Feature

Building a Consensus for Urgent Change

Alternative business models, new competitors, fast-changing client demands, low growth and globalisation are amongst the factors forcing law firms to contemplate unprecedented change. But how well equipped is the industry to meet these disruptive challenges? David Morley and Wim Dejonghe take stock.

 

The legal industry is under pressure to radically change the way it works as a host of disparate and highly disruptive forces crowd in upon law firms and the clients they serve.

Amongst these pressures are globalisation, digital disruption, notably in the financial sector, the growing buying power of client legal teams, and the threat of new competition from alternative legal providers and ambitious new entrants like the Big 4 accountants. Then there is the pressure to consolidate and the overriding need to boost revenues in an environment where low growth looks set to remain the order of the day.

As business agendas go, it’s a pretty daunting one.

But law firms must find a response because these are often the very same pressures their clients are facing every day and need help with, say David Morley and Wim Dejonghe, A&O’s senior and global managing partners.

“For a long time law firms worked inside a kind of bubble, protected from the changes that were affecting their clients,” says Wim. “That’s no longer the case. The financial crisis has changed how clients think and work and we have to change too.”

David agrees: “The changes hitting our clients are the things we are having to talk about and wrestle with everyday. If we want to remain relevant to our clients, we have to adapt to the disruption they are experiencing in innovative and creative ways.”

Yet very few of the big law firms know how to respond.

David saw it first-hand at a recent conference where many of the world’s biggest firms met to discuss this precise agenda.

David and Wim are quick to put the changes at A&O – including a massive expansion of the firm’s global network and the creation of a new, cost-efficient, hybrid business model – into context, however. The changes may have given A&O a first mover advantage, but they are still at an early stage. “We’ve really only just begun to scratch the surface,” says David.

That makes it essential to keep confronting the key pressure points head on – something they intend to keep doing ahead of stepping down from their current roles in April 2016.

The power of the buy side

So what are the most pressing concerns? They identify four with particular significance for the legal sector – globalisation, the rising power of the purchasers of legal services, the reshaping of the banking industry with the emergence of alternative credit providers and the disruptive challenge from Fintech businesses, and growing competition from new providers of legal services, including those like the accountancy giants, from outside the industry.

The most significant perhaps is the increasing power and status of corporate General Counsels. As corporate risk has risen, so has the power of the GC, with many now represented on the executive Board and backed by a growing army of sophisticated in-house lawyers.

“Risk is right up the agenda since the financial crisis and many companies have hired better people to cope with it, usually partners from firms like ours – poachers turned gamekeepers,” says David. “They know us, they know the game and they are much more sophisticated.”

But they are under pressure to make big savings in their legal spend. While initially that may have been a response to the economic cycle, the drive for cost savings has now become a permanent structural change and not just a temporary legacy of the financial crisis.

“Attitudes have shifted and people are saying ‘why should we pay more for some of these services?’ It makes sense for them to be driving costs down in this low growth environment where you’re much more dependent on cost efficiency to squeeze out increased profitability,” says Wim.

Unconventional competitors

Competition from new legal and non-legal entities is another key imperative for change.

The Big 4 accountancy firms, in particular, are homing in on a market comfortably occupied by the big law firms for decades. Keen to add legal expertise to a broader business services offering, the accountancy firms are very likely to buy up legal businesses in the years ahead, they say.

“The Big 4 basically control high-end accountancy across the whole world unlike the legal industry. Whereas we compete with many players” says David.

“Our industry is incredibly fragmented. There is no one law firm anywhere that is close to controlling even half a percent of the world’s legal market.” A&O – one of only two global firms to handle more than USD1 trillion of transactions in 2014, would be one of the few to come close to that relatively low threshold, he adds. So consolidation within the industry is another strong likelihood as firms at the top end try to increase the scale and reach of their global networks.

The new threat from the accountants, explains Wim, was a key motivation for building A&O’s in-house project management capability – a rarity in the legal industry. It has, for instance, allowed the firm to recently win the biggest project in its history, ousting one of the major accountancy firms in the process.

“This is one area where the Big 4 will try to move into our space because they do have the project management skills. These projects are on a vast scale so you’ve got to find a way to do them efficiently, to manage the risks involved and to deliver the quality at the right cost, whether that’s through our low-cost legal services centre in Belfast, our Peerpoint contract lawyer business, outsourcing or whatever. I mean, this is not rocket science, but the truth is no-one else in the legal industry does it!” he says.

David agrees. “A long-term threat is that if we are so narrowly focused in what we can offer clients that we will no longer be the lead adviser on a project. Clients will just bring in someone else to manage the whole project and then you are reduced to being just a sub-contractor.

“That’s a bad place to be because you’re one remove from the relationship, one lower down the food chain. It’s already happened in other sectors, and it could easily happen in ours. We’re not prepared to let it.”

The U.S.

Not all threats are coming from non-traditional sources. Commentators have been making much recently of the growing global dominance of the U.S. law firms. While David and Wim acknowledge that U.S. and English law are increasingly competing fiercely with each other, not least in the UK, they think the threat is overdone. Few U.S. firms have built effective global networks; fewer still have started to address client demands for both low-cost and high-end legal support, as A&O has begun to do.

But the best response to that threat is to build A&O’s own U.S. capabilities and they note that five of the 20 partners most recently promoted are U.S.-qualified.

Wouldn’t it be quicker to merge with a U.S. firm? “It’s probably the quickest way to build capacity, but not necessarily the best,” says Wim. “This is a long-term game, you know. I think it’s better we get it right in the next ten years than do a big sea-change in one year, only to discover five years later that it was wrong and be forced to start all over again.”

The bright spark in pyjamas

Broader trends are pressing in too, both for law firms and their clients across sectors. The threat of digital disruption is chief among them.

“It’s at the top of the agenda for every company of any size across the world – how my business is going to get disrupted by some bright spark sitting in the garage in his pyjamas inventing some app that makes my business model suddenly redundant,” says David.

“It’s 20 years since Amazon sold its first book, now it’s worth nearly USD200 billion. Airbnb started in 2007 and now offers more guest rooms than any major hotel chain, without owning a single one. Everyone can see there is a revolution going on here – it is affecting us all.  And I think it has been compounded by the financial crisis with everyone searching for new and permanently more cost-efficient ways to work,” adds Wim.

It’s a particular issue in financial services, where tech companies, offering new services such as peer-to-peer lending and payment services, and alternative providers of credit, like Hedge and Sovereign Wealth Funds, are posing a growing threat to traditional institutions.

“The banks have always been a very important part of our client base, so this could be a threat to us,” says David. “But actually many of the people working in these new providers of credit are former bankers. We know them and have worked with them as they’ve moved into new areas of the market. We’re pretty well placed to serve clients across the sector, both new and traditional – but only if we continue to adapt and change.”

Longer term economic and geo-political trends – climate change, the implications of continued low oil prices, the balance of power between China and the U.S., the decline of the euro, the UK’s receding influence in Europe – are all part of a mix of less controllable risk that all businesses face, particularly a global one such as A&O.

Managing such risk is a complex matter. Remaining “hedged but independent” is the way the firm tries to balance the risk equation.

“We try to diversify so that we don’t ever find ourselves over-concentrated on any one sector, any one group of clients or any one country,” says Wim. “No client represents more than 4% of the firm’s revenues, for instance. It’s a guiding principle for us.”

Breaking free

At the start of their joint tenure, A&O’s peer group was the UK-based Magic Circle of law firms. With so much change since then, the growth of the global network and the strengthening of key practice areas, notably Corporate, the point of comparison is now a global elite of firms that also includes some of the big American firms.

Since A&O is ahead of many in rethinking legal services for the future, is it time to break free from the pack?

“We think the direction of travel for our industry is pretty clear,” says Wim. “Working closely with our clients, we want to drive that direction of travel, not just for ourselves but for the industry as a whole. We want to lead the pack without breaking out of it.

“And I think it’s about evolution not revolution, finding the right balance between what has worked really well for us historically but making sure we are ready to deal with the changes that are happening and the opportunities that arise from them.”

David is clear that the A&O brand is now firmly associated with innovation and a willingness to try new things. “The next challenge is to really deliver that on the ground and the question for the leadership of the firm is how hard do you drive this.”

Here partnership – a model some may think is, itself, ripe for disruption – remains a powerful advantage, they argue. It offers checks and balances, avoiding the mismatch of interests between management and shareholders that often afflicts public companies. It also frees the firm from the tyranny of the quarterly report and allows them to think long term.

“At times of great change, striking the right balance between providing direction and building a consensus is a constant exercise – it evolves,” says Wim. “And that evolution is central to the art of running a partnership – it’s not a science. As a model it is extremely powerful because it gives a huge sense of ownership to 500 of your leading people. You don’t want to be driving them too much because then that sense of ownership goes away.”

The long view

So what will the firm look like in ten years’ time?

David predicts it will have evolved into an organisation offering clients a range of solutions to the complex problems they face. It will work in close collaboration with other key selected advisers to individual clients – a key strength of the firm today. It will be more global, though not necessarily much bigger in terms of permanent headcount. Instead it will have added reach, able to call on a wider range of people and skills. And these people will work in different, more flexible ways, with a much bigger array of careers falling under the definition “legal”.

“I don’t see us straying into areas that are not rooted in legal-type issues. We’re not going to diversify into business services, accountancy, IT – at root we will always be working on issues where, essentially, there’s a legal element to the problem. But I do think we will be a more adept provider of solutions.”

Is he gloomy about the future?

“Far from it! One of the ironies of this more complex world we live in is that clients continue to say: ‘we need to work with smart people like you to solve the problems we face. You might have to present your ideas differently, come at the problems in a different way, but we do need your help’.

“So, this is not a story of gloom.

“In fact, it’s the opposite. It’s a story of opportunity.”

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