As part of our 25-year anniversary, Legal Business talks to industry veterans to assess the big forces impacting the profession and asks what it will look like come 2040.
The profession faces an unprecedented period of upheaval and uncertainty in the next ten years in which the pace of change will continue to accelerate. Discuss.
This notion – that the profession is facing dramatic challenges never before seen – has become the received wisdom. As such there is some reason to be sceptical. In a second part to Legal Business’ 25 year anniversary special, we shift from looking back over the period since the title’s launch in January 1990 to prod some of these claims and wonder what the profession may look like come 2040.
As with taking a long-term view over the previous quarter of a century, it is impossible to escape the sense that the profession develops on a path that is anything but linear. Where some routes appear to double back on ideas and trends well established in the law for 20 years, in other cases accepted ideas of how the industry would evolve have proved comically wide of the mark as the status quo proves stubbornly resilient.
Co-publishing features:
Look back, face forward: 25 years of offshore in Asia – Frances Woo, Appleby
Garrigues in Latin America: a step ahead – Javier Ybañez, Garrigues
But then who really believes in efficient markets or rational actors these days? Markets and industries are based on people and people have their own agendas, incentives, needs and biases.
That is not to pretend there isn’t the prospect of wrenching change facing the law. The legal industry is already wrestling with notions of productisation, industrialisation and the related reality that advances in predictive software, data mining and more fully-fledged artificial intelligence will take over much more work currently handled by para-professionals and junior lawyers. The application of such technology and models is the ultimate wildcard facing the profession and anyone telling you they have a clear idea on how that will play out is trying to sell you something.
Yet in many areas a closer investigation of the facts and recent events can at least give a clearer picture of how the legal market has developed and therefore could evolve in future.
In trying to look ahead we focus on ten major trends or issues we believe will define how legal services will evolve in the UK and globally. In trying to tease out some thoughts about how these forces will – or crucially won’t – change in the years ahead, we sought the views of senior practitioners and figures with at-the-coalface experience at law firms and the alternative providers that may begin to supplant them.
To bring more rigour, we structured our assessment as a case both for and against radical change and looked at what indicators were available in recent years to demonstrate a current trend. Finally, of course, we included our bottom-line prediction for the avoidance of doubt.
1. The American Century – global domination at last
Since the mid-1990s there has been a sustained battle between two power blocks in corporate law with leading US law firms and the City elite striving to secure a decisive edge in a globalising legal market. However, the evolution of the post-banking crisis market has increasingly raised the question of whether US firms are finally securing the upper hand.
Reasons for revolution
At roughly $300bn – more than half the global legal market – and serving the world’s largest economy, the US legal industry has always enjoyed compelling advantages. With additional assets like the portability of New York law, a busy flow of globally-active clients and profitability unmatched in any major legal jurisdiction – the market has proved impenetrable to foreign law firms.
Since 2009, the relative resilience of the US economy, a buoyant dollar and the vogue for European borrowers to tap US investors has combined to give fresh momentum to US advisers in Europe, helping them build English practices with comparable profitability to their home market. The growth over the last ten years of cross-border enforcement has further aided US firms internationally.
Reasons for status quo
Leading London firms retain a number of advantages, including better-developed networks in Europe and Asia, more sophisticated governance and management and a more internationalist mindset less hampered by concerns over profit dilution.
The continued resilience of London as a global finance hub – providing it can withstand the threat of a referendum on membership of the EU – the popularity of English law and unwillingness of foreign companies to be dragged before US courts will all continue to play to UK law firms’ advantage.
As White & Case’s London managing partner, Oliver Brettle, says: ‘London will remain an important legal centre thanks to English law. It is the law of choice for many transactions, including, in increasing number, transactions which have nothing to do with the UK physically, and the continued offshore use of English law will benefit firms that have a foothold here given that London has the greatest concentration of English law lawyers.’
Structural innovation should also be a strong card for City-headquartered firms which have led on creating low-cost hubs and developing new services for clients such as Allen & Overy (A&O)’s Peerpoint.
Current trends
Legal Business’ Global 100 rankings show CC, Linklaters and Freshfields Bruckhaus Deringer taking the top three spots in 2007 and 2008 with over $2bn in revenue and profit per equity partner between $2.3m and $2.9m. Over the last five years that position has been ceded – last year’s ranking saw only CC make it into the top five with turnover of $2.1bn (£1.36bn in sterling accounting), still shy of the high watermark set before the financial crisis.
In contrast, firms such as Latham & Watkins and Kirkland & Ellis, which were some $500m behind Magic Circle firms in revenue 12 years ago, are now ahead both in income and profitability while others, such as Gibson, Dunn & Crutcher have dramatically narrowed the difference. Even allowing for a weakened sterling, a dangerous profitability gap has opened up between London leaders and, not only New York firms, but the next tier of US advisers. The last five years has seen UK firms cede material ground in City private equity, acquisition finance, restructuring and regulatory work. In 2014 the top 50 foreign firms employed 4,937 lawyers, nearly 500 more than during the mid-2000s’ boom and a growth of 12% in the preceding two years. The largest firm in London, Latham, in 2014 generated UK revenues of £163m, a 21% annual increase.
Wall Street Leaders – Global v DomesticThe more expansionist firms of the Wall Street elite have experienced faster growth over the past six years than those that have stayed domestic. |
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| Simpson Thacher & Bartlett | Sullivan & Cromwell | Davis Polk & Wardwell | Wachtell, Lipton, Rosen & Katz | Cravath, Swaine & Moore | |
| 2009 | $870.6m | $995m | $846m | $585m | $568.5m |
| 2014 | $1.25bn | $1.28bn | $1.07bn | $702.5m | $648m |
| Growth | 44% | 29% | 26% | 20% | 14% |
| Source: Legal Business/The American Lawyer | |||||
The Legal Business prediction
US firms will set the pace for the global elite, increasingly defining the global legal services market in the 21st century. The global market will be shaped by two sets of advisers – New York-focused firms such as Sullivan & Cromwell and Davis Polk & Wardwell that follow a conservative path to growth but nevertheless achieve gradual cross-border development in high-end work. More threatening will be a band of six to 12 US law firms with a more substantive global commitment typified by Latham. London firms will be challenged on two fronts.
Without a substantive shift in global markets in their favour in the next five years or dramatic business model innovation, elite London law firms will see their position further eroded globally and in their City heartlands. However, options for radical innovation will be hampered by a threatened exodus of their top quartile partners to US law firms, forcing London firms to tread carefully. This erosion of position in the next ten to 15 years will force Magic Circle firms to consider effective takeovers by US rivals, mergers with mid-market firms or to refocus their practices away from a current globalised one-stop shop for high-end legal services to a more targeted alternative.
The global ascendency of US law firms will also be a substantive break on innovation and the adoption of new models globally as these firms remain highly conservative and wedded to the partnership model, creating an increasingly stark cultural divide between the US and a liberalised and evolving UK market.
2. Anglo-American mergers – Waiting for Godot
Long predicted, a merger between UK and US global elite firms would be a major event in reshaping the high-end legal industry. Will it ever materialise?
Reasons for revolution
In a relatively fragmented profession and a globalising market, the business case for establishing substantive US/European law firms remains clear. There also remain a number of European players, including the big four global London firms as well as Ashurst and Herbert Smith Freehills (HSF), with a powerful motive to secure a transformational US merger.
Meanwhile, a gradual internationalisation of attitudes among US lawyers has shifted their focus more towards foreign markets. There is also some evidence of conservatively internationalist firms in New York outperforming more domestic rivals in recent years (see table above).
Another potential driver of US internationalisation will be the threat that globally aggressive US firms such as Latham & Watkins and Kirkland & Ellis will be able to transfer work back into the US, providing a defensive reason for US firms to consider a European tie-up.
The number of solicitors practising with an ABS licence holder |
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| 2012 | 2938 |
| 2013 | 5797 |
| 2014 | 8606 |
| Source: The Law Society | |
Reasons for status quo
Attitudes have hardened towards a US/UK deal among leading US law firms, which have strengthened their position in the last five years in terms of profitability and securing high-end corporate, disputes and regulatory work. The ascendency of the US firms against European rivals weakens the case for mergers-of-equals tie-ups.
Current trends
While top-tier deals have failed to materialise, the 2010 union between Lovells and Hogan & Hartson has proved the closest alternative and opened the way for a string of other firms to deploy multi-profit centre tie-ups, notably Norton Rose’s union with Fulbright & Jaworski in 2013. The now decade-old DLA Piper has also continued to bolster its position in the international market. However, these three have yet to sustain the kind of momentum that would change wider attitudes towards transformational US/UK unions. By a similar token, slow progress at the US arms of the Magic Circle has weakened the chances of a serious US deal as has CC’s struggle to galvanise its US practice 15 years after its ill-fated Rogers & Wells merger. Former DLA Piper co-chair Tony Angel, Linklaters’ managing partner between 1998 and 2007, concedes the moment may have passed: ‘There was a sense of waiting for the perfect partner. Maybe if we’d tied up with a Washington or Chicago firm and then gone into New York we could have done what Latham did. But the CC thing with Rogers & Wells put people off that.’
The Legal Business prediction
With little realistic prospect of a union between a truly top-tier UK and US firm in the medium term, the only deals that could conceivably shift the market would be a marriage between a ‘chasing pack’ European firm like HSF or Ashurst with an equivalent or larger US practice, such as Ashurst’s mooted tie-up with Sidley Austin. HSF, which is currently scouting for a US union, is perhaps the best prospect to move the dial but the odds are against it. The only other play would be for the Magic Circle firms to accept a need to radically Americanise their businesses – reshaping their practice and business model around an Anglo-American play. That won’t happen.
3. Partnership – still fit for purpose?
A heated debate in the profession has simmered in recent years over whether the partnership model can survive as a means to motivate younger lawyers and adapt to new models and funding requirements.
Reasons for revolution
The partnership model is clearly under some stress in the UK, in part because UK-based law firms are straining their businesses to achieve globally-competitive levels of profitability and have been unwilling to move more dramatically from compressed, lockstep-derived pay models.
This backdrop suggests law firms will adopt far more flexible models either alongside a partnership ‘core’ or lead to a further weakening of the model as UK law firms are forced to abandon lockstep-based partnerships.
With greater trainee and associate numbers being lost on route to partnership, firms may benefit more from creating a whole range of different positions for lawyers, which allow for greater flexibility.
Quinn Emanuel Urquhart & Sullivan founding partner John Quinn comments: ‘There should be different roles available for lawyers – positions that are tiered or semi-permanent roles. There shouldn’t be this model where a firm will take a lawyer for six or ten years after they get their law degree, and then you either become a partner or you don’t, and if you don’t you need to find a new job. It just doesn’t make economic sense. If you look at any other professional industry, like investment bankers, you just don’t see that. You can still be successful without becoming partner.’
Reasons for status quo
Partnership has its limitations but retains huge support among senior lawyers thanks to its success in binding senior individuals together, encouraging collaboration and providing enough capital for many major law firms to expand.
It plays a fundamental role in supporting professional services culture, and the fact that big four accountancy firms, which are much larger than law firms, have maintained their partnership structure, highlights its value and longevity. ‘I’m a big believer in partnerships,’ says Ashurst chair Ben Tidswell. ‘You need to keep people engaged and working as a team – especially on a global scale and even in the most aggressive compensation systems. There are lots of good things that come from partnership and the way it causes partners to interact. This is not the only way to motivate people but it is a perfectly good one.’
There is also considerable evidence that the owner/manager model provides a relatively long-term view and high standards. In addition, partnership is a relatively flexible model that has considerable room to adapt in the future to accommodate the different shifts in the market. Another powerful factor supporting it is its overwhelming dominance in other legal markets, in particular the US, greatly lessoning the chances of UK firms abandoning the model.
Current trends
A wealth of evidence shows a clear link between economic conditions and the number of partners being made up at major firms. UK firms have since 2008 been consistently promoting new partners in batches amounting to less than 5% of their current partnerships, below the replacement rate needed to sustain their size. London promotions have been particularly hit.
A number of sizeable surveys have also demonstrated a relative loss of focus on partnership as the over-riding career goal among young lawyers in the UK and US, reflecting its weakening motivational power. However, with large numbers of well-educated people still flocking to law, there is no evidence that major law firms have any problems retaining high-quality staff in sufficient numbers to run their businesses. Likewise, with the top 50 foreign firms in the UK employing 1,403 partners in London at the end of 2014, there are growing prospects for partnership at non-UK firms.
The Legal Business prediction
Partnership is here to stay as the dominant model for high-end legal services. The model retains enough flexibility, global support and advantages to sustain its position for years. However, the UK profession will move towards a considerably more mixed ecology within ten years, with law firms employing more non-partners and partnership-track legal roles and more businesses working without partnership. Firms will also experiment with using partnership alongside outside funding and retaining more capital. The only thing that could kill off partnership in the next 20 years is the emergence of radically different legal providers being adopted widely at a global level. However, regulatory barriers in major jurisdictions, robust demand for cross-border legal services and conservative attitudes among institutional clients make that outcome unlikely even within a long-term timeframe.
4. Law firm structure: Hub and spoke
While there is little sign of the conventional law firm being replaced as the dominant provider of corporate legal services, law firms have begun experimenting with separate divisions either as complementary businesses or to support their core operations with surprising vigour. How far can this run?
Partners: the pace of change in the profession will: |
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|---|---|---|---|---|
| Increase | Stay the same | Decrease | Not sure | |
| 2015 | 72.4% | 23.8% | 1.4% | 2.5% |
| 2014 | 66.7% | 29.9% | 1.4% | 2.2% |
| 2013 | 66.7% | 32.4% | 0.9% | 0% |
| 2012 | 60.1% | 36.1% | 1.4% | 2.4% |
| Source: Altman Weil, 2015 Law Firms in Transition | ||||
Reasons for revolution
The creation of new businesses or divisions outside the core law firm model has been demonstrated to provide substantial cost savings and been supported by general counsel, who are pressing law firms to demonstrate they can handle routine work more cost effectively.
The approach allows flexibility by separating out operations from the restrictive career structure, high cost base and cultural rigidity of a conventional law firm.
As such it provides substantial scope for law firms to innovate in two areas: more efficient back-office support and handling of volume work and – potentially more important – providing related client-facing businesses such as contract lawyer arms or non-legal consultancies. The approach also allows law firms to appropriate models from legal process outsourcing (LPO), dealing with the core problem of LPOs: a lack of clarity regarding who stands behind the work.
The Legal Services Act has also made it easier for law firms to set up such businesses as alternative business structures (ABS) and attract outside funding to back investment.
Reasons for status quo
Deploying a hub and spoke approach – or an ‘accordion model’ of flexible staffing as it is sometimes termed, where a business maintains a smaller core with flexible surrounding operations – requires firms to make difficult decisions on market positioning. Getting the balance wrong risks brand contamination for firms viewed as going downmarket.
Wim Dejonghe, managing partner of Allen & Overy (A&O), comments: ‘We went down the road of making sure we can deliver premium legal advice at the top end as well as more value and quality at lower prices to our clients for more commoditised work, so it’s about remaining competitive. But I can see another argument where others will say they are not interested and just want to do the top-end work only, and step out of due diligence or discovery work and leave that to others.’
It also needs consideration of whether the firm is prepared to make substantive investment in infrastructure and build skills among non-legal staff. Some firms will decide to narrow down their offering instead of referring work to other providers, returning to a ‘purer’ law firm with less structure.
But none of these issues are a serious bar to the hub and spoke approach being widely adopted throughout the legal market.
The five largest ABS employers of solicitors |
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| Source: The Law Society | |
Current trends
The enthusiasm for major law firms to experiment with separate divisions has been one of the most striking developments in the legal market since the 2008 recession. Baker & McKenzie had led the way with its creation of a dedicated back-office facility in Manila in 2000 but that firm’s unique structure limited its wider impact. Also significant was CC’s creation of a large support team in India.
Also influential was Berwin Leighton Paisner’s 2007 launch of the successful Lawyers On Demand, which has extended from its contract lawyer business to move into fully-fledged project management. The business now generates over £12m and has spawned a series of similar ventures from rivals, including A&O’s much-touted Peerpoint, which launched in 2013.
The last two years have also seen a string of separate advisory businesses launched by firms including DLA Piper, Eversheds, Wiggin, Bird & Bird and Dentons.
A total of 380 ABS licences have been handed out by the Solicitors Regulation Authority since the regime went live in 2012. The £637m takeover of Quindell’s professional services business this year by Australian-listed Slater and Gordon also sealed its position as the largest provider of retail legal services in the UK with a business model comprising a wide range of brands and services outside core legal services.
Also supporting the use of flexible models are moves to bring in outside capital. Slater & Gordon acquired UK law firm Russell Jones & Walker for £53.8m in 2012 and last month LB100 firm Gateley announced it was set to this year become the first law firm to list in the UK with an expected valuation of £130m-140m. Irwin Mitchell has also restructured itself to facilitate taking on outside capital.
The Legal Business prediction
The future is already here. UK law firms will continue to push this model both in a support basis and client-facing businesses, raising the possibility that such divisions will become breeding grounds for fresh thinking and operational innovation away from the cultural constraints of the ‘core’ partnership.
Such experimentation will increasingly blur with ABS and options for external funding, as some firms consider taking external investment in separately branded divisions in a joint venture structure, putting some parts of the business at arm’s length.
The wider issue is whether this approach spreads to the far larger but more conservative US legal market or becomes an increasingly stark differentiator between the world’s two dominant common law markets.
5. The client – in-house passing its peak or just getting started?
The growth and increased sophistication of in-house legal teams at major companies and the related transfer of substantial legal work from private practice has been one of the defining trends of the last ten years, jolting the complex, contradictory dynamic between buyers and sellers of corporate law. Whether that trend has plateaued or runs further will be a major force in defining the legal market of the 21st century.
Reasons for revolution
In this context revolution can constitute two potential outcomes. The first is that growth of in-house legal teams will continue for years with major companies effectively creating internal law firms able to replicate the majority of services of a sizeable law firm at lower cost with the advantage of superior knowledge of the specific business.
In this scenario, the continued global arms race between high-end law firms to push up profitability ensures that in-house teams can make a business case to continue expansion on the basis of remaining substantially cheaper than law firms even as costs spiral.
Moreover, despite having gained more clout internally in recent years, in-house lawyers still struggle to secure genuine influence as law is so divorced from the commercial drivers of most companies.
While in-house teams are often able to make the case to handle more work internally, they still struggle to secure investment in technology and infrastructure that alternative providers will heavily prioritise. Meanwhile, upward pressure on salaries thanks to rising remuneration at law firms will continue to push up the cost of hiring in-house lawyers, making lawyers some of the most expensive staff in many organisations.
With law firms also looking to secure work restructuring in-house teams and standardising contracts, which Bird & Bird’s chief executive David Kerr calls ‘legal architecture’, the volume of legal work may fall from increased efficiency. Having launched Virtual General Counsel in 2014 ‘to target clients that don’t have or want the ability to have big in-house groups in Europe’, Kerr says ‘partners of the future will know how to design systems for in-house lawyers so that fewer issues arise and updates are made automatically when new legislation comes out’. He adds: ‘In-house legal teams have a struggle with knowledge systems and having the right back up. Their changing role will be part of a revolution pushing law firms towards mastering more efficient systems.’
Reasons for status quo
The global trend towards tougher regulation and a greater emphasis on risk has been a major factor in supporting the growth of in-house teams – a trend that shows no sign of abating and may even accelerate as emerging economies slowly adopt western-style enforcement.
Many GCs are instinctively wary of taking the career risk of deploying alternative providers in case of problems and have an incentive to avoid providers that could be a threat to their own team.
Eduardo Leite, managing partner of Baker & McKenzie, argues: ‘Some industries are now so heavily regulated there has been a shift to larger in-house teams. Elsewhere it may be more cyclical. What you are definitely seeing though is that the role of the in-house team and the GC in particular is becoming far wider than simply offering legal advice. Increasingly the GC is providing strategic counsel to the board of an organisation and has repositioned their legal departments at the centre of any business.’
Current trends
Growth of in-house teams has been sharp in some major markets, but particularly in England and Wales, where the number of lawyers working in-house more than doubled between 1999 and 2014, increasing the proportion of the profession working in-house from 15% to 21%. These figures mask more dramatic growth outside the public sector, which has remained largely stable, while figures from The Law Society show the number of lawyers working in commerce and industry tripling between 1999 and 2014 to 16,331. There is, however, some indication that the rate of growth has slowed or levelled off.
Interestingly, the US, generally viewed as ahead of the UK in pioneering sophisticated in-house teams, has not expanded at a similar pace. Proportionally the number of lawyers working in-house in government and business fell from 19% of the profession in 1980 to 16% in 2005, according to figures from the American Bar Association, while the proportion in private practice grew from 68% to 75% over the same period.
The Legal Business prediction
The in-house profession has benefited from a confluence of forces that has driven substantial investment, including a tougher regulatory environment, globalisation and the evolution of private practice. This expansion has so far seen relatively little transparency or benchmarking of the in-house profession, which has provided additional protection but will be likely chipped away at. While regulation and globalisation will provide continued support for in-house teams outside western economies, the advent of credible lower cost providers will ultimately lead to intense pressure to outsource. In-house teams have perhaps another five years of modest growth before the pendulum swings. Astute general counsel will look to run a leaner, more productive operation that is less reliant on labour arbitrage with private practice before that happens.
6. The age of New Law – will alternative providers sweep the market?
The last five years have seen non-law firm providers go from marginal to approaching the mainstream. How far can the New Law brigade go?
Reasons for revolution
Law is a $600bn global market, which remains dominated by conservative partnerships that have made relatively cosmetic use of technology, operating a business model that has seen little fundamental change in 20 years. Until recently, the profession relied on a billing model incentivising inefficiency and still structures itself to achieve high margins.
The implementation of the Legal Services Act in the UK opened the legal market to a far wider range of businesses, making the UK a breeding ground for new competitors.
Bruce MacEwen, president of consultancy Adam Smith, Esq, predicts: ‘The New York State Bar will bow to the forces of globalisation and enact the functional equivalent of the UK’s Legal Services Act, permitting (among other things) non-lawyer ownership of law firms.’
The Big Four accountancy firms are rapidly expanding in law too, with Bird & Bird’s managing partner David Kerr arguing that ‘lawyers have already missed out to the Big Four in many areas’, and have the financial might and know-how to re-engineer legal processes.
Reasons for status quo
Liam Brown, founder of legal process outsourcer Elevate, says that ‘the rise of legal services outside of the traditional law firm will continue but it is already becoming something of a testing ground for law firms to poach the best ideas from’.
The appropriation of such new models by traditional partnerships is one of the main reasons to believe conventional law firms will maintain dominance and slow the advance of truly disruptive rivals.
Client conservatism will also slow the adoption of new providers. The model of buying legal services, which involves professionals instructing other professionals, builds in a level of deference and general counsel (GCs) remain wary of the personal career risk of instructing alternative providers. Lower-cost advisers also represent an outsourcing threat to the empires of GCs – a message that has to be managed carefully.
Frenetic levels of new legislative and regulatory activity on a global level will also support traditional law firms geared towards handling new developments. For example, Sweet & Maxwell research found 3,506 laws were passed in the UK in 2010, against an annual average of 1,724 during Margaret Thatcher’s administration. Not only has this trend towards more law-making occurred globally, legislation has grown hugely in length since the 1960s.
Current trends
The last five years have provided plentiful evidence of credible non-law firm providers establishing themselves, including a renewed push from the legal arms of Big Four accountants EY, PwC and KPMG, the granting of nearly 400 ABS licences and the emergence and rapid growth of a handful of New Law providers such as Axiom and Lawyers On Demand (LOD).
EY Legal’s headcount has more than doubled since 2009 to hit 1,450 lawyers and it has more than tripled its global footprint from 19 countries to 66. Slower with its push into the legal market than EY, PwC Legal has achieved strong growth since 2011, with a 27% rise in UK revenue to £42.2m for the 12 months to 15 June 2014, making it bigger than the likes of Lewis Silkin, Thomas Eggar and Bristows.
Even more striking has been the rise of US-based Axiom, which provides a range of contract lawyer and project management services. Founded in 2000, Axiom has increased its revenues fivefold since 2007 to around $200m last year, including generating £30m in the UK. A number of major clients, including Vodafone, BT, UBS and Balfour Beatty, have championed using non-law firm providers, while Barclays this year announced the creation of a contract lawyer panel in a first for the legal industry.
A recent survey by Altman Weil found that 83% of lawyers believe the arrival of alternative providers is a permanent change to the legal market, with 17% of law firms reporting a loss of business to non-law firm providers.
The Legal Business prediction
The legal arms of PwC, EY and KPMG will make substantive progress in the global legal market, primarily building their practices around business lines like tax, immigration and cyber security where they can go with the grain of their parent institution. However, success will partly depend on being able to secure a breakthrough in the UK and US, potentially through a takeover of a major law firm. Barring such a move, conventional law firms will be able to adapt to the challenge as accountancy firms will struggle to manage the cultural tensions between lawyers and accountants, maintaining their own referral links with law firms and shifts in the audit regulatory environment or business model of their parents.
However, the next five years will see a sizeable band of alternative providers make huge strides, including contract lawyer-based operations such as Axiom and LOD. This will trigger a tipping point, where such providers will be viewed as a mainstream buying choice, further speeding up adoption. Ventures either partially or entirely backed by law firms will be among those successful outriders. A stock exchange listing of several major providers will be a defining moment that will help drive on New Law outfits.
7. Consolidation, growth and the mega firm – destined to disappoint
It has been one of the most familiar truisms of the legal industry that it is a fragmented market destined for dramatic consolidation. But will the consolidation play ever live up to its billing or will the industry forever be waiting for a $10bn legal giant to emerge?
Reasons for revolution
Law remains far more fragmented than very broadly comparable industries like accountancy and banking. No law firm has gotten near a 1% global market share despite 15 years of sustained international expansion.
The trend for the largest clients to shift panels to a smaller number of sizeable providers has also gone some way towards supporting larger law firms that can work across borders – a trend that appears likely to continue. The prospects for the legal industry to be shaken up by new providers and technology also raises the possibility that firms will be pushed into more radical responses – as does the popularity of the verein model to ease global mergers.
Reasons for status quo
There is little indication that the global elite of firms are pursuing high-stakes mergers, while the chances of London firms securing credible US mergers look worse than any time for the last 20 years. ‘[Wall Street firms’] mentality is that if it is not broken, don’t fix it,’ says John Quinn, founder and managing partner of Quinn Emanuel Urquhart & Sullivan.
‘What we are seeing is a group of global elite firms shaping up to compete with each other ever more vigorously – not merging,’ says Freshfields Bruckhaus Deringer managing partner David Aitman. ‘This will be the trend over the next few years – an era of competition between the outstanding firms.’
The problems of managing conflicts have also proved a major bar to pursuing aggressive consolidation while the cultural difficulties of agreeing and then integrating large legal mergers are frequently understated.
Indiana University Maurer School of Law professor William Henderson echoes the view of many that growth has hit something of a ceiling, which firms will be pressed to specialise to push past.
Current trends
The last five years have demonstrated consolidation on two fronts: sizeable mid-market mergers in the UK and chasing pack global firms seeking to reposition themselves.
While the 2000s saw little consolidation among major UK firms – the exceptions being the mergers of Pinsent Curtis/Masons and Addleshaw Booth & Co/Theodore Goddard, and several UK takeovers by US parents – there have been a run of notable deals in recent years including substantial takeovers by Clyde & Co (Barlow Lyde & Gilbert); Pinsent Masons (McGrigors); and CMS Cameron McKenna (Dundas & Wilson). Other significant deals include the merger of Wragge & Co and Lawrence Graham and the tie-up of Beachcroft and Davies Arnold Cooper, while the regional market has been fired by an aggressive consolidation push typified by firms like DWF, Shakespeares and Bond Dickinson.
Other notable deals include Squire Sanders’ takeover of Hammonds and a string of mergers pulled off by Dentons in the wake of the 2010 union of Denton Wilde Sapte and Sonnenschein Nath & Rosenthal, which this year agreed a much-hyped tie-up with Dacheng, China’s largest law firm by headcount, to create a practice with over 6,600 lawyers, on this measure the largest in the world. Last year saw more consolidation in the US national market, when Morgan, Lewis & Bockius absorbed the bulk of Bingham McCutchen’s practice.
Nevertheless, the long-term march towards the mega law firm has in some regards slowed in recent years. In our 2008 Global 100 report there were seven law firms with revenues of more than $2bn; in 2014 that number had fallen to six. The highest recorded revenue in 2008 was Clifford Chance (CC) with $2.67bn, a figure that had fallen in 2014, when the highest earning firm, DLA Piper, generated income of $2.48bn.
Legal Business’ Global 100 surveys have consistently shown continuing growth since 2008 at the upper reaches of the market, though at slower rates than seen before the banking crisis. Figures from the American Bar Association and The Law Society also underline a continued steady growth in lawyer numbers. The number of practising certificate holders rose 35% in England and Wales between 2004 and 2014, from 96,757 to 130,382 according to The Law Society. Figures also show the number of domestic law firms in England and Wales declining for four years in a row, falling from 10,413 to 9,542 between 2010 and 2014, in part due to consolidation and pressure on the publicly funded profession. However, in the commercial sector a significant number of foreign law firms and non-law firms have entered the market, contradicting the narrative of a one-way consolidation. Nevertheless, there has been substantial merger activity within the UK top-50 in the last five years.
The Legal Business prediction
Without some form of structural shock to the market, which is most likely to come from the impact of technology and alternative providers – consolidation will continue at the national level but will remain a less central feature of the market than predicted. The industry will pause to take stock of the success of multi-profit-centre mergers, though at present such firms have been under-performing peers and risk losing momentum and influence.
By a similar token the march towards a $5bn law firm will be slower than forecast. The industry is unlikely to see such a practice by 2025 even with a verein structure and even less likely as an integrated partnership. Nevertheless, underlying demand for mid and upper market legal services will remain relatively resilient.
8. Globalisation – mission complete
Compared to the rapid global expansion of the 1990s and mid-2000s, the pace of legal service globalisation has dramatically slowed. Is it game over?
Reasons for revolution
While UK-bred law firms have led the way in internationalising their business, most other jurisdictions’ markets have barely begun. There is clearly huge scope for US-based law firms – powered by the largest legal market in the world – to press on with expansion as only two US-bred firms – Baker & McKenzie and White & Case – generate more revenue abroad than in their home market.
The continued rebalancing of the global economy away from the West towards Asia and a new band of rapidly growing markets will encourage law firms to push investment outside of Europe and the US, as will the troubled long-term economic prospects for the eurozone. The potential for Bar liberalisation when it finally arrives would provide a huge additional spur for growth.
Oliver Brettle, London managing partner at White & Case, argues: ‘Africa and Asia will gain more importance. Europe has an ageing population, a lack of political coherence, a lack of natural resources and a relatively small population with huge social security costs, making it difficult to see how it will be as important in the global economy in 25 years’ time. Other markets will catch up.’
Reasons for status quo
International law firms have run up against the reality that many of the key emerging markets they wish to enter are either protected by Bar restrictions or are difficult for western firms to operate in profitably.
A slowing of key target economies, including China, Brazil and India, and relative revival in western markets has also blunted enthusiasm for aggressive foreign growth. There remains little sign of Chinese law becoming exportable internationally or that Chinese law firms will start to secure foreign law outbound work. Unwillingness to pay western-style legal fees in Asia shows no sign of changing.
Weil, Gotshal & Manges partner Marco Compagnoni comments: ‘Size isn’t what people are driving after, people are very focused now. Anybody who’s still planting flags with non-strategic globetrotting is nuts. The idea that to be an international law firm you need an office in Tokyo is like: “Really?”’
Current trends
A series of deals – many of them verein-backed – has given a further boost in recent years to globalisation, notably at Herbert Smith Freehills, Hogan Lovells, Ashurst, King & Wood Mallesons, Norton Rose Fulbright, DLA Piper and Dentons. Significant shifts in recent years have been full-blooded entry into the global legal market of two G20 economies: Australia and Canada, with a series of significant deals.
The top 100 global law firms have remained highly concentrated in the West. In 2010, Legal Business research showed the group had 87% of their lawyers in the US, UK or Europe. By 2014 the group still had 84% of their lawyers in the West, despite a string of mergers in the Asia-Pacific region.
Explosive growth levels have been achieved in the last ten years by Chinese law firms due to a combination of consolidation and strong organic growth. The opening up of South Korea and continued development of Singapore as a significant global hub has further tilted the balance towards globalisation, as has the emergence in the last decade of many African states as fast-growing economies.
Dentons this year agreed a much-touted tie-up with Dacheng, China’s largest law firm by headcount, though many remain doubtful of the impact or genuine integration between Chinese and western law firms. US firms have sustained investment in London and English law practices. The top 50 global firms in London now employ 4,937 lawyers, up from 4,182 in 2010.
There was a slowdown in the number of office openings in the 2013/14 financial year, with 32 Global 100 firms opening 52 offices, a fall on the 72 offices launched in 2012/13.
The Legal Business prediction
The age of aggressive globalisation is over, leading to a period of gradual evolution in which there will be some office closures alongside a steady run of expansion.
The global success of Chinese law firms will be watched closely but this group will struggle to secure or make successes of foreign takeovers and PRC law will achieve little take-up outside the region. China’s legal market will make many lawyers very rich but not western law firms. Failing to secure a credible US merger, Chinese firms will target mid-market UK practices.
Bar liberalisation will be incremental, grudging and manage to clearly benefit domestic players over foreign firms. Free trade zones, such as the current model in Shanghai, however, will usher in some useful reform but Asia will remain a market in which international law firms have to participate largely for defensive reasons.
The increasing global ascendancy of US law firms will reinforce the domination of the western markets as a ‘core’ to the global market. Providing London survives an EU referendum, the legal markets of New York and the City will gradually move closer together in culture, model and referral links, further cementing a dual hub for global law across the Atlantic.
The globalisation model of the most successful US firms, such as Latham & Watkins, which this year became the biggest law firm in the world with revenue rising 14% to $2.61bn in 2014, will become increasingly influential in promoting a more streamlined and focused approach. Far fewer flags will be planted in the next 25 years than in the previous 25.
9. Market segmentation – how many global elites can there be?
Global elite, Wall Street leader, Magic Circle, mid-tier, boutique – debate rages about how the cake will be cut up. The two big questions: does the Magic Circle still exist as a meaningful grouping? And where now for the mid-tier?
Reasons for revolution
The Magic Circle has lost ground on a host of fronts to US rivals since the collapse of Lehman Brothers, failing to match their closest rivals on revenue growth, market share and seeing a profitability gap re-open. The group has also lost a string of significant partners in London and Asia.
Amid the rise of specialist or boutique firms, the emergence of alternative providers and a consolidating mid-tier, London’s traditional elite hasn’t looked this assailable since the early 1990s in a market in a state of flux.
While there is agreement that the Magic Circle brand carries less resonance than it would have five years ago, the question now looms for the first time in a generation of whether the group can count on being part of a new global elite alongside a widening band of US law firms.
Ashurst senior partner Ben Tidswell says: ‘In ten years a group of the top international firms will have emerged, and been through its first round of determining which are the stronger ones. The question is what it looks like after this. What will happen to those firms that don’t differentiate themselves?’
Reasons for status quo
London’s traditional elite remain unquestionably the dominant players in Europe’s M&A and corporate advisory markets, as well as for high-end dispute work. Plc and institutional clients have remained loyal in the face of US entrants.
The Magic Circle has also built up strong global networks in Europe and Asia and more sophisticated governance systems that position them far better than US rivals to adapt to radical new models. Institutional client programmes and lockstep partnerships have also made them more stable and long term than US rivals.
The group’s progress has been held back in the last five years by a confluence of outside economic forces that may ultimately shift in their favour and the group has seen a rebound in the last 18 months.
Aggressive reshaping of the Magic Circle businesses means they are poised to deliver dramatic increases in profitability when an upturn occurs in their core markets.
Current trends
Even in home currency, the four international Magic Circle firms have been through a bruising period between 2008 and 2014 defined by restructuring. In 2008, the group earned £4.81bn, a figure that only edged up to £5.08bn by 2014. The group shed 637 and 388 lawyers during that period in the cases of CC and Linklaters respectively. UK revenues generally fell during this period among the four as they shifted focus towards foreign markets, though tougher management substantially boosted their revenue and profit per lawyer, making them considerably leaner.
Nevertheless, their performance has been comprehensively outgunned by a dozen or so leading US law firms, with the exception of Skadden, Arps, Slate, Meagher & Flom, White & Case and Weil, Gotshal & Manges.
Star performers extend beyond the New York elite to include Latham & Watkins, Kirkland & Ellis, Gibson, Dunn & Crutcher, and Quinn Emanuel Urquhart & Sullivan, and suggest that even ‘regional’ outfits like Ropes & Gray, Morgan, Lewis & Bockius and Reed Smith have the potential to become strong international brands.
Conventional mid-tier UK law firms that rank between 25 to 50 have consistently outperformed larger UK rivals in profitability and organic growth.
Consolidation in the UK market has narrowed the gap between the Magic Circle and smaller UK firms. In 2004 CC generated the highest revenue in the Legal Business 100, earning £950m and only nine UK-based firms billed more than £200m a year. By 2014, CC had been pushed into second place by DLA Piper with income of £1.56bn, while 22 law firms earned more than £200m, including 12 generating over £500m.
US firms in London have continued to take market share and make dramatic inroads in target niches such as private equity, leveraged finance, restructuring, litigation, white-collar enforcement and funds.
The Legal Business Prediction
The Magic Circle as a grouping has lost relevance as the industry has globalised and market segments have blurred. The model will remain under considerable strain without further substantive reform. Notably the grouping has conceded too much ground in the City and failed to come up with a sufficiently coherent response to a more competitive and diverse London legal market.
On current economic trends – which appear unlikely to change in the foreseeable future – the group is at risk of being pushed out of any emerging global elite by a band of non-New York law firms within the next five to ten years.
Nevertheless, the group retains compelling advantages in its global network, unrivalled operational know-how and strong client bases. A new generation of partners will push through substantive changes to their remuneration and business models meaning at least two of the group are established as true members of an emerging global elite. But in reality there will be two distinct tiers of international advisers – an upper echelon of firms dominated by the US practices numbering a dozen – and a band of 15 to 25 significant international practices with a broader service offering and in some cases a broader geographic footprint.
The quality end of the UK mid-tier will continue to thrive, as will a growing band of boutique and specialist shops.
10. Productisation, legal tech and artificial intelligence – the wildest card of all
Of all the long-term trends shaping the law, the impact of cognitive technology taking on some of the work of lawyers is the most high stakes and hardest to gauge. Is the end of lawyers nigh?
Reasons for revolution
Large elements of law and legal services are based on highly-codified and easily accessible knowledge being used to create legal advice and standardised documents. Advances in technology and workflow systems will allow huge areas of work currently handled by paralegals and junior lawyers to be undertaken at a fraction of the cost, while the high costs of legal services provide huge scope for lower-cost alternatives to undercut current ‘production’ techniques.
Advances in data mining, predictive coding and the deployment of decision-making machines have already demonstrated considerable scope in law. One study in the US found software was able to outperform a group of experienced law professors at forecasting the decisions of the Supreme Court using historical information.
Senior figures in leading law firms are certainly taking seriously the impact of cognitive technology in law. John Quinn, founder of Quinn Emanuel Urquhart & Sullivan, predicts major changes in the way documents are disclosed during litigation as new technology will soon allow parties to discharge their obligations by running databases of electronically stored information through a predictive coding programme. He says: ‘Technology will continue to be the main driver of change in law practice. We will have software and capability to mine data, which will result in our firms being more efficient in creating products. The next step is the courts agreeing this technology is sufficient. I would be surprised if ten years from now this was not the case.’
Other obvious applications for such systems include large due diligence exercises, which convert words into data so patterns can be identified, rather than reviewing individual documents. This technology will be able to assess and identify risks across 80% of total documents within hours, and use more sophisticated technology for the last 20% alongside a lawyer.
‘A truly disruptive technology will invade the legal services sector. All we can say about it is that until it appears, no-one will see it coming; and it will not resemble anything people are speculating about today,’ argues Bruce MacEwen, president at Adam Smith, Esq.
Reasons for status quo
There is nothing new about commoditisation or the turning of the craft of law and legal services into standardised products via technology and process.
Yet this period has coincided with a dramatic increase in the demand for legal services and the number of lawyers, suggesting considerable adaptability in the face of substantial commoditisation.
Busy levels of law-making and regulatory activity, and the march of globalisation continue to dramatically limit the impact of commoditisation. While technology will effectively phase out some jobs, it will create others focused on the application of new technology tools and law firms will also add in additional services that are currently unfeasible or uneconomic.
Many proponents of the positive impact of technology cite the theory of ‘augmentation’ – the idea that humans will increasingly shift towards tasks where they enjoy intrinsic advantages over machines, based around human interaction and flexibility – and will work alongside new tech-driven tools to improve decision making.
There is some evidence that the benefits of sophisticated technology reach a point of diminishing returns, meaning that many innovations, while technically possible, can become economically impractical against human labour.
Current trends
While adoption of technology in legal services has inevitably had a huge impact on the profession, law firms are only just scratching the surface with the next generation of cognitive technology, such as IBM Watson – a technology that processes information more like a human than a computer. Firms making moves in similar areas include Allen & Overy, which currently uses data mining technology in due diligence exercises and litigation discovery work, and Pinsent Masons, which also uses automated document reviews. Automation technology at Linklaters now generates 2,500 documents a month, nearly tenfold the amount that was automated a year ago. In the US, predictive coding is already being used in litigation, especially in document production, e-discovery, although this is limited at present. A number of LPO providers, litigation support companies and forensic accountants already made considerable use of such tools in compliance work and contract review.
The Legal Business prediction
We see augmentation as a more likely path for cognitive technology to take in law in the next 20 years, mitigating disruptions and loss of jobs in the legal sector. The advances of technology will not prove a straightforward zero-sum game where gains to technology are always losses for legal staff. The industry will also adapt as it uses technology to open up new markets and services. The legal industry will similarly confound sceptics by proving able to adapt to continued commoditisation, increasingly driving that process rather than reacting.
By the same token, there will be a growing field of work for legally-trained technicians and process designers to help refine tech-driven models. Likewise, lawyers will concentrate on other aspects of their role, such as business development, client care, negotiation and making judgements in the face of limited or hard-to-compare data. This will be less about moving to a supposed intellectual high ground for an ever dwindling number of highly-educated lawyers at the top of a widening pyramid as shifting in the direction of complementary human strengths with technology.
The line between know-how providers and legal service providers will continue to blur with the result that several ‘publishers’ become fully fledged legal businesses. More challenging for the traditional legal industry will be the role of cognitive technology in driving the growth of alternative providers and the disruption it will provide to the current model of vocational lawyer training. The legal industry will struggle to find effective teaching institutions to fill the knowledge gap for legal technicians. LB
jaishree.kalia@legalease.co.uk; tom.moore@legalease.co.uk; michael.west@legalease.co.uk; alex.novarese@legalease.co.uk
Disruptive influences – the view from the market
25 years on from the launch of Legal Business, we asked industry experts to predict what will redefine the industry in the years to come.
Career development and training
‘One of the big challenges is how will firms train lawyers of the future? Technology will control all the repetitive work and this is where young lawyers build experience. But because of the cost drive in firms, it is cheaper to use technology to do that work. The counter argument is that the less interesting work can be done by tech and the more interesting work can be done by people, but in the long term, tech will take the bigger portion of the work.’
Wim Dejonghe, global managing partner, Allen & Overy
‘There need to be roles for staff lawyers and associates who are not on the partnership track. There needs to be different types of partners and law firm structure should evolve in that direction.’
John Quinn, founder and managing partner, Quinn Emanuel Urquhart & Sullivan
Technology and innovation
‘Software will erode firms’ guarding of the terms of transactions as their key competitive advantage. The knowledge of precedent transactions is becoming increasingly commoditised even for the most complex of products.’
Eduardo Leite, chairman, Baker & McKenzie
‘There’s huge opportunity in the product-building area. In other disruptive tech areas, you see the ideas coming through the smaller businesses that then infiltrate the entire industry, and that will happen in the legal services sector too once City law firms open up from a black box way of thinking.’
David Kerr, chief executive, Bird & Bird
‘Threats to law firms will be from technology, if they don’t get their heads around it, and new entrants to the market. If law firms thought about what their worst nightmare would be, they could come up with some fairly scary scenarios. Whether that would have the ability to wipe out a Slaughter and May is debatable, but it’s a very crowded market in London. We’re not short of lawyers in this country and law firms need to think strategically about shifts in economic growth, technology, and the possibility of new competitors coming in who would revolutionise the practice of law.’
Gerry Lagerberg, head of international arbitration, PwC
Law firm financing
‘The self-funding partnership capital approach is unlikely to be sufficient for many law firms in the future. Outside funding has to be considered and too much reticence on alternative funding would be a mistake.’
Roger Parker, EMEA managing partner, Reed Smith
‘Venture capitalists in the US have shown a willingness to finance alternative legal businesses. But while that segment is starting to take off, clients don’t really want to go and use someone new and unproven. So far it’s a missed opportunity and law firms that lack leadership and imagination, when they have great brands to leverage with capital to make more money, should go out of business.
William Henderson, professor, Indiana University Maurer School of Law
Business development
‘Firms will focus on specific clients more and create more exclusive arrangements. There will be a more open tunnel between clients and their respective firms, more sharing of resources, more information being available – this will go both ways – firms will eventually provide a lot more legal support and training, this will just be a given down the line with clients that they are very close.’
Ben Tidswell, chair, Ashurst
‘I can see more law firms being organised as corporations – like Slater and Gordon – buying up the consumer-facing legal market. This will happen and ABS will really take off. It will be interesting to see how far up the value chain that model goes. You will see substantial providers doing all the consumer claims, employment claims, mortgages, wills – it has already started, but you will see it develop in huge scale over the next 25 years.’
Oliver Brettle, London managing partner, White & Case
‘An increasing factor in law firm strategy is conflicts, and the increasingly severe view on conflicts taken particularly by the larger companies – such as banks, insurers and oil companies. That will undoubtedly be a break on moves towards consolidation in future, not just at the top end, but at the middle-end as well. Boutiques like Quinn Emanuel and Enyo Law have done very well and I suspect not having conflicts is a major contributor.
So consolidation, certainly at the top level, will be difficult in future because for mergers to make sense they need, as they have always been, to be done with a client in mind. This means that very often a firm known for servicing a particular industry may want to jump into bed with another firm also serving that industry, which would make considerable commercial sense were it not for the conflict aspect.’
Michael Payton, chair, Clyde & Co