London will fall to US firms, ABS is no big deal, Vereins have had it and the modern obsession with process is a waste of time. Discuss
In a time of unprecedented uncertainty in the legal market, most people with skin in the game are interested in where things are heading. We industry observers are often asked for predictions, but uncertainty is the mother of caution and few want to stick their necks out. For what it’s worth, here’s my neck stuck out, bared for the troll-axe:
1. The mega-consolidators will struggle
Law firms thinking they can merge their way to market share reminds me of the ‘conglomerate’ thinking of the 1970s, whereby commentators and science-fiction writers imagined a future where two or three mega-companies would dominate. All the conglomerates either collapsed or reverted to core when size and diversity failed to achieve synergies. When it comes to law firms, there is such a thing as ‘too big’.
2. Vereins are over
While the Swiss table tennis fraternity might at one time have seemed like a corking wheeze to resolve the differential regional profits of professional services organisations and facilitate mergers, separate profit pools eventually bite you in the posterior. If you can’t persuade your other offices to play ball because there’s literally nothing in it for them you will be outpointed by rivals who can deliver global resources locally. And, while we’re at it, nothing irritates the multinational client more than the inability of a supposed global brand to offer a single point of contact.
3. The magic circle is doomed
The US is the biggest market for
legal services in the world and if you can’t offer world-class service there your days are numbered. It is not an impossible ask, but you’d better get it right, and soon. I’ll see at least two of the four – I except Slaughter and May – merged or fading into rosy irrelevance before I retire (see point 6).
4. The accountants will fail again
Everyone is talking about the accountants having another crack at the legal market, and they do seem to have the hiring chequebooks out. They will fail again, but this will not be their last try and some day they may get it right. Why will they fail? Because they are trying to find an answer to the wrong question. If they could answer the right question they could change the game. They are not years ahead, as many think – they are operating in a different dimension from their legal cousins.
5. ABS will remain confined to consumer-facing markets
The alternative business structure (ABS) is a wonderful way of ridding the legal industry of a giant swathe of pretty rubbishy little high street firms who should have gone out of business years ago. However, anyone crackers enough to invest large amounts paying off the already-overpaid partners of some borderline mid-tier City practice to try and make a profit under ABS will lose their money pretty quickly.
6. London will fall to the US firms
US firms are already hiring proportionately more corporate and finance partners in London than their UK competitors. This is a matter of fact. But remember that, thanks to the obsession with litigation back home – the US tort ‘industry’ is bigger than the agriculture sector – they have very, very deep pockets and can outbid the UK top-tier forever if necessary. As Cicero said, “the sinews of war is infinite money”.
7. The future is about purpose, not process
Excellent process is a vital consideration for today’s top law firms. And so it damned well should be, given the eye-watering amounts charged for even run-of-the-mill services. Do they demonstrate excellence every time? No, they are human beings. Process in itself will not win you the game if you don’t know why you’re playing the game in the first place. Being a cog in the wheel of the most efficient process in the world won’t get Gens Y and Z out of bed in the morning, but having a point to life will.
8. Top-down branding is yesterday’s news
In a world boned, filleted and hung out to dry by social media, the idea of a top-down controlled brand is yesterday’s thinking, especially for law firms. The successful professional services brands of the future will be tech-savvy, organic, cool and trusting, understanding their true brand power will be Gestalt: an expression of a whole greater than the sum of its parts.
So there you have it, a few curve balls thrown out into the ether. Emails, brickbats, tweets and missives to the usual place…
Interesting opinions, although there’s not one mention of Bond Dickinson’s role controlling this bright future.
Seriously though, why do you think Slaughters is best placed out of all the MC firms to survive? Is it because they have differentiated themselves from the other MC firms?
I think you are spot on about ABS though; all this fanfare for something that really only threatens volume law providers.
I have spent a lot of time with private equity houses and firms talking about the possibility of direct investment and I am in no doubt now that ABS will remain focussed on consumer markets for many years to come, as Mark highlights.
Any direct investment into B2B legal services will need to be from specific and specialised vehicles targeted solely at that sector .
I believe he means he expects Slaughters to fail. “Expect”, not “except”.
First off, thanks Anonymous! I except Slaughters on two grounds really, the first is that despite the market in general feeling they are part of the MC, they are already a very different entity from the other four, so much so that The Lawyer expelled them from the Circle, at least for its own analytical purposes, already. The second is, I think, that they are very distinctive in character and, dare I say, purpose, from the other MC firms. Will that alone be enough to save them? I think it probably will, as long as they can maintain their focus and distinctiveness.
Clever, amusing and largely correct (and by the way, the answer’s 42…..)
A provocative piece as usual, Mark. Some points where I disagree:
1. Consolidation. The 1970s consolidators failed because there was no synergy between elements. The consolidated law firm succeeds because the client doesn’t have either (a) the skill or (b) the desire to disaggregate themselves. Many clients are more dysfunctional than the firm they instruct.
2. Vereins are over. Agreed about point of contact, but companies’ profit pools are just as regionally disfunctional as a law firms. Sadly global firms need to reflect local rates when getting work and paying partners.
7. Future is about purpose, not process. Agreed, but that there is a world of difference between process re-engineering (internal engine-fixing) and project management (engaging with the client to deliver the quality the client will pay for in the timeframe they desire). Process is easier to fix, as we can usually avoid confronting partners. Project management requires partner commitment, not just involvement.
I am still pondering 3-6. Point 8 contains an interesting example of an oxymoron “a …tech-savvy, organic, cool and trusting… law firm”. let me know if you find one
I think the danger for UK based firms focused on M&A and corporate law generally is whether they can continue to attract quality deals at a global level. I think you are right Mark that US firms have an advantage as their large home market often attracts a sizeable amount of these type of deals! Traditionally, the Sullivans, Cravaths, Skaddens and Simpsons all dominated Global and European rankings by value. This also prevented them from investing abroad.
However, I think that certain overseas investments made by the MC have paid off. The UK is a relatively small legal market – certainly compared to the US – yet the M&A H1 2014 league tables show that the only non-US headquartered firms to come in the top 15 worldwide by deal value were Freshfields – at No.2 in the world according to Mergermarket – and Linklaters. This is quite a feat.
What I think should be worrying for firms like Slaughters, is that they do not even appear in the top 20 by deal value in Europe. A firm like Simpson Thacher, whose home market is not even in Europe, consistently does. In the most recent European rankings Freshfields are No.1 for M&A value in Europe and Linklaters No.3.
This trend seems to continue at UK level as well. The London corporate departments of the MC firms – including Slaughters – are all roughly the same size (unlike their respective European footprints). Freshfields were No.1 in the UK having completed 45 deals at $73.3bn. Linklaters did 44. Slaughters only did 21 deals – half that of Freshfields and Linklaters – and at a significantly lower value of around $30.7bn.
Having worked in M&A for a long time, much of one’s future position is determined by the deals that you complete today and rankings are – unfortunately – an increasingly important and objective means of showing this. Davis Polk, Sullivan and Cromwell and Simpson Thacher all performed a volte-farce and launched English law practices in London (despite maintaining for years that there was no need for local law capability). To my mind, this shows the increasing internationalisation of the ultra-premium market.
Can you explain why, in your mind, this spells doom for Freshfields and Linklaters but not Slaughters?
@Arachnae: maybe law firms in Mark’s new world should turn to branded towels rather than branded umbrellas?
Thanks all. @Jamie, I don’t disagree with your points. My piece suffered a little in being edited for length, so I’ll expand a little here. My thinking re the 70s conglomerates is that they were about opportunistic territorial expansion. Some – not all – of the massively expansive law firms have little business logic behind the thinking save for having flags in maps and being able to say to (theoretical) clients that they have presence in ‘x’. That, for me, links to the verein point; without the ability to deliver global resources at a locally-acceptable rates with a single point of contact, clients are often better off co-ordinating their own activity.
Your point on project management is also valid, but good project management still doesn’t equate to organisational purpose. I look at some major law firms right now and I think “what are you FOR?”
@Jeffrey, thanks for your input, very interesting. I think Slaughters’ future lies in their distinctiveness, specifically the comment – time and time and time again – from clients that Slaughters produces more ‘holistic’ lawyers, which allows them to put fewer people on deals, think around problems more effectively and leverage their undoubted intellectual talent to a very profitable extent. The firm also has, according to some experts I’ve spoken to, an unrivalled alumni, not just in terms of quality, but how it ‘manages’ it. You can’t buy connections like that. I think there could always be a future for a firm like that, not least because they are unthreatening to the major US firms. As I see it, the other MC firms have all poked the hornets’ nest in taking on the US firms on their own turf, so far to very limited effect.
The other MC firms in London meanwhile are fertile hunting ground for headhunters, losing quite a few real prime-movers to US firms; are they replacing them fast enough? We have no way of knowing. If the core of truly excellent partners becomes sufficiently eroded, they will become very vulnerable very quickly.
As the axis of world thinking swings towards Asia, the cultural links of Empire have allowed the MC (and chasers) to attempt to outflank the US firms with an ‘Asia via Australia’ strategy, but I know as many people who think this is plain daft as think it’s a good idea.
Whatever happens in Asia, I remain unconvinced how a firm can claim to be truly global without having cracked the largest legal market on the planet, and short of merger (= submission) I just don’t see how you do it.
Thanks for your reply Mark.
I think the MC are – at some point – headed for some kind of merger with their US equivalent. I think that you are spot on that firms like Slaughters (and Herbert Smith pre Freehills) have benefited in the short term from not stepping on the hornets nest of Wall St so to speak; however, this leaves the firm much more vulnerable and much weaker than the rest of the MC should it ever need to merge. It will undoubtedly be the weaker player to any major Wall St firm. Freshfields and Linklaters – perhaps less so with CC and A&O – are at least as strong as most of the Wall St elite in deal value and partner profits (although the latter can depend on the value of the pound to the dollar). Although whether Wall St or the MC are willing to even look at a merger is a whole other kettle of fish! However, the only firms that rival the Wall St elite in terms of M&A prowess on the world stage are Freshfields and Linklaters.
The clear danger of the so-called ‘best friends strategy’ is that you get none of the benefits of expansion with much of the risk. Slaughters has no access to the ultra profitable New York market (which I believe is Freshfields most profitable office per lawyer) while at the same time it is forced to watch its so-called best friends now move ever more into English law (and Hong Kong law). Davis Polk, Simpson and Sullivan have all built sizeable English and HK law practices (DP and Sullcrom have established training contracts) which will inevitably cut off the flow of referrals from Wall St. The firm faces a big strategic issue: it doesn’t have the capability to handle the same level of transactions abroad as its rivals in the MC or Wall St and it is too far entrenched and dependant upon its ‘best friends’ to turn back from its strategy now. This doesn’t mean that the firm is heading for collapse but its relative position is much weaker. In a world where Wall St is no longer willing to stay out of London or HK, which is what this strategy is founded upon, it is not good enough for a firm’s overseas strategy and international deal strategy to depend solely upon Wall St’s good will.
The very idea that Slaughters will be excepted from the so called shakeout is questionable. So , Mark you claim they have differentiated themselves , their alumni network is the best, and their intellectual capital is unmatched. Well when one look at Investment Banking, the same could have been said for the likes of Cazenove, amongst others, and look what happened to them, and they are and were light years ahead of any law firm!!?
Interesting stuff. Your final point resonates with my beliefs. Big challenges ahead in addressing next generation lawyers needs and wants. Not something we as a profession are very good at (in the main).
I think to come back on Jeffrey’s and Mark’s points, my point of view is very debatable. I’m not necessarily suggesting that Slaughters’ strategy is dependent on the whim of Wall Street; I think if they can carry on doing what they do in the way they do it, there will – hopefully – always be a market for it. Whereas Cazenove (and others) died a death when it became clear that money and only money was the decider in that market, law has been more stubborn to date. If the destruction of Slaughters is dependent on Wall Street ‘outSlaughtering’ Slaughters, then Slaughters just need to stick to what they do better than anyone else. I’m not sure money alone can defeat that. Perhaps that is a romantic view, but I’d like to stick to it.
I think the other MC firms are playing a much more high-stakes game, and there, money is probably the ultimate decider.
Actually I think the accountants are the Great Unknown, although as I say, I think this latest iteration of their strategy will be a failure, just as their first foray into the market was (pretty much). They alone have the ability not just to out-compete the law firms – after all even the smallest of the Big Four turns over twelve times what the largest law firm does – but they have the ability to change the game entirely, if they put their minds to it. Nothing I’ve seen in the law firm arena competes with their vision or purpose, but whether it can be redirected into the thorny, fragmented mess of a market that is law, I don’t know.
I am amused by the Lawyer’s Most Commented list, which currently reads:
“1. Mark Brandon: UK law is focusing too much on the wrong things
2. Bond Dickinson makes up four in all-female promotions round”
Apt. We should be focussing on ways to improve the profession, not meagre promotions from a very average firm.
Hi Mark
I’d be interested in hearing your expanded thinking, insights, facts, research on all of these opinions. Drop me a line. I’m actually speaking about point 8 (branding, social media and digital) at the IBA in Tokyo. Whilst I agree with you on this particular point, I also have a few curve balls of my own on this topic. Pop along to the session “Social Media and the Digital Age in the workplace” (Tues Oct 21 morning session 09:30-12;30). Hope to see you there – and anyone else interested on this subject…
Warmest
Chrissie
The Entrepreneur Lawyer
(of the naked kind)
I agree with a lot of this. We are already seeing dubious combinations which seemed destined to become 1+1=1 and a bit. Multiple profit centres is a fudge and like all fudge will become sticky when the heat is turned up. I think Big Law generally has a problem and that will impact from the Magic Circle downwards but will also impact on the US firms.
I disagree that ABS is only relevant to B2C. I think that we will see new B2B models as well.
All in all very thought provoking stuff. Nice one Mark.
Interesting and informative. Not the usual self promoting garbage found in this section.
@Phil, thanks. The ABS thing is potentially interesting and while I see b2b applications at a ‘lower’ level, I think a lot of City partners in big firms secretly fantasise that a private equity fund is going to march in the door and offer them squillions, a scenario I think is highly dubious and potentially ruinous for the fund daft enough to go for it.
The real potential of ABS of course is to be a disruptive model in a previously hermetically-sealed environment. I suspect that any BigLaw iteration of that is far off as things stand, although I continue to meet interesting individuals who have ideas about how that might change.
If the accountants ever do get it right, is it game over for UK Law? Thanks in part to the market stagnation of an oligopoly, the big accountants missed things like £12bn of missing assets at RBS. Could an analogous situation strike in law, with there being complacency in the market as the errors/lack of value would never be discoverable?
On the question of purpose v process, I think Mark may be missing the point. Process alone won’t save a law firm – and he is right that purpose is increasingly important to younger employees – but a lack of process might kill it pretty quickly. Many law firms are hopeless at process – clients cite project management as an area that all law firms are weak at – and others will blow them out of the water by implementing efficient process management. However, processes can be replicated so they won’t provide sustainable differentiation. But any law firm leaders that think they can create a great purpose and forget efficient processes would be kidding themselves.
I also don’t think we should dismiss the challenge from accountants so quickly. They may not have got it right previously but, much like his point regarding US law firms, they have deep pockets and ambition. Again, kidding ourselves we don’t need to respond is not likely to prove to be a wise strategy.
@Anonymous, I don’t for a moment suggest abandoning process in terms of the product output for law firms. On the contrary, at £200, £400 or £800 an hour, good process should be a given. I think great purpose without good process is oxymoronic for a law firm, anyway, because I find it impossible to believe that you can impress a client without due attention to process.
Agree with you re law firms and project management, though, and as you say, one cannot dismiss the challenge from accountants, ultimately. I just don’t think they’ll get it right this time. I could, of course, be proven wrong, but I don’t think I will be. Give it five years and I’ll revisit this prediction and see how successfully I’ve read the runes.
CommentMark. Is there an expanded version of this piece as I am reluctant to offer comments on those sections I am qualified in? It seems to me from what is printed here you assume the market will segment further into those advising major multi-nationals (probably globally) a mid tier – possibly domestic sector working with the mid tier corporate sector, a consumer/private client sector and presumably some specialist niche players (IP, employment etc.). Whether the MC consolidates further is moot and largely dependent on factors outside the control of law firms.
As for process – it has some relevance for those firms unable to deliver efficiently or who consider that bespoke work will continue to be the mainstay of the profession. Their future is questionable – as for others the ability to deliver triple A work (work you can sell again and again and again) surely remains fundamental.
Whatever your views it is good to see debate and provocative comment as legal services delivery cannot continue on its present trajectory and expect to survive intact. The present business model is already creaking at the seams. Ownership is far too widely spread and profit margins unsustainable. The pricing dynamic is now with the client and will never return to the profession (well not in my lifetime) which leaves those attempting to get ahead through clever pricing ploys unlikely to find an enduring solution.
When do you think the squeeze will start to affect the Magic Cirles numbers? Predictions of the the top 4 failing to modernise and react to US competition have been circulating for years and yet the recently released financials have the gap between the Magic Circle and the rest of UK law as widening (if I am not incorrect) and CC and A+O both posted very healthy growth didn’t they?
If you keep telling someone its about to rain you a likely to be correct at some point in the future are you not?
Mark,
I think this is a really interesting and thought provoking article.
I don’t know if the predictions are right but what is giving rise to such predictions is the fundamental effects of globalisation.
In the case of legal services, no value is added to goods and services. Hence legal services is increasingly becoming a luxury service that business (particularly small business) increasingly cant afford. Globalisation creates a race to the bottom and adding the cost of legal services to the price of goods and services makes them uncompetitive.
In my view legal services will continue to shrink because even big corporates will need to find more value.
If I wanted to start a business selling cakes or
@Ashley, good points all. I haven’t done – as yet – an expanded version of this article; to be honest I think it’s probably eight expanded articles, as I think each topic would deserve its own treatment! Happy to have the debate offline, as it were (to my email address).
@Tom, you make a very good point! A consultant friend of mine, commenting on advising the Magic Circle, recently said to me “how do you tell a bunch of millionaires that they’re doing the wrong thing?” As you say, if you ceaselessly predict rain, you’ll be proven right eventually.
I don’t think the MC are getting it ‘wrong’, per se; heck, I’d love to be earning £1.5m a year for doing what I do! But I do think they face serious challenges in the coming years and that it will be the end of at least two of them (that’s a guess). History is littered with examples of types of worker or industry which were riding high until they were rudely de-saddled; as they say in investment, past performance is not a guarantee of future performance.
It’s a very complex question to answer in this thread, but I think the real danger to BigLaw is cultural, not procedural or mechanistic. That’s a point I’ll definitely expand on, just not right now!
US firms will do more of what MC Firms do. MC firms will do more of what Silver Circle Firms do and Silver Circle firms will disappear or keep merging to stay afloat for as long as they can.
The elite US firms do not currently compete in any meaningful sense with the magic circle on the premium level work that originates in the UK or Europe.
Isolated examples aside, the offices are too small and with patchy quality (not saying worse than the magic circle but someway short of where they need to be to break through the barriers to entry to this market).
You do not address how these firms are going to do it. High yield, PE, emerging market work has all helped the US firms so far but FTSE 100 clients do no engage them ahead of Slaughter and May or Linklaters for their English law legal work.
@Brokeback. You’re correct, I didn’t address it – 800 words doesn’t give a lot of scope for it!
I guess it depends on your view of how long and extensively English law legal work emanating from the FTSE100 can help the MC fend off what seems to be a growing challenge from the elite US firms. I think their better globalised practices are the best defence, but without cracking the US market (NYC and to a lesser extent, California) there will always be that Achilles heel.
Very interesting thoughts, Mark, but can I draw some together and ask how you think they play out? How do the US firms taking over London (6) avoid the pitfalls of 1 (too much growth) and 3 (Magic Circle dead)? Do you have a sense of what a successful international firm should look like?