From time to time, I am asked to talk at panels and conferences. Though I usually weasel out of such commitments on account of deadlines looming threateningly over my head, I did recently agree to a one-on-one discussion with the senior partner of a mid-tier UK player at the firm’s partnership conference.As part of the prep, we sketched out some outline questions and I then wrote down some notes to order my thoughts. Since it was flowing conversation and I wasn’t looking at those notes, what is below only loosely relates to what I said on the day. But since I often get asked these kind of questions and such Q&As have an off-the-cuff accessibility, I thought it would make a decent blog.
I have resisted the urgent to rewrite my downbeat view on consolidation (news of the Irwin Mitchell/Thomas Eggar talks came out just before the conference, soon followed by the Addleshaws/Maclays saga). That’s partly to stick to my guns and partly because an Addleshaws/Maclays tie-up is just wrong and weird.
In one case here I approximate the answer I gave to a question from the floor about accountants and incorporate a few things I can remember saying on the day, although the piece below is primarily taken from my prep notes.
Anyway, mid-weight law firms wanting to know the Legal Business take on the market, read on.
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Q: How do you regard New Law providers? Are they getting traction?
Alex Novarese (AN): The short answer is: yes, primarily in the contract lawyering and project management arena. It is very uneven – there’s been a pretty poor run from PI-focused operations and those targeting retail law. But the nature of the beast is that 90-95% of them can fail but they still keep coming.
In what areas will they be most effective?
AN: Institutional law. The real progress will be contract lawyering and managed legal services where you become an extension of the in-house function. For related reasons, you’ll see this in routine-heavy areas: compliance, large-scale contract management and regulatory areas; discovery. But that will likely be a bridgehead. They won’t be contained there. It’s hard to know about the tech-driven platforms. But there is substantial money going into the sector. Cracking the High Street may need proper High Street brands. Tesco Law needs Tesco.
What barriers or hurdles – if any – will hold them back?
AN: They are too expensive. For all the talk about the new models and efficiency, they are usually based on being a little bit cheaper than a law firm. And law firms are quite often ridiculously expensive. City firms aren’t the worst offenders – they deal with clients with real buying power and options. On the High Street, there be monsters. The attitude prevails that lawyers have a divine right to charge a lot of money for pretty basic stuff, so people don’t go to lawyers. There remains a sense of entitlement.
How can law firms respond most effectively to such rivals?
AN: Pretty much the way they have been: by ripping them off. Many major law firms will have divisions that do what New Law providers currently do, some will brand them separately, some will contain them more discreetly in a back or middle office context. Law firms will move more into online provision – Allen & Overy now generates about £10m out of an online subscription service on a margin ahead of its core legal business.
How significant will be the impact of artificial intelligence, cognitive tech and advanced automation be on the legal industry?
AN: Significant – very significant – soon.
Does innovation matter in law? Is the currency debased?
AN: There is more than there was. Partly because of the times – the Legal Services Act and the banking crisis helped the mood music – though the UK profession was always more innovative than given credit. It’s the most innovative in the world by a long way. You could put a Legal Services Act in Germany and, with respect, it wouldn’t make any difference because of the culture. That said, some of it is spread pretty thin. You see those innovation awards and a lot of it is the same stuff they were doing five years ago. Ten years ago.
Should you be a first mover, fast follower or don’t botherer?
AN: My basic advice is: be insecure, alert to the threats and act accordingly. It’s much better to worry that the tiger is in the bushes and for it not to have been there than the reverse. For a mid-weight law firm, in terms of deploying limited resources, being fast-follower is probably the most realistic approach. But that actually means acting fast. If you don’t have anyone at partner-level who isn’t a lawyer – I also think you’ve got a problem.
How much impact will consolidation have in the law in the next three-to-five years?
AN: It will be stable. It might slow down. It will often happen where it usually does: outside the UK top 50. There was a phase, roughly during 2011 to 2013, where there was a genuine step up in consolidation, but that has passed now. Its role is genuine but typically overstated.
Will the pace of mergers continue, increase or decline in the next two to three years?
AN: About the same.
How effective are mergers in law generally?
AN: They vary enormously, between awful and great but usually make little difference. They typically work best when both sides have a very clear motive to park their egos and hook up and the dominant party grasps the basics of project management and common sense. But they’re no panacea.
The danger of legal mergers is distraction. The most important thing for most law firms is that they grow sustainably and profitability, at least in the context of their peers or core markets. Mergers can be a distraction from that, especially if they obscure the basic problem that a firm isn’t growing (which usually means there is a substantive problem at partnership level).
What future do you see for mid-tier law firms?
AN: Good. Very good. If you can get the practice mix right, have solid management, decent quality control at partner level and a pragmatic and roughly coherent strategy allied to vaguely competent execution, it’s a licence to print money. Mid-weight law firms have gotten over the shock and disarray they faced through the 1990s and 2000s. They’ve evolved. There are clearly certain things you can’t do with the model but it’s been proven that it has some material advantages over larger rivals in terms of being more agile and a tighter link between the owners and producers.
What marks out an effective player in the mid-market?
AN: The problem with being smaller is that you have less margin for error, but the good thing is that encourages discipline. Struggling mid-market law firms are basically like a great fudge, they muddle along as neither one thing nor the other and can become a hotel for the mediocre. Some still lack discipline but that’s fading fast because you can’t get away with it as long as you can with a bigger law firm.
How effective will mid-tier UK players be against elite London firms and US rivals in the next five years? How should they position themselves?
AN: They are getting better at it: look at Macfarlanes; Osborne Clarke; Mishcon de Reya – these are some of the strongest brands in the UK market right now. It’s not been a great period for the Magic Circle, who are being assaulted on many fronts.
How are GCs’ needs changing and what is driving this?
AN: It’s an obvious point but the job has become more about compliance, regulation, risk and process. That may have plateaued but won’t reverse.
In what ways are GCs not changing?
AN: The culture of in-house legal teams hasn’t changed that much. For good and ill (and it’s ill more than commonly supposed).
What are the opportunities for law firms to better position themselves with clients?
AN: If I were running a mid-weight City law firm, I’d be investigating whether we can do something aggressive with a proper BD and sales function. Not a brochure squad – I mean a fully-fledged sales team. Backed by solid industry intelligence, that could be an operational edge and it’s a relatively small investment.
A related aspect is more aggressive projection of the brand. Part of it is being realistic about the markets in which you can be most effective (and least vulnerable) at your scale. Realistically – private equity, leverage finance and global investigations are not going to be great markets for mid-tier law firms, but there are plenty of areas that will.
Will in-house teams get larger or begin to shrink in the years ahead?
AN: I am not sure how much longer in-house teams can keep expanding. The New Law thing will be a major challenge to in-house empires.
What makes a law firm successful? How easy it is to work out the secret sauce?
AN: Number one is the partnership, which sounds ridiculously obvious but is still rarely commented on. I’m talking about having a high quality of partnership with a useful culture (as in hard-working, constructive, collaborative and performance-orientated – which is a lot easier to say than achieve) and being intolerant of asses in the partnership. That trumps everything.
Other important factors: a good bench of quality mid-rank associates that you retain rather than having to endlessly ship in; morale and retention doesn’t hurt; a decent working strategy that you actually implement (it doesn’t have to be the Sistine Chapel of strategic thinking, just pragmatic, sensible and not copied off other people and designed to offend no-one).
Decent leadership definitely makes a difference, even with a good partnership but especially with a patchy one. Decent and well paid non-legal staff are also important providing there is a culture of performance, clear targets and accountability. Law firms are masters at paying a premium for third-rate support staff.
Having said all that, there is too much pretence that people know what makes a law firm successful. Beyond some broad observations, many firms that do well don’t really know why and neither do the pundits, consultants and business school types. I’m always meaning to dissect a bunch of high-performing firms to find out if there is any common ground. I know enough to know I don’t know.
And be lucky. The role of chance is materially under-estimated in business and business journalism because you can’t construct a narrative out of dumb luck and the writers often don’t understand what they’re reporting on.
How important is strategy to a law firm’s success or failure?
AN: All things being equal, it helps. Though a strategy is also a proxy for being willing to face a few hard decisions rather than kick problems down the road. You could argue that a sensible leadership that is willing to address issues as they arise doesn’t need to worry too much about a 2020 vision. Ultimately, strategy is a means to an end, not the end. It’s about having goals in an industry where many of your rivals’ goal is to still to eat your lunch.
How important is leadership in law?
AN: It’s hard to be remotely scientific on this. That said, I’ve met and known a lot of law firm leaders over more than a decade, during which I’ve tracked the performance of a lot of law firms. My gut is that you usually get a decent sense of the effective and ineffective leaders and the general standard has improved in law over recent years.
The better firms tend to have better leadership and perform better as a kind of feedback loop and also because a duff firm is unlikely to breed an outstanding leader. It’s very rare to see a law firm with a poor leader do well, though it does happen if they are well placed and not short of good partners. When I have seen what I would regard as a poor leader take over, the law firms quite often start to drift a little. But it’s complex. There is a particular challenge for leaders at the largest global firms that has emerged over the last decade which is a lot about the logistics of how you wrangle such a complex beast built on a partnership model. That’s very difficult to get right and London’s big four has generally struggled with that since the easy growth ended.
The gap between high-performing firms and laggards is huge and has been for the last seven to eight years – what separates the firms with ‘Gulfstream growth’ from the herd?
AN: At best, I only half know, because of the reasons I’ve given. Some of it is luck. But I’m surprised there hasn’t been a more coherent focus on that startling gap in performance in the legal industry though, because it’s huge.
How important is focus to a practice?
AN: It generally helps; it certainly helps to have things that you are known for that you are very good at. It’s clear that law firms do get a lot harder to manage once they get to a certain size. That said, I’ve seen firms with pretty hazy focus do fine, especially if they’ve got the chops at partnership level. I sometimes think focus is a virtue but an overrated one.
Will the accountants be a major threat?
AN: I’m doubtful. That’s not because they don’t have the ability to be – they do. The problem that they have is that they are part of huge organisations in which the legal product line is tiny. It’s very difficult for them to feel anything like core or not be trampled by the wider considerations of the parent, which can be impacted by regulatory or strategic issues completely outside their control. That said, they are becoming more sophisticated in working out areas in which they have a more distinctive sales pitch rather than replicating the practice lines of a law firm. You have to assume they’ll become more of a force.
What will the UK legal market look like in 2018?
AN: The American advance will have continued; I wouldn’t be surprised if the Magic Circle will be weaker; technology-driven law will have become more important both in New Law providers and law firms. I don’t see a weakening of the position of mid-tier firms as a breed over that timeline.
alex.novarese@legalease.co.uk
