The new business models debate | Spring 2019
Hamish McNicol, The In-House Lawyer: What are the changes people have made in their business in the last 18 months that made the most impact?
Axel Koelsch, Addleshaw Goddard: When I joined Addleshaw I noticed the firm had done lots of innovative things, including paralegals up north, but they were scattered all over. We pulled those things together. When I was talking with clients, they do not think of those as six different things. They just have business problems they need to solve. Bringing all these new ways of working together allows you to start solving clients’ problems and not the law firm’s problems.
Hamish McNicol: How do you do that?
Axel Koelsch: You need to break some silos. Think, what is our client trying to achieve? If the problem is I have this frigging GDPR mess, the answer could as well be a managed legal service as a technology solution. If you don’t bring the solutions together, the old saying is: if all you have is a hammer, all you see is a nail.
David Pester, TLT: There is a challenge around command and control. Allowing yourself to have a culture where you can experiment is interesting for the legal sector where we have been trained to look at things on a no-fault basis.
What has been amazing for us is seeing how putting aside £500,000 for innovation and saying ‘you have the chance to experiment’ has benefited a range of smaller ideas and initiatives across the business. If you try and control it, you lose that dynamic of innovation.
Alex Novarese, The In-House Lawyer: Is that like a venture capital fund?
David Pester: Yes. People put ideas in. If we have an idea with potential, we will find clients to work with. You need a real-life example. If you try the big idea and major change across everything, you face real challenge getting it implemented. Whereas if you pick areas where you have an enthusiastic opportunity, you can have real effect.
John Croft, Elevate: With a modicum of hubris I would suggest some of us around the table have changed the entire legal ecosystem.
Alex Novarese: Fighting talk.
John Croft: I mean it. None of our customers are happy with the
way legal services have been delivered over the last ten years. People
like us have come up with ‘well, let us try one little thing’ and the
very first thing we did – ten years ago – was starting to do document review for litigation. We did it in India. LPO was born. We found
there were other pockets. I remember in the mid-2000s commentators saying: ‘Careful, lawyers – your jobs are all going to India.’ They
didn’t, but today most law firms have figured out a way to do this
work more efficiently.
Alex Novarese: I am forever being told what I have written before as a journalist. No, we didn’t write that. John, can you give us one issue over the past 18 months that has been impactful? I want to get this down to nitty-gritty elements.
John Croft: We have a software called Cael. We have a legal project management tool, which has improved the lives of the lawyers. It has improved the profitability of the firms. Most importantly, it has improved the end-customer experience because they have been able to see what is happening as they go.
David Halliwell, Pinsent Masons: We have moved to agile working in over 50% of our business. It has had benefits not anticipated. You may have heard in the last month our basement filled with sewage. I was standing next to the managing partner when he was told he had to close the London office. You could see his face falling and thinking: ‘How much is that going to cost?’ The building closed for two days and utilisation dropped by a fraction of 1% because everybody is used to working an agile way. Everybody went home, they worked. It had no impact on productivity.
Hamish McNicol: Mike, three years ago you changed your firm fundamentally by taking it through an IPO. What has been the most positive impact of that?
Michael Ward, Gateley: We were convinced the business model of a corporate put us in a better position to meet the challenges of tomorrow than the old partnership structure. One plank of our strategy is to diversify income streams. We have done four acquisitions, two chartered surveying businesses, one clinical psychology business and one legal business. In terms of its attraction at the coalface for clients it is far more engaging than just selling basic legal services. All [legal consultants] try to do is make everyone look the same. We want to provide good-value legal services but being the same was not attractive to us.
Hamish McNicol: A lot of people have talked about talent. You mentioned more than 60% of staff are on a share incentive scheme. Have you found benefits in attracting different types of talent?
Michael Ward: We are hoping it is going to increase retention levels. Some people get it. Some don’t. It has certainly become attractive to certain senior members in the profession. When I say senior, I think of age 50-plus.
Andrew Darwin, DLA Piper: Mike, if you are in the market for a lateral hire and competing with a traditional partnership, how has that played out?
Michael Ward: It is interesting. In the old law model, you get a share of profit, which is a mixture of a lot of things. How you value those things you do not even think about. In the corporate model those have to be broken down. You are either comfortable with that or you are not. There is less variability in terms of decision-making. There is less goalpost moving and more certainty. Some people like that, some will not.
Hamish McNicol: Mike, you told me you expected a bigger firm would have an IPO by this stage.
Michael Ward: Absolutely. We turned over £58m in the year prior to the float. We should be doing about £100m this year. In market terms that is quite small. I am really surprised the market has been taken up at the lower end.
Alex Novarese: Looking ahead, will there be a domination of legal partnerships or will many UK law firms have built a captive LPO or something like an Axiom internally?
Andrew Darwin: You will get a combination. We built our own legal delivery centre in Leeds, but we also work and partner with others.
Alex Novarese: In banking, you have investment and retail: two different models under one brand. A&O now generates £70m out of its New Law operations. That is growing at a clip, way faster than its regular law practice. Let us look five-to-ten years ahead. Do people think the UK top 50 will have large parts of their business operating via ‘New Law’ models?
John Croft: Yes.
David Halliwell: There is a difference in the business model. If you are a big transactional firm, these hubs are being set up to service transactions. They are still transactions led by the lawyers.
Alex Novarese: For now. What if [these LPO-style arms] are growing 25% a year and you can barely grind out 5% on the regular business?
David Halliwell: Absolutely. You then have to think about what the model is for that. Is that going to then provide services directly to clients that completely stand alone from the main advisory business? That depends on your strategy.
Alex Novarese: How many people around the table have read The Innovator’s Dilemma? One of its core ideas is you have to first separate new model areas away from the parent company and they then start to amass investment, capital, different skills… They then start to drive change in the wider business.
John Croft: That is what law companies are doing.
Alex Novarese: Do they not become power bases within law firms?
Nick Pryor, Bryan Cave Leighton Paisner: It is very easy to look at the two ends of the spectrum and see high-complexity work and then the process-oriented stuff and say you need fundamentally [different models]. A disaggregated service is part of one way of doing that, but equally clients do not want a completely broken-up experience. We will just see much greater diversity in partnerships across different businesses and organisations, and having to be much more creative in the way in which you work together.
Emily Foges, Luminance: Would it be controversial to think further ahead that this commoditisation of legal services and race to the bottom is an interim step towards a world where, like in accounting, the purchase ledger clerk is a thing of the past? Technology has taken over from that. Are we looking at this being just a path towards lawyers using technology more effectively so you do not need to farm out those services to less skilled people? Clients want your advice. They are not that bothered about who does the work if it is going to be that kind of process-driven stuff, are they?
David Halliwell: No, they are not. It is less about technology enabling lawyers to do the work; it is technology enabling the business parts of our clients to be self-sufficient in their daily needs. That is where it is going: a self-service end game for the clients who have the tools and knowledge.
Emily Foges: We come full circle back to the trusted adviser. You cannot resource up for every eventuality so you need specialist advisers for those particular situations, but you are not going to farm out repetitive drudge work.
John Croft: When our consulting group talks to GCs, one of the common first-stop things is do less law. Find a way to self-serve. One of the biggest frustrations GC customers say is they feel they are funding how law firms train their trainees because everyone gives their work to junior people to learn on.
Alex Novarese: Of all the arguments GCs come up with, that one is the weakest. If I buy an Apple product, I am paying a baked-in price for their supply chain and rent for their offices. Plus, GCs do not train many lawyers.
Michael Chissick, Fieldfisher: You could say the same about retail or accountancy. The legal profession is incredibly dynamic. This idea of constantly coming up with these triumphs of how bad legal services are is basic elementary stuff that is not grounded.
Alex Novarese: To be fair to John, GCs do say this a lot.
David Patient, Travers Smith: It does not tell you there is a massive legal market in the UK that has the capacity to have a lot of different approaches.
Michael Chissick: Most of us do fixed fees. Half of our stuff is on fixed fees so the idea that people are paying for trainees is rubbish. There is room for [New Law operators], but there is room for traditional law firms.
Alex Novarese: How complementary do people see New Law businesses and old-school law firms?
John Croft: Very complementary.
Alison Hook, Ulster University Legal Innovation Centre: England and Wales in particular is incredibly dynamic in law. I deal a lot with jurisdictions all over the world, and people are beating a path to England and Wales because you can do things here you cannot anywhere else. That is really important. You see how existing law firms who have been around for hundreds of years feed off that and benefit from it. We are going to be OK despite everything else because of this.
Chris Lowe, Watson Farley & Williams: One of the best opportunities we have as a firm is to expand our business service resource outside the UK. There is a UK-centric discussion going on in this forum, but it is a big world. We are growing in all our jurisdictions outside the UK. Also you cannot underestimate the impact of the American legal market, which is such a huge economy, and they do not think like the people round this table. They do not, in my view, have a strong commitment to innovation; they are selling hours.
Nick Pryor: I don’t know about that. CLOC [the Corporate Legal Operations Consortium] grew out of the States and that has been a huge catalyst for innovation. Hourly rates aren’t a particularly reliable indicator either way; recovery rates remain pretty static.
Emily Foges: I went to an all-day workshop in New York recently. The big message there was we need to look to the innovation in Europe.
Chris DeConti, Axiom: There’s no doubt we see much more innovation in the London market than in any other we are involved in. The New York firms, with profits per partner of $4m, are not that worried about innovation.
Andrew Darwin: That is an important point that our profession has to face up to. We are so fragmented. No firm has more than 1% market share.
Alex Novarese: Yet when I have mentioned the possibility of using multiple structures, which you need to consolidate, the response was: ‘No, no, we can collaborate!’
Andrew Darwin: The reality at the moment is the balance-sheet strength of the law firms. That is mainly part of the partnership model, but also we just do not have the investment goggles. If you were a big tech investor looking at sectors, would you put your money in the legal sector? Probably not.
Alex Novarese: The UK legal market is awash with capital. You just flush it out every year.
Andrew Darwin: We pay for the partners.
Alex Novarese: You should stop doing it so much. You are bleeding money out.
Andrew Darwin: Then the US firms come in and pay even more to the partners.
Alex Novarese: The full distribution model is a joke.
Andrew Darwin: It has worked very well.
Alex Novarese: It is not going to be working 20 years from now.
Chris DeConti: Today’s partners do not need to worry about that.
Ray Berg, Osborne Clarke: Today’s partners do have to worry about it. It is not an attractive model. It is not sustainable. I know PwC sets roughly 5% of their revenue aside each year for investing and innovation. We could not afford to do that on our scale, but it is just changing the mindset. It is not sustainable for us to carry on earning more and more and more and more every year. It is just wrong. There is a massive social impact issue around this. We would not be attractive to a lot of graduates. They see us as being the wrong side of the line, frankly.
Nick Pryor: In the junior lawyer market, the diversity of ideas about where their career might take them has massively changed. Their entire approach and engagement on that pact is very different. That takes a long time to carry through. But I think that has been broken.
David Pester: Ray makes a good point because what I hear the most from the people you are talking about is: ‘What is the purpose? What are we trying to achieve?’ We all have different answers to that. We have a challenge to mitigate the burning platform where the sector creates millionaires who might not see the need for change based on current revenues and profitability. I suspect the generational change that is coming will be as big a catalyst as 2008 for change.
Alex Novarese: Do people believe that clients will drive innovation?
Emily Foges: Innovation is driven by need. What we have seen in the last couple of years is a lot of very big firms who want to tick the innovation box. Then you see firms in emerging markets or with different structures who are saying: ‘We have to do something and we have to do it now.’ That is more successful.
Andrew Darwin: It has become a proxy for internal efficiency. Now most people have realised you have to separate the two things. You cannot drive real innovation through that kind of function.
Alex Novarese: There is nothing wrong with targeting profitability. But I do think the legal industry is selling itself short because there are huge structural pressures building up and it needs to invest. If it does not renew its own model, major law firms will be in serious trouble in ten to 15 years.
Chris DeConti: That is something we talk about a lot. In one way or another, there have been dinners like this for the last 20 years and not much has changed. If that is the case, do we believe we are now in a turning point that the convergence of legal tech, the maturation of alternative models, the overwhelming pressure caused by new compliance and regulatory burdens – is there enough of a convergence that we are at a tipping point?
Philip Goodstone, EY: It is a great market. I was in traditional law a long time and am now part of New Law. What you have to look at is the different parts of our law businesses. Some businesses will be ripe for technological change. It is why firms came out of parts of the market when they cannot compete in it anymore. Other parts of the market will not have to change as much. I have two other points. First of all, you have to be purpose led. You have to know what you do and why. If you do that, you will carry on being a great business.
The other thing we have not talked about is the landscape for legal services. The world is changing and becoming more complicated. These changes will increase the market for legal services. What used to be done by lawyers 30 years ago is no longer done by lawyers. A lot of the radical changes we have seen in the law to date have been B2C rather than B2B. What we are seeing now is the rate of change accelerating in B2B.
Will some firms come out of compliance because compliance will be automated? Of course! Will some firms focus on high-end advisory? Of course! Is there a chance for businesses like EY to do both? Probably, because we have the brand.
This doom and gloom is misplaced. There are great businesses – be they New Law, traditional law – who are innovative, respond to client need and differentiate. It is a massive, growing market. Look at the US, the US has been a disaggregated market for years. Look at litigation. It used to be done by lawyers, then by the accountants. This is great. This is change.
Alex Novarese: Can I get thoughts about what you should do right now to your business?
Michael Ward: The fundamental is attracting the right talent to the business. That will never change.
Andrew Darwin: To the point you made, David, it is about whether we can combine lawyers and other professionals more effectively. That would be a really good change.
David Patient: The shape of law firms will fundamentally change in the next few years so you have fewer lawyers as a percentage of the total and more professionals supporting the provision of legal services. That will probably be the biggest change to certainly my business over the next five years.
Shilpa Bhandarkar, Linklaters: There will be fewer lawyers at the bottom of the pyramid rather than across the board. At some point, the traditional pyramid will have to be redrawn.
Alex Novarese: Because you have other professionals or just more tech?
Shilpa Bhandarkar: Both. You will have other providers that can do particular tasks more efficiently. What clients will always want though is that high-value-add strategic legal advice.
David Pester: Stewardship of client relationships is the first point. Are you in stewardship or delivery? You are all part of the same thing, but there is going to be a balance around that, which is going to drive value. I am absolutely convinced that it is not going to just be about lawyers. It is more broadly about what talent you need to deliver what is required. We need to stop categorising.
Andrew Darwin: You can still attract very, very talented people to our profession and they still are passionate about it.
Ray Berg: People coming to law later in their lives is probably one of the things that interests me most. We have seen more second-career lawyers over the last five years, often because they have a particular expertise. So they are able to morph legal skills and other skills, whether technology or finance: a new lawyer.
Alex Novarese: Thank you for your time.
- Shilpa Bhandarkar, head of innovation, Linklaters
- Ray Berg, UK managing partner, Osborne Clarke
- Michael Chissick, managing partner, Fieldfisher
- John Croft, president and co-founder, Elevate
- Andrew Darwin, senior partner, DLA Piper
- Chris DeConti, executive vice-president of global solutions, Axiom
- Emily Foges, chief executive, Luminance
- Philip Goodstone, head of law for UK & Ireland, EY
- David Halliwell, director of knowledge and innovation delivery, Pinsent Masons
- Alison Hook, advisory group member, Ulster University Legal Innovation Centre
- Axel Koelsch, chief operating officer, Addleshaw Goddard
- Chris Lowe, co-managing partner, Watson Farley & Williams
- David Patient, managing partner, Travers Smith
- David Pester, managing partner, TLT
- Nick Pryor, innovation solutions director (EMEA and Asia), Bryan Cave Leighton Paisner
- Michael Ward, chief executive partner, Gateley
- Hamish McNicol, corporate counsel editor, The In-House Lawyer
- Alex Novarese, editor-in-chief, The In-House Lawyer
- Amy Chestnutt, business development director, Invest Northern Ireland
- Maria Quinn, business development director – global business services, Invest Northern Ireland