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Legal Business’ take on pre-Brexit City law market

On occasion, they let the head of Legal Business take a break from the glamorous job of proofing features to go meet and greet. One such occasion saw me last month pop along to a major UK firm’s partnership conference to provide the LB perspective on the funny old game we call law.

Below is an edited version of my notes, jotted down to help organise my thoughts in response to the outline questions ahead of the event. Obviously, I wasn’t reading my notes during a two-way discussion, so I often rambled on about other stuff – I vaguely recall a monologue about the ‘Napoleon phase’ of managing partners that go on too long before going crazy. But for LB readers, these notes represent a decent summary of our current view of the industry at a particularly turbulent moment. I’ve removed all identifying references to the firm generous enough to host me.

What are the three most common things that you hear from law firm leaders at the moment?

Alex Novarese (AN): They usually talk about things like technology and changing business models, how to engage with young lawyers and the impact of US firms. Generally, it’s not a great period for industry debate. We’re a long way from the reinvention of the profession during the 1980s and 1990s.

You are a fan of sustainable organic growth and in particular don’t believe that firms can shrink and prosper at the same time – could you explain that? Do you think that growth is more important than margins? What do you think the most telling metrics or other measures of success are in a law firm?

AN: It’s odd anyone would even ask why sustainable organic growth is a good thing. The contrary argument is an eccentricity of the legal industry and a reflection of a general desire by partners to focus on their own interests over their firms. There are firms where growth is less important, particularly those operating in highly-defined niches. Even then growth relative to close peers is still important. A business that isn’t growing in the context of its market has something wrong with it. Apart from the obvious reasons that growth is important for a business, there are peculiarities of the partnership structure and the transfer market for partners that make it important. Firms with solid growth have happier partners, they are easier to retain and you can hire more of the ones you want.

Growth isn’t more important than margin, they operate in dynamic relationship to each other, as do all useful metrics. It’s just that some partners worship margin over all else. Most important metrics? Partner/fee-earner leverage is not given sufficient weight in assessing law firms. It tells you something fundamental about the business. Five-year revenue growth will also tell you something fundamental. You assess a law firm by looking at revenue growth, revenue per lawyer, leverage and partner profits on a one, three and five-year basis, cross-referenced. Partner retention isn’t properly tracked as a metric though if it were, it would be illuminating.

You have commented that you think that law firms are too complicated and focus too much on differentiation and not on simplifying their models to focus on what they do well and on accountability – could you explain your thinking and concerns there?
AN: This is at a practice level because the business model of law firms is simple to the point of dumb. Large law firms by definition tend to have highly-diversified product lines. If you throw complexity over that with a large network of offices spanning countries and multiple industry practice lines, that’s a lot to corral. That complexity appears, looking at the data with large firms, to be having a profoundly negative impact on their growth and competitive performance. US law firms by comparison are more tightly-focused in practice, client base and geographic spread. If you indulge in educated guesses or extrapolation, I’m arguing that complexity in commercial law firms appears to be linked to poor performance. At the very least, that notion has not had enough serious discussion in the profession.

Diversity is a huge challenge for all law firms, certainly including us – do you think that things are fundamentally changing on that front or will do so?
AN: It’s only a huge challenge if they care, it’s not apparent that they do. No, I don’t think they are fundamentally changing. Even on gender, where the law gets huge influxes of female talent, they don’t much change. It primarily becomes an issue to me as a professional pundit when the business states its official policy is to address something that it then doesn’t follow through on. It diminishes the institution and its leadership. It diminishes the profession.

What are the smartest things that you have seen law firms doing in the recent past?
AN: It hasn’t been a great period for smart things in law. Major law firms have fallen to bureaucracy and managerialism. I’ve seen a lot of firms I admire diminish themselves in recent years. Kirkland & Ellis’ willingness to tear up the conventions of law and build new models would be a standout, however.

What do you think the most important (but not necessarily most obvious) barriers that prevent law firms from changing and adapting are?
AN: Their penchant for hiring expensive but ineffective support staff is one issue as that robs them of some fresh ideas that should be coming to the table. Their own partnership models, which are often far too restrictive in what they try to achieve, leave far too much power in the hands of older partners whose interests are often in conflict with the longer-term interests of the institution and younger lawyers. It gives them a strategic veto on things that should happen. It’s their own, inbuilt ERG.

You are not a fan of the concept of collaboration and have called it a ‘vacuous platitude’ – why?
AN: It’s often thrown around in contexts that appear totally unrealistic. Collaboration can work in scenarios where you reasonably align the incentives of various parties. In some contexts in which it has been used – often to do with panels or GCs being theatrical – I’ve seen no evidence that it is any more than platitude. You can’t get competitors to hold hands without a clear reason why it would work for them. Why should they?

You have said that law firms should think about focusing more on sales and less on marketing – can you explain what you mean and how you think law firms might go about doing that?
AN: There is no good reason why law firms don’t have sales teams, other than partner egos. You know it, I know it. But challenging it puts you up against those partners. The problem with a lot of what is called marketing or comms in the legal industry is what should be an outward-facing operation increasingly shifts inwards, so you have swathes of fairly expensive staff focused on currying favour with partners and doing their bidding, rather than bringing in new clients, new talent or boosting the external brand. Everything I hear from people who work in law firm coms is that the vast effort goes internally. That’s crazy.

What do you think your biggest story in the next couple of years is likely to be?
AN: Floating law firms. One or two firms with real juice will try it. And we’ll get into how well the growing band of listed firms are performing. Another big story will be if the Magic Circle ceases to exist in any meaningful sense.

What are the most interesting stories that Legal Business carried this year and why?
AN: The #MeToo stories are noteworthy, because they often say something about the realities of partnership and how these institutions work. DWF’s float is interesting for reasons I mentioned already, as is the recent row over Burford’s business model. Two cover features so far this year that stood out for me were one about how law firms tackle racial diversity  and the recent one on Freshfields  because the issues those articles address are issues impacting many law firms.

It has often been said that there are few economies of scale among law firms: Do you agree with that and do you think it is changing? In particular as alternative service providers and the Big Four scale-up do you think that will put renewed pressure for scale on law firms?
AN: I agree to an extent, though that tends to be about not taking the non-fee earning part of the business seriously enough. I believe the Big Four can do well in law if they want to on an institution-wide level. It is not yet clear that they do. Legal commentary also makes insufficient account of the potential regulatory threats standing over those firms. That said, managed legal services is a potential Trojan horse for the Big Four – if they are really that intent on sacking Troy.

Do you consider Kirkland’s impact on the London market to be beneficial and, if so, in what ways?
AN: Kirkland is an evolutionary force in a raw Darwinian sense, so it’s not to everyone’s taste. I understand why it makes some recoil but I find a lot to admire in the firm, in that it struck out on its own and rejected lazy consensus in the industry. Its success has further exposed some of the weaknesses and the soft underbelly of top tier firms in New York and London.

You could certainly bemoan the push towards law as the mega-bucks game that Kirkland personifies but some of the complaints come from very highly-paid rivals, annoyed that they are being out-classed and outplayed.

alex.novarese@legalease.co.uk


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