If it ain’t broke… Do A&O’s New Law business lines live up to the hype?

After a series of ventures Allen & Overy has become the bellwether among the legal elite for innovation. But do the new business lines live up to the marketing?

‘We’re going to close the doors soon,’ says David Wakeling, the Allen & Overy (A&O) partner leading the City giant’s new tech-based service, MarginMatrix. It’s not often you hear a law firm talk of turning away potential clients, particularly not when they are some of the world’s largest banks.

‘Given the level of demand, we’re already managing expectations in the market. We’re offering a good product, not just trying to get as many clients signed up as possible. It’s been incredibly hard work.’

Even more striking, Wakeling’s business – set up to handle painstaking compliance about to hit major banks’ derivatives operations – has seen A&O partner up with Deloitte in the first substantive joint venture (JV) between an elite law firm and a major accountancy group. Hopes are high. One of the first clients to sign up was Goldman Sachs. Six more major banks have followed. Some Bishops Square insiders are talking of an eight-figure proposition.

MarginMatrix is the latest in a series of initiatives by A&O stretching back more than a decade that have marked the City law firm as a consistent innovator– at least by the conservative benchmark of its peer group.

The earliest move was the development of A&O’s online subscription business, again targeted at the regulatory needs of the firm’s core banking clients, a business that currently generates over £10m annually.

The logic behind the push is not mysterious. Following years of swallowing escalating costs from law firms, after the 2009 crisis banking clients were pushing down on fees and in some cases attempting to break up and parcel out legal work.

A&O’s own research in 2014 underlined the shift in the dynamic. The firm found that, within the UK alone, four in ten clients were looking to cut spending with conventional law firms; 70% were already using contract lawyers; and 37% were using document-review services.

If the business became a catalyst for new ventures at A&O, a decade later the firm would make a far more public move with the launch of its back-office hub in Belfast, an initiative that has been followed by many rivals. In 2013 the firm then launched its much-touted Peerpoint service, making it the first top firm to move into the contract lawyer business being defined by Axiom and Lawyers On Demand (LOD).

While restless long-time leader David Morley had put a premium on creative thinking – being willing to spend arduous hours bringing around sceptical partners to new ventures – the current leadership team of managing partner Andrew Ballheimer and Morley’s replacement as senior partner, Wim Dejonghe, has kept innovation as a major part of the firm’s four-year growth plan.

For better or worse, A&O’s brand has become more associated with fresh thinking and new business models than any comparable law firm. The response it now receives for its efforts are a cocktail of admiration, scepticism and curiosity. Should you believe the hype?

Something scalable

It arguably started back in 2001, when A&O recruited Merrill Lynch and Reuters alumnus Marc-Henri Chamay. Chamay was a computer engineer hired to help the firm handle the growing demand for compliance tools for banks.

‘Our partners and lawyers in the derivatives group were receiving recurring queries from clients,’ recalls Chamay. ‘It wasn’t very efficient. You didn’t have a clear way of charging for this work. That’s where the idea came to create a central resource which contains the answers to those questions.’

That operation began as the blandly named subscription product Derivative Services but despite A&O’s unsurpassed institutional client base, it took time to build momentum. Having signed up around 40 clients by 2008, three years later the client roster had swelled to 100. While demand had been subdued during the boom years, growth has stepped up since the banking crisis. In 2015 the firm relaunched and rebranded the service as aosphere. The division offers 11 services covering shareholding disclosure regimes, the global marketing of financial products and services (including a sector-specific asset management module), cross-border data transfers, over-the-counter (OTC) derivatives enforceability and G20 regulatory reforms. Other aosphere services provide detailed analysis of industry legal opinions from the International Swaps and Derivatives Association, the International Capital Market Association, the International Securities Lending Association and the European Federation of Energy Traders on areas such as netting, collateral and securities lending.

Aosphere now serves 298 clients, boasting a 98% subscription renewal rate and 12,000 users. Those contributing to its £10m-plus per annum ongoing subscriptions include 95% of Statista’s top 20 leading global investment banks worldwide, and 80% of Willis Towers Watson’s top 20 in its list of the World’s 500 Largest Asset Managers. Aosphere has also seen a spike in global users with one third of its subscriptions coming out of the US, up on 10% in 2010.

According to separate LLP filings the business generated profits of £2.38m and £2.05m respectively during 2013 and 2014, against revenues of £6.34m and £7.45m.

Aosphere is backed by a roster of 22 flexible-working lawyers, with average post-qualification experience of well over ten years. Overall, the number of dedicated aosphere workers sits at 31, including Chamay as chief executive.

Chamay recalls building the service was initially a tough call. ‘Everybody loves the idea of having a generic product you sell to multiple people, then you have good fees and make recurring profits every year. The challenge is you have to invest in creating that asset before you can market it. That’s a potentially disturbing thing for law firms when they’re used to charging for work straight away.

‘You have to change the risk appetite to support these investments. That is part of the A&O DNA, because we’ve been doing these types of things for years. There is an expertise around how you tackle those projects and ensure the right business models.’

The innovation brand

There were other steps along the way as A&O became more sold on New Law models. The 2006 launch of the FT Innovative Lawyers report and subsequent awards series gave law firms a forum to market themselves to plc clients as fresh thinkers.

The series was run by the FT‘s commercially-driven special reports arm with RSG Consulting devising the methodology and conducting the research. While the venture never had buy-in from the newspaper itself and the methodology and logic of the awards was at times hard to follow, it benefited from a research-intensive process from consultants specialising in the legal industry. The awards helped to push the concept of business-model innovation into the legal profession’s mainstream. A&O was heavily involved from the start and the largest law firm sponsor – reputedly spending about £40,000 a year, a figure that was dwarfed by the six-figure commitment of lead sponsor Integreon, though A&O also provided facilities. Even if there was griping from rivals about A&O’s perceived domination of the event – particularly among Magic Circle rivals – the firm soon had many notable initiatives in play to back up its sales pitch.

In 2007 A&O set up an innovation panel, allowing employees the opportunity to propose business ideas, which would then go on to receive funding. Those ideas that are approved by the panel’s current chair, partner Jonathan Brayne and his team of partners and senior business staff, will be supported and implemented by the firm. Two years later A&O made the decision to recognise Chamay’s contribution, offering him what it characterises as partner-equivalent status in 2009.

If other ventures had been relatively low key, the next step happened in a blaze of publicity. Two years after going through one of most aggressive restructuring programmes ever seen in the industry in 2009, A&O in 2011 announced that it was to launch a back-office support arm in Belfast, with an initial target of having 250 support roles by 2014. The business, which was backed by a £2.5m grant from Invest Northern Ireland for creating local jobs, was at first focused on providing areas of support such as document review, litigation support and due diligence, though its remit has since expanded to become a hub for new ideas. The rationale of achieving dramatic cost savings was obvious at a time when law firms were facing unprecedented fee pressure. Its current headcount sits at 400, with approximately 75 fee-earners. Over the past three years, 274 partners have used the Legal Services Centre (LSC). According to the firm, the LSC is also taking up an increasing number of lead roles on client work.

In a recurring theme, A&O’s move was partly provoked by its core banking clients; the firm had been influenced by the tactics of several banks, notably Deutsche Bank, in breaking up work and using near or northshoring. The idea was that Belfast would play particularly well with the finance clients that built A&O’s brand.

While Herbert Smith had announced a comparable venture in Belfast several months previously, there is little doubt that it was the scale of A&O’s move that pushed such ventures into the mainstream, with a host of major firms, including Freshfields Bruckhaus Deringer, Ashurst, Norton Rose Fulbright and Hogan Lovells, since announcing similar moves.

Brayne is convinced that Belfast has gone on to not only cut costs but actively brings in work. ‘It’s very hard for a big law firm to differentiate itself from other big law firms in terms of pure quality and responsiveness. There’s a client perception that once you’re in the top five you’re home free on all those fronts. In this area it’s differentiating us, so it’s helping us to win work against the odds more often.’

Belfast, under well-regarded head Jane Townsend, has eventually won over a sceptical partnership. One M&A partner who has used the Belfast centre on a number of projects, including a major non-disclosure agreement programme, comments: ‘It’s not perfect, nothing ever is. You have to look closely at it and work out what the strengths are and what the weaknesses are and use it appropriately. It’s very tightly supervised and very, very cheap compared to what it would cost us to do things out of London.

‘Legal services centres are better for large projects with long timelines where you have plenty of time to plan exactly how the work’s going to be done remotely rather than for a short-term response to urgent situations where the briefing time you have to put in wouldn’t be rewarded.’

The next step came in 2013 with the launch of Peerpoint, A&O’s contract lawyer business. The initial drive behind the venture was to deal with voracious demands for secondees from banking clients, who were trying to deal with post-crisis regulation at a time of tightened budgets. Senior management had also determined that a successful rollout of Peerpoint would mitigate the need for painful job losses during downturns by giving the firm a flexible resource to help manage periods of peak demand, while further bolstering A&O’s progressive credentials.

‘The big difficulty is persuading partners that the quality of the work and the responsiveness is going to be good enough to make it worth the effort.’
An Allen & Overy partner

 

 

The service was staffed with A&O-vetted freelance lawyers, drawing heavily on its alumni and often provided short-term or maternity cover.

Starting with around ten lawyers, the firm now counts 140 on Peerpoint’s books, including 40 currently working with clients. A year after the launch, A&O signalled its ambition for the business by recruiting highly-regarded Deloitte partner Richard Punt to lead the team as chief executive, with Punt accorded partner-like status within A&O.

Again, it did take some time to sell the idea to the partnership, with a continual struggle to find the right pool of able lawyers. Says one partner: ‘The big difficulty is persuading the partners at the coalface that the quality of the work and the responsiveness is going to be good enough to make it worth the effort. It’s all about finding high-quality lawyers that you can then re-deploy internally to deal with periods of crisis. Last summer and the summer before we had an absolutely nightmarish time because everyone was on holiday.’

Teething troubles aside, the business gets solid feedback from partners and has grown rapidly in its first three years.

A&O is not alone in enjoying rapid growth in its contract lawyer business. US-based Axiom already generates more than £30m in the UK, more than double that of LOD’s UK business (both companies offer a wider range of services than Peerpoint). LOD itself has had 20-40% annual growth rates in recent years.

While rivals often downplay Peerpoint’s scope as a self-standing business, A&O’s innovation play is seen as more than a marketing gimmick. ‘Our observation has been that Peerpoint coming in with Allen & Overy’s massive brand behind it has helped legitimise the market and grow it,’ says Tom Hartley, managing director of LOD.

There is something to claims that Peerpoint is more slick support resource than fully-fledged business in the sense of LOD or Axiom. While its launch was positioned in part as a business line in its own right, the firm now mainly talks of a flexible team that complements A&O’s conventional business, similar to how Belfast is used.

Punt reflects on the business’s value: ‘Peerpoint brings a range of talented lawyers who would otherwise be outside [A&O’s] orbit – people who are looking for a different work balance. But, just as interestingly, we’re starting to bring in people who have considerable in-house experience and that introduces some different skills into our business.’

The firm is somewhat evasive on Peerpoint’s revenue (rivals estimate it at over £5m a year). ‘I don’t pay a great deal of attention, frankly, to what our revenue is,’ claims Punt, adding: ‘If Peerpoint was being developed purely as a new revenue stream, I don’t think the firm would do it. This is not about the direct impact on our revenue or profitability; it’s about the impact it has indirectly on our talent, our clients and on our resourcing.’

Punt notes that a key metric for the firm is the extent that Peerpoint is being used by its core finance clients. He adds: ‘We’ve adopted a highly, highly integrated approach. In the vast majority of cases, Peerpoint is working with existing material clients for the firm. We have partners identified as sponsors for every Peerpoint consultant and every single client situation. This is absolutely joined up at the point of delivery.’

While this approach is understandable, some would see it as a lack of ambition and a reminder that many of A&O’s innovations are designed to support its conventional business rather than reinvent it.

Why don’t you build it?

The background to the launch of the first major JV between a law firm and accountancy group was the mind-numbing challenge of handling incoming global regulation of the $500trn OTC derivatives market. Rules under the European Market Infrastructure Regulation framework will require counterparties for derivative contracts not processed through an authorised clearing system to provide additional margins for their net exposures. This will generate substantial compliance work for banks.

From this unpromising background, junior partner Wakeling came up with the concept for MarginMatrix last summer as an online-driven compliance tool.

After pitching and receiving backing from the firm, he was sent off to create a prototype. ‘This is an investment by the firm in me building this thing,’ Wakeling says. ‘There was that degree of incubation because it’s a hard thing to do as a practising lawyer, but it was very deliberate. I was told that the concept was clever and asked: “Why don’t you just build a prototype?” That’s why it happened so quickly, it was that ability for a practising lawyer to step away from the practice and build it.’

Wakeling delivered the prototype in September. The service codifies legal regimes in multiple jurisdictions, automating the drafting of documents based on computer-assisted analysis. The firm claims it can create a document that would conventionally take three lawyer hours in three minutes. On its estimate, the 10,000 OTC contracts a major bank would normally hold can be processed in 12 weeks with one person deploying the system, against 15 years of lawyer hours.

In November A&O approached Deloitte in a bid to get the Big Four accountant to agree to help it with its implementation. An agreement was reached before the end of last year. Deloitte partner Hugo Morris predicts more than 100 Deloitte staffers will be employed on the JV.

‘It’s been a fantastic reaction,’ says Morris. ‘A number of tier-one global banks have signed up to the service. The reactions have been positive in a way that you could do something truly innovative and disruptive in moving away from the historic approach of just having lawyers manually draft these contracts.

‘There’s the technology that sits at the heart of the offering which codifies the law and drafts contracts that are then negotiated with counterparties. There are several thousand counterparties involved with the major banks. That’s a very neat fit with what the management service at Deloitte does.’

Wakeling estimates around 30 full-time A&O partners will be working on the implementation of MarginMatrix, describing it as a ‘mini global department’ within the firm.

Seven top-15 banks have signed up to MarginMatrix with Wakeling expecting another two before the service is effectively closed to new business. One senior partner in the firm talks of the business as potentially generating tens of millions of pounds of revenue.

The announcement was followed by news that Ashurst has signed a deal with Axiom to provide a similar service. The pair have signed up seven banks so far. However, Axiom banking head Chris DeConti argues that A&O’s Deloitte tie-up is ‘still kind of an imperfect pairing’, adding ‘curiously, they haven’t partnered with the legal arm of Deloitte. It really is operational bodies as opposed to resources with the sort of negotiation skills and the familiarity with market norms around this work’. But overall he sees the partnership as a positive. ‘The fact that they are embracing a more technology-based approach to legal work is important in the development of the overall market – it becomes the norm rather than the exception.’

In many ways the significance of this latest venture for A&O lies not in arcane derivatives jargon and more in expectations that the model can be adapted, packaged and made scalable across many other areas of the law firm’s business.

Wakeling observes: ‘This isn’t about derivatives regulation, this may well be the first thing done, but I believe we will see it replicated in a lot of areas of law. This is just a trailblazer.’

The current leadership team of managing partner Andrew Ballheimer and senior partner Wim Dejonghe has kept innovation as a major part of the firm’s four-year growth plan.

 

 

Backing the idea that the firm will increasingly be able to both build new models and also combine its teams across its traditional business and new law models, A&O hired a team of project managers 18 months ago to help it parcel up work.

There may be challenges ahead if A&O is to maintain its hard-won reputation for innovation. Morley stepped down this year, robbing the firm of the long-time leader who has been both a strident champion of the innovation agenda and in possession of the clout and communication skills to prod a sometimes reluctant partnership to back it. While Dejonghe is also supportive, incoming managing partner Ballheimer is seen as more traditionalist. (Andrew Trahair, Ballheimer’s main rival in the partnership vote earlier this year, was viewed as the more progressive candidate.)

In context, such ventures – while fast-growing – represent a tiny proportion of A&O’s £1.31bn revenues. By far the biggest commitment the firm has made is in Belfast, which is essentially a new model of supporting its traditional business. A&O is still some distance from the kind of compelling commercial breakthrough that would give it a decisive competitive advantage.

Arguably the real challenge facing major law firms is the more substantive shift in the profession of larger plc legal teams taking work in-house, transferring levels of work that utterly dwarf the market share taken by New Law ventures.

Chamay, nevertheless, believes the model developed with aosphere will be increasingly demanded by clients in other areas, representing a blurry line between subscription services, expert systems and emerging forms of artificial intelligence.

‘What we try to exploit with aosphere is an increasing demand from clients to have a self-serve model. If you think about some of the challenges that legal and compliance teams have, whether it’s in financial services or other industries, they will have elements of what they need where they don’t need a lawyer.’

Wakeling puts it in more direct terms. ‘This is a sea change in the legal market. It’s going to shake things up.’ LB

madeleine.farman@legalease.co.uk