Dissent: Why the in-house triumph over law firms may prove short-lived

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Dissent: Why the in-house triumph over law firms may prove short-lived

Scott Gibson and Kristi Edwards argue that GCs have secured a short-term advantage over their external advisers at the risk of undermining their own position

In the decade prior to the collapse of Lehman Brothers, an excess of work masked the corrosive effect to law firms from competition with increasingly sophisticated and growing in-house legal departments (C&I teams). Post-Lehman, the economic downturn has exposed significant structural challenges to overstaffed law firms, which have been ruthlessly exploited by C&I to decisively shift the balance of power in favour of clients.

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Hogan Lovells was right to get hitched. It needs to remember that.

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Hogan Lovells was right to get hitched. It needs to remember that.

I’m not a big fan of comparing law firm mergers to marriages. All those torturous metaphors and incongruous imagery. But in assessing the three-year old union between Lovells and Hogan & Hartson, it’s hard to escape the nuptial motif. The deal was forged amid high expectations and a simple analysis: both firms were better off together as neither looked compellingly positioned for an emerging elite of global law. Putting together a transatlantic merger of equals with two large firms that ranked just below the top tier in their respective markets made sense and was arguably a first for the profession.

But, as we address this month, the problem with raising expectations is that you’ve then got to meet them. And on that yardstick the firm has faltered. Three years in Hogan Lovells is still struggling for growth, the gap between its profitability and other global 20 peers remains too wide and the break-through in transactional work is elusive.

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The Asian century maybe but not the Asian decade for the Global 100

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The Asian century maybe but not the Asian decade for the Global 100

The market for the world’s largest law firms remains as reliably turbulent as ever. The group as a whole eked out a 4% hike in revenues to generate $84.9bn, a figure slightly flattering underlying growth due to a handful of sizeable mergers – including the creation of Herbert Smith Freehills and King & Wood Mallesons. Revenue per lawyer was flat. In real terms, the world’s legal elite is once again modestly shrinking and headline income growth slowed in comparison to the 2011/12 year. Conditions remain considerably better than seen during 2009/10 but are a long way from pre-2008 boom years.

It has been another year that has re-enforced the overall dominance of US firms, largely due to the strength of the US economy and a delayed revival in contentious work. Of course, the relevant performance of UK advisers since 2008 looks considerably worse due to the sustained weaknesses of sterling and the euro but by any measure, the Magic Circle has lost some ground. Compared to their mid-2000s’ heyday, the profits gap against key New York rivals has again ballooned out, while a group of broad-service US rivals are now challenging their scale and global reach.

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To soar or crash with an Asian giant

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If you are going to finally do a global merger, it would be fitting for one of the most distinctive City practices to hook up with the great outlier of the Global 100. That is what is on the agenda for SJ Berwin as it this summer mulls an outline deal to combine with King & Wood Mallesons (KWM), the ground-breaking union between the top commercial law firms in China and Australia.

And what an outlier KWM is. When large mergers happen in the profession, a received wisdom among clients and peers soon takes hold. But since KWM was formed in March 2012, creating a 2,100-lawyer Asia-Pacific giant, consensus has resolutely failed to emerge. For some, it is a world-beater with an unmatchable position in the most powerful economic region of the 21st century. For others, it is a desperate act by two firms who had saturated their domestic markets and faced the awkward reality that their businesses won’t easily go global. After all, Australian and People’s Republic of China law travels badly and the increasingly heavily-lawyered and fee-sensitive Asia-Pacific region is currently struggling to live up to expectations.

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DISSENT: Do you know Titian? Berating law firms on social mobility belies commercial realities

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RollOnFriday founder Matthew Rhodes argues it is education – not an increasingly meritocratic profession – that is to blame for lack of social mobility in law.

Earlier this year Westminster School offered a mini-pupillage at a barrister’s chambers as a lot in a charity auction. The story hit the national press – The Guardian fumed: ‘Fancy a career in the law? A mini-pupillage with a criminal barrister can be Freddie’s for offers over £650.’ The Social Mobility Foundation complained, the Bar Standards Board felt obliged to investigate. All hell broke loose, over a week’s work experience for a teenager.

A bit of an overreaction? Given the kicking the profession is currently getting for not providing sufficiently broad access, perhaps it’s an understandable one.

I declare an interest: I went to Westminster. A few weeks before this story broke I attended a dinner for lawyers who had been at the school. The 80-odd guests that turned up included five High Court judges, the Attorney General and the President of the Supreme Court. From just one school. Alan Milburn, whose 2012 ‘Fair Access to Professional Careers’ report castigated the profession for not doing enough to encourage social diversity, would have had a seizure.

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Flying High – The Legal Business Global 100

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Flying High – The Legal Business Global 100

How the Global 100 has gone from turning over $71.6bn to $85bn in five years.

The world’s largest passenger plane, the Airbus A380, costs $403.9m dollars to buy. Mayer Brown, ranked 22nd in the Global 100, could buy one A380 with a year’s total equity partner profits. The equity partnership at Latham & Watkins and Skadden, Arps, Slate, Meagher & Flom could probably do a deal to buy three apiece – they almost earn enough cash.

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In defence of big – the maths are favouring two + two

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In defence of big – the maths are favouring two + two

How many times do you hear lawyers roll out the line about mergers having to be two-plus-two-makes-five? True in many regards. Getting bigger doesn’t make you better or necessarily solve structural and strategic issues and mergers are hard to pull off effectively.

But when it comes down to it, this truism has become pretty misleading in Law Firm Land 2013.

Because scale does indeed matter in law, all things being equal. Bigger firms have the economies of scale – and these advantages are only getting more important given the continual shift towards smaller and more process-driven panels.

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DISSENT: When the BlackBerrys light up: why firms neglect their culture

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DISSENT: When the BlackBerrys light up: why firms neglect their culture

Former SJ Berwin head David Harrel argues that law firms delude themselves when it comes to their own values

The banking crisis and the revelations about mis-selling and Libor fixing, and the failures in the NHS, have highlighted the issues surrounding corporate and organisational culture. It is perhaps not surprising that the newly-formed Financial Conduct Authority has made business culture a particular area of focus. What is perhaps more surprising is that culture was not a central focus before.

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Don’t push your luck with partnership

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Don’t push your luck with partnership

Do law firms take partnership for granted? They really shouldn’t as the model has served them so well. Just consider the case. Partnership aligns management and ownership. This has helped large law firms to avoid the patchy governance and rewards-for-mediocrity seen at public companies over the last 20 years and drives partners to a pure form of performance pay. It is inherently long-term and as such has a strong record in promoting independence and ethical standards. And given that law isn’t a capital-intensive trade – at least once you cross the Rubicon of international expansion – partnership is workable (if not ideal) from a financing point of view.

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The ABS dilemma – join them sure, but shouldn’t you be beating them?

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The ABS dilemma – join them sure, but shouldn’t you be beating them?

Amid all the hype surrounding alternative business structures (ABS) one story that emerged last month stood out – the aggressively-marketed Riverview Law’s eye-catching alliance with 48-partner practice DMH Stallard.

In an ABS market heavily focused on the high street and volume insurance work, the deal stands out for aiming to provide something different to corporate buyers of legal services.

The firms, which are in discussions about the impending launch of new fixed-fee products, will offer their respective clients each other’s services on a permanent basis, following a four-month trial.

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