New tricks – Can law firms beat New Law disruptors at their own game?

Lee Ranson was restless. It was late 2018 and Eversheds Sutherland’s co-chief needed something different: a viable plan to double revenue over the next five years.

A few months earlier, he and US-based co-chief executive Mark Wasserman had joked about telling the firm’s partner conference in New York they were floating on the stock exchange. Now Ranson turned his mind to a public offering, or at least the options to attract external investment. But it was not about his law firm. This was about Eversheds’ alternative legal service offerings, covering consulting and flexible lawyering, then generating £29m annually. A tidy sum, and growing rapidly, but just 3% of the firm’s overall revenue.

Over the last decade, the list of external providers available to general counsel (GCs) had changed dramatically, as New Law challengers proliferated in the wake of the banking crisis. High-profile players like Axiom, Lawyers On Demand (LOD) and UnitedLex, as well as the Big Four accountancy firms, were encroaching on Eversheds’ hunting grounds. And with hundreds of millions of pounds in investment pouring into these companies, Ranson needed a response. The conventional law firm model was not geared up to tackle it.

A plan was taken to the heads of his firm’s alternative legal service lines last spring. Eversheds would spin the business off into a separate corporate structure, called Konexo, and be opened up to outside investment to rapidly scale up. The move was unveiled in June.

‘This was his vision for how the business should proceed, rather than us persuading Lee,’ notes Konexo head Graham Richardson. ‘He says that any market where you pay more than £400 or $400 an hour, there’s an opening for an alternative legal service provider. And if we aren’t seen as having an alternative provider service, the alternatives start eating the main law firm’s lunch.’

It was the kind of move often mooted but rarely seen. A handful of rivals have made significant strides in building New Law operations: Allen & Overy (A&O), Herbert Smith Freehills (HSF), Pinsent Masons and Eversheds most notably. Many others are experimenting, but most exist as small internal services pitched as value-adds rather than standalone offerings.

With structural pressures building in the legal industry to accommodate advances in technology and more demanding clients, the success or failure of conventional law firms at building such operations may do much to define the shape of the industry for decades. As such, Legal Business assessed eight of the leading firms and conducted dozens of interviews to determine whether this is just a cottage industry or the next big thing.

What is clear is that a growing number of law firms see a compelling future for building New Law operations backed by a single, trusted point of contact for the clients, or ‘one throat to choke’, as Matthew Kay, head of Pinsents’ contract lawyer business Vario, puts it. ‘If you rely on your law firm to give you advice, then why would you not rely on your law firm to take care of your flexible lawyering needs? You’ve already got a relationship with your firm in many cases going back years and years.’

Smoke and mirrors

‘It’s difficult to unpick what a lot of the law firms are doing and how significant the businesses are,’ says one leader of a major law firm’s alternative provider. ‘There’s a lot of smoke and mirrors.’

The alternative legal service provider market is broad and hard to define. Generally, the offerings are predicated on being cheaper, process-oriented services that target low or mid-level volume legal work. The most prominent area is the provision of freelance lawyers, while managed legal services capabilities – where whole pieces of legal work are handed out to providers on long-term contracts – have grown rapidly.

Other usual features of the market are near-shoring offices in lower-cost areas and teams that make more use of paralegals, legal executives and other professionals (not to mention technology and automation) rather than the solicitor-dominated model of a law firm. Typical work includes disclosure, risk and compliance, document review and due diligence, as well as complementary services, such as consultancy and project management.

A Thomson Reuters report earlier this year – which surveyed more than 500 law firm and in-house legal department heads – estimated the global New Law market was worth $10.7bn in 2017, up from $8.4bn two years earlier.

Of that market, about $300m was attributed to law firm offerings. The managed service provider segment, featuring the likes of Elevate and UnitedLex, and flexible resource market, including Axiom, were put at $700m and $1.1bn respectively. The report estimated the conventional legal process outsourcing (LPO) industry as the largest chunk of the group, at $7.4bn.

But such figures must be treated sceptically. That $300m figure is almost certainly a material under-estimate. The eight UK firms that Legal Business focused on for this article alone report a collective New Law revenue of more than £210m, while LPOs have proven hard to value in recent years.

But despite some existing for the best part of a decade, the law firm alternative offerings are tiny compared to their traditional businesses (see boxes below).

A&O, one of the first major law firms to move into alternative legal services and widely considered a market leader, is understood to generate more than £70m globally from its New Law stable, which features flexible lawyering resource Peerpoint (accounting for £32m of revenue), digital derivatives compliance tool MarginMatrix and subscription service aosphere.

Peerpoint managing director Ben Williams comments: ‘I give credit to Axiom and [LOD]. They were the guys that pioneered it and have done a very good job at disrupting the market. But in places we operate, we and Axiom are the market leaders. It would be false modesty to say we’re not up there.’

Eversheds says that revenue at Konexo – which absorbed its contract lawyer business ES Agile, managed legal services provider ES Ignite, consulting arm ES Advisory and company secretarial and insolvency managed services – is £40m. Advisory was worth about 10%, with Ignite and Agile splitting the difference.

Pinsents, meanwhile, reports close to £80m of its £482m in global revenue. Part of that is the £17m generated largely between its well-regarded flexible lawyer platform, Vario, and diversity consultancy Brook Graham. The larger element, however, is from its SmartDelivery line, which works on matters that rely heavily on technology and process, as well as managed service mandates and sole provider deals. The firm has about 50 legal technologists, analysts and engineers in its R&D function. As such, its operation blurs the line more than some peers between its old and new businesses. Indeed, making comparisons in the field between different operations is more art than science.

‘I stand back from the New Law language. It’s not about opening up another stream of business, it’s more about delivering a relevant legal solution,’ says Pinsents head of client strategy Alastair Morrison.

HSF’s Alternative Legal Services (ALT) – which launched in 2011 and includes document review, due diligence, re-papering and commercial contract support among its services – claims an annual revenue of more than £42m, while Ashurst and Simmons & Simmons report turnover of more than £15m and £11.5m respectively. Relative newcomer Condor at Fieldfisher, is believed to generate more than £2.6m.

What is unclear, however, is how much this represents new business for the firm, or if it is more about shifting revenue internally to cheaper service models. Flexi-lawyering businesses, for example, were mostly created as a replacement for secondee requests from clients and that service line is the highest generator at most firms.

HSF’s head of practice for ALT, Libby Jackson, reflects: ‘It’s an incredibly confused market and it’s getting bigger and more difficult for clients to see what is different. If you were a client looking at this stuff, how would you make the choice?’

Compare the figures to independent providers. LOD’s global revenue is understood to exceed £40m, of which around half is generated in the UK, while 70% of Axiom’s reported $360m global revenue came from flexible lawyering services (before that business was spun out and sold to private equity). Accounts filed for LOD suggest, however, that original business is slowing its growth. For the 2017/18 year, it generated UK turnover of £17.6m, barely up on the £16.9m seen the previous year, while its post-tax profit of £2.06m hardly moved.

With little of Axiom’s marketing hype, UnitedLex has also rapidly emerged as a serious player with its model of combining operational consulting and providing managed legal services to bluechip clients. The firm generated revenues of $350m in 2018, an increase of 27%. Elevate, another touted player with a similar model to UnitedLex, generated £76m in 2018, including £20m in the UK, with income rising dramatically from its £48m turnover in 2017.

Condor head Stephen Ingle describes its strategy as providing services – it focuses on contract management, re-papering projects such as GDPR, and data extraction and analytics – which deliver more value to clients for the same spend. It is an oft-recited phrase but hints to these firms wanting to retain revenue, rather than generate new business or lose it to competitors. ‘They’ve got A spend this year from which they can achieve X,’ he says. ‘But using our alternative provider, they can achieve X, plus 50%.’

Addleshaw Goddard chief operating officer and head of Intelligent Delivery Axel Koelsch observes: ‘The motivation is that we like to do an excellent job. I can’t think of any industry where it’s a good strategy to deliver expensively and badly.’

‘We just responded’

Pinsents’ flexible lawyering hub Vario, which launched in the UK in 2013 and has expanded into Australia, Singapore and Hong Kong over the last two years, receives applications to join from more than 800 lawyers every year. It accepts about 200. There is no sales team, yet last year revenue increased by 50% (adding about £5m) and over the three prior years it had grown annually at 30-35%. Kay says: ‘We didn’t make some strategic decision to turn this into a huge service offering. We just responded to the evolving market and what clients have been asking us to do.’

Pinsents says its overall New Law offering – bar SmartDelivery – grew by 69% last year (which includes fees generated by Vario in support of matters Pinsents’ lawyers are working on), the highest stated expansion of the firms canvassed. Others ranged from 38% year-on-year growth at Eversheds, to 11% at HSF. Most exceeded 20%, well ahead of their parent businesses.

Both Konexo and Addleshaws’ Intelligent Delivery arm were involved in the largest single mandate at each firm last year (financial services and real estate, respectively). Moreover, Kay believes Vario will soon take instructions from clients directly, rather than through the core Pinsents business, and expand its non-lawyer contract resources to cover forensic accountants, procurement and legal operations consulting.

Headcounts, too, have grown, with most firms boasting staffing levels of more than 100 within their New Law divisions – not including consultants – of which the majority are fee-earners.

When Eversheds’ New Law offerings were established under former chief executive Bryan Hughes in 2011, an initial revenue target of £10m was set. Now at £40m, Konexo is aiming to generate £100m within the next five years, the only firm to set out its stall so clearly.

In the early days, GCs had to be sold the concept of different offerings, even the use of flexible lawyer resource instead of secondees. Now, New Law capabilities are frequently targeted – or even required – in legal panel arrangements and tenders.

‘At a recent pitch to a big bank for traditional legal work on its core panel, 30%-40% of the hour was spent talking about Konexo,’ says Richardson.

Many also say that GCs are coming back to law firms to provide such services having seen the wares of specialist outfits like Axiom. GCs regularly complain that alternative service providers are not much cheaper than a law firm anyway.

‘What we’re increasingly seeing are clients coming back to the law firm,’ Kay says. ‘They’re saying: “Our challenge to you, Pinsent Masons, is we want you to think about how you can deliver what the disruptors have opened our eyes to.”’

Alternative service lines within law firms are widely cited as profitable, with many stressing the businesses would not last long in a law firm if they were not. Margins can vary hugely, however, between different products, though they are often lower than a conventional law firm. Fifteen percent is cited by several as a good target in areas like flexible lawyers.

But many argue that interim resourcing and managed services have vast growth potential. One potential hitch is upcoming changes to IR35 tax legislation from April next year, which could impose new tax liabilities and increase the cost of engaging freelance staff.

While contract lawyering is currently the bigger market, many see managed legal services as the ultimately larger and more profitable. The tension, of course, is that it is also the area that forces law firms to cannibalise their core business before a New Law rival does.

One key deal in July saw recently-listed law firm DWF secure a five-year managed legal services mandate for BT’s insurance and real estate work, transferring over 40 BT in-house lawyers as a result. The value of the deal was not disclosed, but DWF jumped from being a top-ten provider of legal services to BT to a top three as a result. DWF is in the early stages of developing its offering but has the appetite, and money, to invest after raising £75m in its March IPO.

It is understood that a couple of law firms – a total of 26 providers were assessed overall – which pitched for the deal struggled to sell the business case to their partnerships given the lower margins. Cynics also see DWF as desperate to secure a brand-name client to leverage the New Law pitch that was central to its IPO. Interestingly, one account says the BT deal is worth about £4m a year, though initially DWF had been in talks to take on a much larger mandate from BT worth well over £15m annually.

Managed services is considered a riskier and more complex business than contract lawyering. That makes it harder to pitch and scale up. Earlier attempts to make it work in legal have also struggled, not least on concerns that GCs are uneasy about outsourcing their own teams. Notably, legacy Berwin Leighton Paisner (BLP) struggled to build a managed service venture with Thames Water despite early success with LOD.

Nevertheless, with renewed efforts in the area, some law firms maintain they are better placed to offer managed legal services than pure-play New Law rivals, given it is more akin to what the broader law firm has always done: regular, ongoing advice. Axiom only looked to float its flexible resource business having separated its contract and managed services businesses – a move that was seen as reflecting the difficulty of running the two businesses together and struggles to generate growth in managed services.

One law firm’s New Law leader comments: ‘It’s far easier to place an interim lawyer and forget about it. But if you’re managing a project and it goes wrong, it’s your problem. If there’s a problem and you’ve only given them 100 people, it’s still their problem.’

BT legal chief for technology Chris Fowler, the in-house legal department’s former chief operating officer, led the year-long process to secure the DWF deal. He is not convinced law firms understand the different economics of managed services yet, however. ‘It’s an arrangement you’ve got to make work. What it isn’t is a traditional model of always doing it at the same margin as there’s no capital outlay at the start. When we look at some of the law firms out there, they’re all seeing this is the direction to go, but they’re also conscious of what that means from a financial perspective.’

Out with the old?

In mid-2018, buyout house Bowmark Capital acquired Bryan Cave Leighton Paisner (BCLP)’s 62% stake in LOD for an undisclosed sum. It completed LOD’s journey from internal service line at legacy BLP a decade ago to independent provider gearing up for global growth. Along the way, LOD transferred into a separate company in mid-2012. Co-founder Simon Harper says this allowed LOD to take a different direction from the firm and created competition between the two.

‘This was something the BLP board accepted as a potentially positive dynamic, but there was risk there too,’ Harper comments. ‘I was happy to drop out of the equity and lead a new sort of business, but it was very clear from some of my colleagues’ comments at the time that it wasn’t the sort of decision everyone would have taken.’

BCLP partner Neville Eisenberg, previously BLP’s managing partner, recalls that the separation helped distinguish the New Law brand from traditional law firm services. ‘LOD wanted to raise capital in a way a law firm can’t. But it depends on the business line: if it’s a value-add service for clients then [splitting off from a law firm] is not an inevitability. If it’s further growth and expansion the business wants, however, then a good option is for a law firm to consider changing ownership.’

There were other incentives to sell since BLP’s then-looming US merger meant the sale generated a multi-million payout for the legacy UK firm’s partners rather than blurring the LOD stake with the US partnership they were about to combine with. BCLP has since unveiled a new BCLP Cubed business, a core hub for a group of New Law services, though it is staying out of the contract lawyer sector pioneered by LOD.

Eversheds is eyeing a similarly expansive path for Konexo. Peerpoint’s former chief executive Richard Punt had shown interest in tapping outside investment for A&O’s New Law operations before he this year quit the Magic Circle firm for Thomson Reuters. There have been claims the departure was connected to frustration with reluctance to unshackle Peerpoint from its partnership.

‘[Punt] was deeply frustrated [before he left],’ says one analyst specialising in the legal sector. ‘He thinks he’s got a brilliant business, but the A&O partners don’t recognise what they’ve got.’ A&O’s attention would likely also have been distracted by its unsuccessful but lengthy merger bid with US firm O’Melveny & Myers, which was finally abandoned in late August.

Corporate advisers note the growing interest from investors for such businesses because of their growth, revenue and predictability. New Law models also avoid the inherent tension between partners and outside owners with law firm investing.

‘If Peerpoint or Vario or Konexo was to come to the private equity market, there’d be a helluva lot of demand,’ says one corporate adviser. ‘LOD was a very hot auction. There were a lot of private equity houses looking at that.’

But none of the other law firms interviewed for this piece admit to interest in external funding. Simmons & Simmons senior partner Colin Passmore at least concedes that if its £11.5m Adaptive business got much larger then it would be up for debate, while Ashurt’s managing partner Paul Jenkins is similarly open to the idea, although does not envisage it.

Others, however, are adamant that any capability in this area is about expanding and diversifying their own businesses. They also claim confidence the law firms they are housed in will provide them with enough investment to achieve their ambitions and are wary that external capital would come with strings attached.

‘I’m very doubtful of the big new rebrands happening over the last few months because they almost seem to be saying: “We have an Old Law offering and a New Law offering,”’ Koelsch says. ‘I don’t think that’s what the law firm of tomorrow looks like. If you don’t bring to bear all these tools in your client relationships, you’re not serving your clients well.’

Peerpoint’s Williams reflects: ‘I like to keep it within A&O as the really exciting things come when you look at what you can do by stitching the two together. Combining traditional law firms with the New Law capabilities is exciting.’

The problem, however, is that such service lines are difficult to articulate without a separate brand. A big reason for establishing Konexo was Ranson’s belief the service was getting lost within the wider law firm. Furthermore, creating arms-length entities allows for separate strategies, more autonomy and the ability to reinvest profits.

In the last 18 months, the New Law independents have each ramped up massively. There is Axiom’s recent sale to Permira, UnitedLex securing $500m from CVC Capital Partners and Elevate acquiring multiple complementary businesses. Meanwhile, Axiom Managed Solutions, which last year earned £50m, including £28m in the UK, looks to be on the cusp of a private equity buyout. There is also the touted re-emergence of the Big Four accountancy firms in law: EY’s acquisitions of Riverview Law and Thomson Reuters’ Pangea3 LPO business are cited as ominous moves.

Elevate president John Croft argues outside capital is rapidly improving the prospects for alternative providers: ‘Firms tend to think they can do everything themselves, but access to capital is driving change. At law firms there has not been the incentive to take cash off the table and invest.’

Time to strike

David Morley, the former A&O senior partner and a key architect of Peerpoint, believes there is huge demand for cost-effective, quality work for everyday problems clients face. He estimates somewhere between 60% and 70% of what lawyers do is largely routine and ultimately capable of being digitised, even at the top end of the market.

But getting partners engaged is difficult. It is a classic case of Clayton Christensen’s celebrated book The Innovator’s Dilemma, Morley says, because the incumbent businesses of law firms are still making money at good margins.

‘It’s not always easy to convince partners,’ he says. ‘The argument that if we don’t do this someone else is going to come in, do it and eat your lunch anyway, that just didn’t wash with people. Intellectually they might get it, but emotionally they are like: “Yes, but I’ve still got my fee-income target to make this year so why would I agree to anything which might take away from that?”’

By common consent, law firms seeking success in this field will need robust leadership to support it amid indifferent or even hostile partnerships. As Richardson at Eversheds’ Konexo notes drolly: ‘Lee’s vision of what he wanted to do has been tremendously powerful. If I got to talk to the partners, while I am really exciting and interesting, 10% turn up. If Lee turns up and says, “I want to talk to you about something different”, 99% of the partners in that office will turn up!’

Harper argues that a rising tide lifts all boats: ‘The market is clearly growing and I guess it’s for clients to decide whether they’d prefer to work with the firm they also use for global M&A, or want to go with the market leader who is there specifically to provide this sort of alternative legal service.’

At some point, however, every law firm with New Law capability will face a decision: should the partnership continue to own and fund this, or does it need outside capital and ideas to move to the next level? External capital is attractive to those who see scope to rapidly scale up but requires trade-offs for a firm, and the complications of interacting with outside parties with very different incentives.

As yet, such a step remains beyond the comfort zone of most law firms, though it is hard to see how such divisions will avoid being ultimately stifled if they remain merely as slicker support operations to the core business. Capital is most pressing when considering the vast US market, which many see as crucial to building a compelling global position. But arguably even more important than investment is the autonomy that conventional law firms are willing to grant divisions that can quickly become potent independent forces.

It is already clear that a good many bluechip GCs want New Law solutions while remaining more comfortable with the notion of buying their New Law from Old Law. There is an opportunity to be seized, offensively in carving out a rapidly-emerging market and defensively in holding off pure-play rivals now backed with tens of millions in fresh investment.

If more law firms are not ready to back such operations as more than glorified back offices, the ultimate risk is that the New Law pioneers will achieve the kind of scale and brand recognition that makes them much harder – or even impossible – to combat.

In an age in which law firms have become much better at talking up strategic daring than delivering change, it is ultimately hard to disagree with the assessment of Konexo’s head of client development, David Saunders: ‘There is a first or second-mover opportunity here. The alternative legal service providers have a threshold of work which they’re not able to do. That creates a problem for GCs. If law firms can get it right, why wouldn’t you as a GC want a one-stop shop?’ LB

hamish.mcnicol@legalease.co.uk

thomas.alan@legalease.co.uk