A few years ago the general counsel of one of the big banks told me that they only went to outside law firms for three reasons. First to get advice on what to do. That could be on a deal, a dispute or some other objective of the bank. It requires senior time and is not particularly price sensitive. Let’s call that ‘advisory work’.
The second reason is to find out what the law is. Despite having a sizeable team, sometimes they didn’t have the expertise they needed. They just wanted to know the black-letter legal position. Not particularly difficult and nowadays largely available for free on law firm websites or on the internet.
Thirdly for resource and execution. They know what they want to do and how to do it and now need the resource required to get it done. Let’s call this ‘execution work’.
It was apparent, even then, that it made no sense for law firms to charge the same rate for all three types of work. Advisory work is high value and requires lots of senior time. It suits advisers that have a low partner/associate ratio and the hourly rate is rightly high. These firms tend to be more lightly managed with a strong entrepreneurial culture.
Execution work in comparison requires a lot more associate time, supervised by partners. It requires a high number of associates per partner, the price is lower than for advisory work and is often susceptible to a fixed fee. Having a high associate leverage means there needs to be more management, a high focus on process and systems, lots of key performance indicators, project leaders and, increasingly, professional managers who have not grown up as fee-earners.
Of course, even for advisory-focused law firms, execution will always be important but their model allows them to be more efficient because senior lawyers can work more quickly than less experienced associates. These firms are also increasingly subcontracting elements of execution to cheaper firms, for example confirmatory due diligence, specialised areas such as pensions, environmental, real estate title and local law issues.
The top global English firms have historically driven their profitability through associate leverage. But the world is now changing. Low-cost providers are emerging, US law firms are offering an attractive low leverage model to clients and mid-size and regional firms are becoming stronger, fuelled in part by the US firms that turn to them for support. The impact of technology is also growing fast and will be significant.
As a result the global English firms have been left with a high leverage structure which is poorly suited to advisory work. While there are plenty of examples of pockets of high-quality advisory teams in these firms, they are sitting in an organisation pulling them in a different direction.
Senior and mid-level partners are under pressure to push work down to younger partners, let alone associates. And the lockstep model forces these firms to retire more senior partners in their early 50s just when they are seasoned enough to offer the judgement at the core of true advisory work.
There is plenty of anecdotal evidence supporting this with one of the greatest complaints of clients being that they don’t get enough partner time from some of the English firms. Clients also complain that being too exposed to associates, or even younger partners, for advisory work is inefficient because their relative lack of experience means they run up more time than more senior partners and lack the experience to advise on ‘what to do’ as opposed to ‘what the law is’.
Low leverage firms have a further advantage which is attractive to Millennials. These firms provide their trainees and associates with more face time with partners, they get more interesting work earlier in their careers and enjoy a more lightly managed and entrepreneurial culture.
The English global firms are responding by opening low-cost centres in Belfast, Glasgow and Manchester. But they are having to tackle this challenge just as the US firms are getting stronger in London, with a lower leverage model, the US law capability the English firms are struggling to match, a later retirement age for partners, access to US clients and higher profits.
The global English firms have substantial brands outside the US and an extensive network, which brings many advantages. They are certainly not going to disappear anytime soon but they face an increasing challenge in securing their previously pre-eminent position as strategic counsel.
It may be that the debate about consolidation in legal services needs to recognise that increasingly there will be firms that tend towards advisory work with a stronger partnership culture and firms that focus on execution work, which will be more corporate in their nature. They will need to be judged by different criteria and will in truth be deploying increasingly divergent business models.
Charlie Geffen (pictured) is chair of the London corporate practice at Gibson, Dunn & Crutcher.
