Management and leadership strategies have come under scrutiny in recent times as existing law firm models are put to the test. High-profile failures, global mergers and increasing pressure on fees have sparked discussions of how law firms ought to be run in the 21st century. As the leading players look to maintain their share of a heavily saturated marketplace their approach to compensation, technology, globalisation and client billing will determine their success.
The financial crisis exposed the high-stakes strategies of certain players and the market looked on as former leaders Howrey and Dewey & LeBoeuf collapsed. The former embarked on a course of rapid expansion funded by borrowed money, which unravelled when the financial crisis saw revenues drop and partners being paid from profits the firm was no longer making. Dewey & LeBoeuf’s collapse, which remains the largest law firm failure to date, followed an unsustainable practice of lateral hiring with guaranteed levels of remuneration on extended contracts. Dewey’s downfall is widely attributed to poor management that saw the firm accelerate the hiring of high-priced partners in a bid to grow the firm out of trouble. Former chairman Steven Davis was ousted in spring 2012 after the Manhattan District Attorney began investigating him for fraud. Even more recently, the partners of Canadian firm Heenan Blaikie voted to dissolve the partnership. While gross mismanagement has been cited among the causes of the demise of Howrey and Dewey & LeBoeuf, Heenan Blaikie’s strategy was very much of the mainstream. Its downfall was due to declining financial performance that led to a raft of defections of senior partners depriving the firm of needed revenue. The firm was a victim of the changing legal market that made it tougher to achieve the profits partners have become accustomed to, and stands as an example of the tightrope law firms are walking between success and failure.
Following the downfall of these firms, there has been much conversation about the lessons to be learned, the most important of which is how (mis)management, particularly in a financial downturn, can spell ruin. Since these failures there has been renewed interest in strategies and the ways in which firms can achieve growth in difficult economic times.
The answer for many has been to focus on partner performance: looking at how much business they bring in and how many hours they bill. Although the mass layoffs and demotions that were common in 2009 and 2010 are now in the past, firms are still looking to trim their weakest performers. The decrease in demand for some types of legal services due to the economic downturn has made it difficult for firms to maintain profitability levels and they have responded by both reducing the number of equity partners and, in many cases, expanding into new practice areas or jurisdictions. The latter has been achieved by opening new offices, making lateral hires and entering into mergers – a high-profile example being the Norton Rose and Fulbright & Jaworski combination in 2012, which saw Norton Rose Fulbright become a global powerhouse with a presence on six continents.
At the same time, clients are becoming smarter shoppers. They are scrutinising their legal spend, increasingly looking to take work in-house and are generally more inclined to shop around for outside counsel. Whereas previously they might have used a single firm for all their legal needs, now corporate counsel are looking for the right firm for a particular matter. For complex, cutting-edge work they are turning to leading specialists within the relevant area of law, whereas for routine work they are turning to firms who can offer the cheapest service. If the matter requires a seamless cross-border service than clients will turn to a global firm with offices in the required locations. Risk management, in the form of internal compliance work and representation in investigations, has also become increasingly important to clients and many firms have responded by bolstering their offering in these areas. At a time when transaction levels have fallen, risk management presents an opportunity for firms to make themselves indispensable to clients. During our research across 35 disciplines worldwide, the common view is that in-house counsel are becoming more sophisticated in their requirements, with many citing demand for flexible billing structures.
Law firms have no choice but to adapt and respond to the changing lawyer-client dynamic and technology is one way in which law firms have begun to provide a more efficient service. From the use of smartphones with instant e-mail access, making lawyers available 24/7, to investment in knowledge and document management systems to maximise the use of the firm’s accumulated expertise, technology is being used to improve the service clients receive. Furthermore, e-discovery and the outsourcing of routine work to third parties and the operating of administrative functions out of lower-cost offices are helping to bring down the costs of legal fees.
Based on our findings it is apparent that there are three types of firms emerging in the international legal market: the global elite; those that focus on highly commoditised and high-volume work; and specialist firms.
The Global Elite
The top-tier firms of the future will be those that strategically manage their actions to become truly global entities with strong brands. This group will largely emerge through consolidation of existing firms as they seek a presence on the ground in order to tap into emerging markets, and to grow their market share in a saturated legal marketplace. Firms will either opt for a global merger or focus on building their reputation across markets by opening new offices. Norton Rose Fulbright, Herbert Smith Freehills and King & Wood Mallesons are just a few of the firms to have begun down the first path; their next challenge will be to merge their cultures to create a seamless client experience. For those who choose to concentrate on organic growth, they will need to show clients that they have the most talented lawyers in every market. Their task will be to build a practice from the ground up, putting them at a slight disadvantage to those firms opting for mergers who are acquiring a ready-made client following and reputation in new regions.
In recent years, we have seen law firms and their clients expand into Asia, South America and Africa while the European and US economies have remained stagnant. Some firms have opted to combine with Australian firms in order to position themselves to take advantage of work coming out of Asia, such as Ashurst’s merger with Blake Dawson. While their strategies may differ, they all have in common a desire to service existing clients in new jurisdictions and to access new clients in emerging markets. Through combining their resources, client base and network of offices and alliances, these firms seek to provide a “one-stop shop” for clients’ global needs.
The highly commoditised/high-volume work
Commoditisation of legal services is a challenge to all firms and there are fears that it will bring about a significant decline in legal fees. Certain law firms are using technology to their advantage to offer clients a cheaper service for their more routine work, leaving the elite law firms to concentrate on critical matters that require their specialised cross-border counsel. While those focusing on highly commoditised, high-volume matters are for the most part chasing different work from the elite law firms, it has added pressure on the latter to justify their high fees and perform value-adding services to clients. There are some lessons for all to learn from this category: how technology can be used to increase efficiency and cut costs. An example of how the world’s leading law firms are embracing certain aspects of this model is the use of outsourcing work to third parties and offshoring work to different countries, as well as e-tendering for new matters.
The third category is made up of niche firms focusing on particular areas of law, and who as a result are able to offer the very highest levels of expertise. Quinn Emanuel Urquhart & Sullivan is one example for its dispute resolution work, while offshore firms such as Maples and Calder, along with Walkers, also lead their particular field. By demonstrating themselves to be true specialists they are able to attract top-level clients and their size often enables them to provide a more flexible and client-tailored service, less marred by conflicts. These firms often focus on areas such as labour and employment, sports, patent or trademark disputes, private client or immigration – practices that tend not to require the support of lawyers in other disciplines.
Of course, not all firms will fit into these “types”. Our WWL: 100 includes many leading entities who have not sought global expansion on the same scale as those vying to be part of the global elite, including Clayton Utz and Slaughter and May. While the former has an office in Hong Kong in addition to its offices in Australia, and Slaughter and May has offices in London, Brussels, Beijing and Hong Kong, both have eschewed international mergers in favour of informal networks with the leading players in jurisdictions in which their clients are doing business. The key selling point of this model is the flexibility to refer work on a case-by-case basis to the most suitable local contact. While “best-friends” networks have worked well in the past, it remains to be seen whether they will be similarly successful in a consolidated legal market. Slaughter and May lost its decade-long best friend Allens in 2012, when the latter chose to form an exclusive alliance with Linklaters, and legacy firm Herbert Smith and its alliance partners Gleiss Lutz and Stibbe chose to end their partnership in 2011 following failed merger talks. Since then, Herbert Smith Freehills has opened its own German offices in Frankfurt and Berlin. With fewer independent firms to choose from, will a “best-friends” network or alliance be viable in the long term?
Alongside these alterations at firm level, lawyers are also experiencing change on an individual level as the traditional partnership model comes under scrutiny. Many firms have woken to the reality that having hundreds of partners paid for by thousands of associates is no longer viable and others have found that the pyramid has become top-heavy. As a result, they have been decreasing the ranks of non-productive partners. Indeed, fewer associates are making partner and even among those reaching this rank, many are being appointed as salaried as opposed to equity shareholders. We are also beginning to see firms reconsider the lockstep model. Those in favour of a more flexible structure argue that it better drives performance and allows firms to reallocate resources where necessary. Many have chosen to introduce a bonus-pool that allows the better rewarding of top performers and enhances the ability to attract and retain stars. However, supporters of the traditional lockstep model argue that it emphasises the team and supports the notion that partners are all working for the success of the enterprise. The resulting picture is one where law firms are moving away from the models that have served them so well in the past, and beginning to operate more like businesses with a greater focus on revenue, profit and growth.
Furthermore, the adoption of external funding in certain jurisdictions has seen the first publicly listed law firm – Slater & Gordon – and the advent of alternative business structures with non-lawyers running the firms. This marks another step away from the traditional partnership model, and its ramifications are likely to be felt across the spectrum of legal business.
Firms are also taking steps to improve diversity and the retention of female lawyers at partner level, largely due to pressure from clients who expect their legal advisers to be an extension of the company and reflect their values. As clients discuss the benefits of board diversity, law firms are also looking at ways in which they can increase the number of women making partner. Flexible working is a key aspect of this and we are beginning to see some firms embrace a culture whereby flexible working is not only offered but also does not hinder future promotion prospects. Moreover, national and international companies have become increasingly aware of the responsibility they have towards communities in which they operate and expect their legal advisers to mirror this commitment to “giving back”. This has led to the discussion of pro bono work in pitches as a further element on which firms can be compared by potential clients.
It has become a strategic necessity in today’s harsher trading environment that law firms evaluate their current model and make changes to ensure they are well positioned for the future. The legal services industry has undergone a dramatic transformation in the past five years, rivalling that of decades preceding, and some firms have inevitably been left behind, their failings exposed by the falling tide. These firms are not alone: others will also fall by the wayside before this era of change is over.
The changing nature of the business, in the form of growing demands from clients, globalisation and reduced profitability, also presents opportunities. For those that get it right there is the possibility to earn a place among a small number of elite firms who serve the biggest clients on a global scale and to be rewarded by the profitability that will inevitably ensue. For others, there is the opportunity to carve out a niche practice at the top end of many types of work, or to exploit previous inefficiencies to find success in commoditised work. In order for firms to prosper, managing partners need to make decisions now to set a clear strategic direction to secure their position in the future.