Enterprise GC | Summer 2019
Alex Novarese, The In-House Lawyer: Catherine, how much progress are you seeing at law firms in listening to the stuff clients tell them?
Catherine Johnson, London Stock Exchange Group: They listen quite a lot. Whether they act on what they hear is the question for me. One of the areas where I have seen the biggest change is around diversity. Three years ago I sat on a panel for the 30% Club. I was asked, ‘If you want to see diversity on your external legal teams, what amount of pain are you as the client prepared to take?’ I would never expect to hear that comment now. That has been a massive change. They are not doing as well as the accountancy firms, but they are catching up.
The other area is technology. It has been a massive focus for my team over the last couple of years. For the large firms, the sort of technology they are looking at tends to be how to improve their processes. It is nothing life changing; it just makes it more efficient and a bit less painfully expensive. The new firms or the accountants tend to be more focused on solutions.
Richard Price, Anglo American: On diversity I am seeing tremendously slow progress among the big law firms. I just saw the headline that at the rate that the US firms are heading, they will achieve gender parity in new partner promotions – not within the entire rank – by 2032. Law firms could very well be extinct by 2032.
Alex Novarese: You are not impressed.
Richard Price: Not at all. We talk to our external counsel a lot about diversity. We try to encourage them and there is much we can do as clients to support them. My concern is that they can only do so much around the edges. I wonder if the issue is with the business model and that things are not going to improve until the business model changes drastically.
Alex Novarese: Nick, how would you say the legal industry has changed over the last three years?
Nick Roome, KPMG: Massively over the last five years. I was one of the first movers into a Big Four environment back in 2014. Back in the day a lot of people said, ‘What on earth are you doing?’ Wind forward the clock and the market now starts to understand.
On this diversity point, I work in a huge professional services organisation. It is a massive agenda item and we are genuinely working hard at it. In certain parts of the market, your talent pools are just fundamentally not diverse. That creates a real challenge when you are building a practice. We are lucky within our legal services bit of the KPMG business because we are building afresh and we are four or five years into our build. We have been able to get that diversity and inclusion balance right from the off. We have a 50/50 split at partner level and down the structure.
Alex Novarese: Simon, where would you feel the legal industry has made the most progress in the areas we are discussing?
Simon Levine, DLA Piper: Law firms genuinely try to listen. Whether they always act on what they hear, sometimes is down to the individuals. I have another four years [leading DLA Piper], so I can say what I want. The thing I have learnt in the last five years is that you are running a business that is fundamentally dependent on human beings. You train them and try to get the right values into your firm. You hope they follow through. In many cases, at all levels, they follow through. Then some people let you down and that is the bit that gets publicised, and it is grossly disappointing.
In terms of new entrants, it is a good thing. We work with some of the Big Four law firms and with some of the technology firms. I have never understood why people are so defensive about competition. If you have backed yourself to be good, what are you worried about? Choice is a good thing.
The thing I am sure we will come onto at some point is that the business model is a challenging model. Getting law firms to change is hard when you are changing the engine mid-air. If you go to your best partners and say, ‘Would you please change your model, take this pay cut and do all these other things for the good of the business over ten years?’ they will go, ‘I hope you don’t mind, but I’m off to the nearest US law firm.’ That is not a reason for saying we should not change; we do need to. But it’s not as simple as it sounds.
Richard Price: Richard Susskind talks a lot about this. It is an industry that has a bias against change. It is a very lucrative profession.
Simon Levine: Richard did something with us that I know he has done with A&O, Deloitte and different people. He put up on a display behind him a picture of a power tool – it was Black+Decker; he said all the senior Black+Decker people got together and brainstormed about what their clients want. They all started talking about better powerpacks, cordless drills and whatever else. At the end he said, ‘No’, and put up a slide: a plank of wood with a perfectly drilled hole. He said, ‘What your customers want is a solution.’ There was a look of slight horror on the face of some of my partners because they had never thought in terms of solutions before, but that is what customers want.
Nick Roome: There is an interesting point around the way the regulatory landscape has changed. One of the things that has held back evolution in our sector has been the way in which regulation has promoted that lack of change. In the last five years that has started to make a difference.
If you look at the big global outlier in the way in which our sector is regulated, the US market, the biggest market in the world, is still where we were many years ago.
We worked very closely with the SRA as part of becoming an ABS and have continued, as a new entrant, to work very closely with our regulator. Their view is this is starting to permeate across different geographies and is the direction of travel.
Simon Levine: People forget how far ahead England and Wales is compared to almost any jurisdiction.
Alex Novarese: Simon, what do you make of the state of leadership among general counsel?
Simon Levine: GCs and the role of in-house functions has become immeasurably more professional and organised. They are very much more professional than 30 years ago. What I would say is that I have sat here over the last ten or 15 years listening to GCs tell law firms all the things they should do better. GCs are the people most likely to change the industry. Ultimately, law firms react to what clients do. But I have lost track in my career of how many times I have built relationships with clients, done all the things they wanted, all the training, all the secondments… then when the big deal comes along, they go, ‘I’m using Slaughter and May.’
This is symbiotic. Law firms, GCs and in-house counsel have to do this together. One of the things that winds me up most is the way law firms are against each other, and GCs against law firms and barristers, and spend their time slagging each other off. If you look at some of the successful sectors out there, they do it by operating together. We have to be more harmonised about how we do stuff.
Catherine Johnson: I agree GCs are people that can force change in the industry, because we are the big buyers. The approach we tend to take is horses for courses. You might go to Slaughters for a massive transaction, but you try people out in the middle before you shift your allegiance.
I am not sure there is any desire from the bigger firms to go away from their high-margin business. They just want to do that better or more cheaply – not as cheaply as I want them to do it. If you want something really different, new and tech savvy, you are not going to get that from traditional law firms. As a GC, you have to go out and find something.
Alex Novarese: Is that not a career risk for a general counsel? Are they prepared to follow through on that?
Catherine Johnson: I have. I have been [at the London Stock Exchange] a long time, so people might trust me more to do that. With all these little experiments, you start with something small that is low risk. If it works, you put a bit more out there.
Alex Novarese: When I first started covering the legal industry, a whole chunk of law firms were doing radical things to their business model, particularly with the globalisation in London firms. If you look at recent years, law firms have become a lot more risk averse. Why?
Nick Roome: In terms of the bold steps you are talking about, there was opportunity. DLA is a great example of a firm that had, very early on, a global strategy and executed that fantastically; they were a first mover. Over time, those opportunities get fewer and further between. Maybe that resulted in a slowdown.
Alex Novarese: How do you feel about IPOs? DLA wanted one at one point.
Simon Levine: Some law firms will change and be more technologically driven, or at least driven in different ways in terms of services they provide. I have some strong feelings on that and think they will end up investing in other businesses or JV-ing with other businesses.
Do I think it makes sense for law firms to IPO? I personally do not understand it on a number of levels. I feel strongly that people in law firm management have a legacy issue to the brand and the firm. You are potentially depriving many generations of lawyers from what they aspire to do by cashing in your chips and taking the money out. When Goldman Sachs did it, they reinvested a large proportion of that money back into the business. The second point I don’t understand is why you would invest in an IPO of a law firm. It’s the concept I do not really get.
Alex Novarese: Has the partnership model had its day? Is it a barrier to the kinds of services that clients want to get?
Nick Roome: As a profession, we need to take a hard look at where we have evolved to. One of the things that concerns me is that, in certain parts of our profession, we have evolved into a 2,000-hours-a-year culture, which has massive implications. It drives up wage inflation far beyond other comparable professional services because people have to be so heavily compensated to put up with it. It creates issues around the perception of our profession, which are not good. It does not promote diversity and inclusion that we all desire.
If you can look at fundamentally different models for how you motivate, reward, engage with people and give yourself greater flexibility outside of the traditional partnership model, there is something in it. I have spoken to people who operate in IPO legal businesses and love it.
Simon Levine: We are being very UK-centric. I have looked at it and there are a lot of jurisdictions where the regulator would not allow you to do that.
Alex Novarese: There is a lot of talk about structural issues building up in the legal industry that make it ripe for disruption. How does the panel feel about the pressure to change building up?
Richard Price: The law firm model is under tremendous pressure. I worry about how sustainable it is. I worry about the ability of private practice law firms to recruit strong talent out of the schools. It is becoming, relatively speaking, less attractive than it used to be. Frankly, in-house is more attractive relatively.
As a big consumer of private practice legal services, I worry and wonder if there is space for disruption. I also wonder if there is room for a very different kind of law firm to emerge. It is probably not one of the big existing law firms that is a massive tanker that needs to be turned. It is probably something that spins out of a firm. I wonder if there is space for a law firm that has a purpose that is bigger than maximising profits for its equity partners. All our companies, all our corporations have purposes. What are the purposes of private practice law firms? In most cases people will say it is to maximise profits for the equity partners, but I do not think that resonates well with clients and the kind of people law firms are trying to recruit these days.
Alex Novarese: Simon, how do you see that playing out in the next couple of years?
Simon Levine: In the next couple of years it will not change that dramatically. There is no disruptive element yet in the profession. I spend a lot of time in the US and they are not quaking in their boots about anything – not technology, not the Big Four, not any of those things.
Alex Novarese: Structurally they are losing market share.
Simon Levine: I am telling you that when I sit around there they are not. It needs a disruptive element. It may come from technology, new providers, the Big Four, clients, GCs or whatever it happens to be.
The biggest single problem [with the law firm model] is the full pay-out distribution [of partner profits]. We have more of a quasi-corporate structure and there are two independent NEDs [non-executive directors] on [DLA’s] board; they have both been CEOs from industry. They look aghast at how you can pay out everything in one year. The full distribution model is the biggest problem, more than the partnership structure.
Alex Novarese: For what it is worth, I totally agree. What should in-house legal departments look like in 2025?
Richard Price: We are focused on optimisation of delivery and that is using technology. It is also using alternative service providers. Another big challenge for us, particularly as we recruit more people out of private practice, is showing them a career path. It is very difficult in an in-house legal organisation. At least in private practice, there is a well-understood path. One of the things that we have been focusing on is showing a career path outside of legal. What I am trying to do is encourage some of my best people to leave legal and go into other functions.
Alex Novarese: I am going to suggest we draw it there. Please give a warm round of applause to our panel.
- Alex Novarese, editor-in-chief, The In-House Lawyer (moderator)
- Richard Price, group general counsel, Anglo American
- Catherine Johnson, group general counsel, London Stock Exchange Group
- Simon Levine, co-chief executive, DLA Piper
- Nick Roome, UK head of legal services, KPMG