which is of course much larger than the UK. If anything, that innovation is accelerating, partly because of the impact of the Legal Services Act and the effect of its most liberalising element, Alternative Business Structures (ABSs). The UK will continue to extend its reach across the world in terms of innovation in the global legal market.

When you say trying new things, do you mean from a business model standpoint?

Primarily we are talking about innovations in service delivery and the business model. There is a cliché that clients drive change: it’s often not true. Innovation in many industries often comes from the suppliers. There’s a famous quote Henry Ford was reputed to have said along the lines of: ‘If I just sat around asking what the customers wanted, I’d have invented a faster horse.’ You see that in a lot of in-house legal teams, who are under a lot of pressure and are not necessarily geared up for innovation. One of the reasons why you don’t get more innovation is because quite often law firms try and are then knocked back by clients. It happens all the time.

How has law acquired this reputation as a traditional industry, then?

It’s true that in many ways law firms are a conservative bunch. There are certainly many boring reasons why law has gone through only fairly moderate changes compared to some industries, but there is often a lot of exaggeration. There are other conservative industries, too, such as utilities or banking.

Was law as profoundly impacted by the recession as other industries, like banking?

It depends on how you measure it. There was never a series of cuts in a major developed legal market to that proportion [as occurred during 2009 in the US and UK]. But if you look at the contraction in the legal industry, it’s pretty moderate overall. I’ve seen some of the reporting of it, and you’d think these guys were on the breadline! They’re not. It’s a high-margin industry. Firms paid staff a lot of money and therefore had high fixed costs. One of the reasons why London didn’t see a worse bloodbath was because Freshfields reset its associate compensation [in 2009]. They took a lot of stick for that but if they hadn’t done it you would’ve seen another 1,500 job losses because everyone else followed suit and the costs would have been even more unsustainable across the profession.

How does the legal industry look in 2014?

It’s generally good and there are a lot of positive economic indicators. In terms of the numbers, the back end of last year was dull. This year it’s definitely more positive. The UK market is bouncing back and the better-quality City firms are doing pretty well. They’re outpacing the Magic Circle firms that are supposedly making money in the emerging economies.

Who’s leading the pack?

Of the big firms, Clifford Chance have probably had the best year – and they really needed that.

There were quite a few mergers last year. Is that trend likely to continue?

People say that every year – they were probably saying it in the 1500s! I’m not sure but there are definitely a lot of factors that stop law firms from merging. Consolidation is often predicted, and it hasn’t happened. So the only conclusion you can have when something like that doesn’t happen is that there is something structural in the industry to stop it happening.

More law firms are launching offices internationally. Where are law firms likely to assemble next? Middle East? Australia?

There aren’t many substantial untouched markets left. Indonesia is definitely getting more attention and Africa is the big frontier in terms of opportunity. There are many barriers to operating across Latin America. There aren’t that many worlds left for law firms to conquer that they can actually get into, because it’s highly protectionist in a lot of the big places.

Why don’t more firms take the Travers Smith approach? Keep to London and just have referral-firms across Europe?

Only so many firms could realistically make that work. The big advantage about going international is that, because it costs so much money to do it, once you have done it you have fewer competitors. CC hit more than a decade of turbulence but it was so well ensconced in an international market in which it didn’t have many true competitors [it was protected]. International law firms are expensive to build and it takes a long time, but they’re very difficult to knock down once established. CC proved that. Going from memory, I recall in the early 2000s Norton Rose had 21 offices globally – 20 of them lost money. London kept it limping along and they had to go through a massive restructuring. All these international firms have a lot of challenges – they’re just different challenges. There are a lot of claims to say you can’t be UK-focused, you have to be international, and there are strong reasons to be international, but UK advisers will outpace international law firms this year. The likes of Macfarlanes and Stephenson Harwood are growing rapidly.

One way to stand out seems to be having an office where someone else does not. The other, I assume, would be operating in a specialism that is quite niche, or where your competition is similarly small, yes?

That’s a theory, but the reality is that if it’s a market of any scale, everyone will just jump in. Arguably, you would do better as a law firm to try and work out how to run a partnership better, how to manage your firm, your staff better. How to become better at lateral hiring. Operational advantages are hard to copy. One of the reasons why UK firms have evolved faster [compared to other international markets] is that they are close enough to look under each other’s bonnet. That’s the upside of the high transparency in the UK profession. But there’s a limit to that and I wouldn’t oversell how good they are at it. If you looked at sustainable advantages for law firms, it would come through either an extreme refinement of the classic law firm model, or the addition of a model along the lines of Lawyers on Demand, or Axiom. A book called The Innovator’s Dilemma has been talked about a lot it in recent years. If you have a successful model, you need to create something that will give you some future-proofing, give you an edge. Because if you don’t do it, the danger is someone else will come in and do it to you.

I suppose with law firms, one can question whether they’ve got the guts or the imagination, ultimately, to consider whether they need to start reinventing themselves, or if they will just wait for somebody else to come in and be their giant killer. But law firms are good at appropriating ideas from other sectors. They’ve clearly adapted legal process outsourcing models. Sometimes people overdo the idea of these lumbering giants! Law firms can hustle when they need to. What they’re very good at is putting off stuff that they don’t want to do and can get away without doing.          

This article first appeared on the website of Lex 100Legal Business’s sister publication.

For more on the current performance on UK law firms see our LB100 report.