EVENTS AND ROUNDTABLES > Roundtable > The Legal Business 100 debate
As a resurgent mid-tier asserts itself in the UK legal market, our LB100 debate brings together City players to talk tactics, threats and sharpening your focus.
If the talking point of the UK legal market in recent years has been the sparkling performance of the City mid-tier, success is not leading to complacency. Bringing together a group of leading law firms to pick up themes from our recent annual Legal Business 100 report, it was clear that discipline, focus and a pronounced streak of insecurity means that the group are determined not to surrender the hard-won success they have achieved in the last five years.
From a looming vote on Brexit, to changing client expectations on value and service and the increasing threat of the legal arms of accounting giants targeting their core markets – the breed are scanning the horizon for any threats and indications that they should shift their tactics.
For anyone thinking the City mid-tier looks open to challenge, the message is clear: they’ll fight fiercely to protect their increasingly clearly marked territory.
Mark McAteer, Legal Business: To start let’s get some impressions on the current state of the market.
Michael Chissick, Fieldfisher: We are having another good year. We will have our second year of around 10% income growth. The mid-tier is an easier place to grow when you are at £100m turnover. The larger top 20 are struggling to do even 5% growth. We have all been following a similar course with a bit of offshoring, a bit of managing costs, a bit of lateral recruitment and a bit of smarter working. Everyone seems to be investing in technology, going open-plan and providing more agile working. It is just easier to make those types of changes in our space than the top 20.
David Patient, Travers Smith: 2014/15 was a strong year for many firms. There was equity capital markets work. There was M&A. There was disputes work. Despite a bit of a slowdown in the period leading up to the election most firms were firing on all cylinders for most of the year.
The champagne cork popped after the election and the market roared back in the last four months of last year. On 1 January suddenly everything was about Brexit, and that uncertainty raised concerns in some clients’ minds.
Jenny Hardy, Gowling WLG: 2015 was a strong year, particularly in certain sectors and practices. Real estate was very strong, as were corporate, construction and pensions, but there is a sense that certain clients this year, since the referendum announcement, are taking their foot off the gas. Overall though, we will be up on the previous year.
Chris Lowe, Watson Farley & Williams: Good solid single-digit growth is a result this year. The other thing at play at the moment [is] some of the currency swings, such as the strengthening of the US dollar and the weakening of sterling, which could have an impact on firms’ results. It will be an unspectacular year for many firms.
Mark McAteer: That seems to have been the trend last year of a number of firms that were saying they did well and then caveated it with a currency adjustment.
Chris Lowe: The swings have not been as dramatic as they have been in some years. You are not going to see a big play on P&L. If you are strong in the US it is going to be a good year. Good offices are good and bad offices are bad, but a good office in a strong currency is great and a bad office in a strong currency is terrible.
Mark McAteer: Michael, you mentioned Brexit – is that more perception than reality in terms of the effect on clients’ business?
Michael Chissick: There is not much happening in corporate at the moment, but come July, it will be very busy; there are these pent-up transactions that are not happening. But many of us in the mid-tier are not so corporate-dependent. Transactions are a little bit quieter but dispute work is booming.
David Patient: There is plenty of good mid-market M&A out there to chase and we certainly have not seen much of a slowdown this calendar year.
Andrew Saul, Osborne Clarke: That has been our experience. Strategic M&A is being done, particularly if it is UK-focused. We noticed in the lead up to the Scottish referendum there was a big slowdown, so I bet at some point we will see more of a slowdown once it gets closer to Brexit. That is damaging, to have such a long lead time for the referendum.
Jenny Hardy: It depends on which sectors you are in. Natural resources is a tough market right now. In contrast, something like automotive is a buoyant sector in Europe and particularly in the UK. The UK is driving R&D in the sector, so that is throwing up opportunities for us. As for other sectors, life sciences and energy, in particular renewables such as solar, have been very active, especially in the corporate space.
Jonathan Watmough, RPC: You need to have a bit of luck as well, because if you are running a £100m law firm, the difference between a good year and a bad year could be £5m of luck, and that can come out of nowhere. Things do not necessarily repeat themselves. I would not read a lot into whether a firm has gone 5% forwards or 5% backwards in one particular year because it does not tell much of a story in a market which is fragmented. It’s the medium to long-term trends which are more important.
Alan Barr, Burges Salmon: The thing that annoys my partners more than anything else is when growth for the next year is based on the assumption that what you did last year is in the bag and all you need to do is concentrate on the extra £5m that you need to get. There’s a need to win that work from scratch every time.
That said, one advantage of being smaller is that we don’t have to feed the machine in the same way as the very large global law firms.
Chris Lowe: Comparing ourselves to some of the other firms that have originated from the London market, we have been able to differentiate ourselves as a sector-focused business and through our willingness, early on, to open offices in places where our sectors are key.
Mark McAteer: Does sector focus give you an edge in the mid-tier?
Andrew Saul: That has certainly been the engine for our growth over the last several years. It has moved us up the food chain in terms of quality of work. Most of the mid-tier now are adopting a sector strategy to a greater or lesser extent, but it is not just talking about it; it is delivering on it.
Alan Barr: You know when the hourly rate is simply not an issue? It’s when you’ve got your sector focus right. When you see your partners have very good meetings with clients and they have not advised on one single clause of law, one case or anything, because it has been discussion about the issues in the sector then the client will happily pay. That’s when you know you’re adding real value.
When you couple that approach with our independence, it creates a very attractive option for the large international firms to link up with.
Jonathan Watmough: Gordon Murray designed the McLaren F1, which is still now regarded 20 years later as the best supercar ever built. They bought the top 20 supercars in the world, got them to Woking and figured out all the fundamental errors, and then they decided what they were going to do was not repeat those errors. Clients tell us what makes some firms fall over time and time again. Listen and do not repeat that. If you can avoid those mistakes and do the same quality work at a better rate, you are in the game. That is what we have done.
Mark McAteer: You could argue for the Magic Circle and chasing pack that a failing has been paying lip service to sector focus.
Michael Chissick: Every firm has a sector focus and it has had its day now as a differentiator. Clients do not want a technology sector firm any more – they want a nanotechnology expert. Likewise, everyone does energy and natural resources, but what clients want now is the windfarm specialist.
The global perspective
Mark McAteer: Is the drive for tighter focus the next evolution of the legal service market?
David Patient: The pressure on profitability is what could drive people to pare back certain offices. In continental Europe some of the bigger international firms in London have slimmed down their offices.
If you take the global strategy of lots of law firms, it is essentially the same. You can have 25, 30 or 40 offices and say, ‘That is what we are selling to our clients’ but what about the other 100 jurisdictions that you might work in around the world? We worked in over 100 jurisdictions last year. We do not have any foreign offices apart from a small one in Paris, where we practise exclusively English law, but we procured advice in many of those 100 jurisdictions in exactly the same way asFreshfields would have done in the 100 jurisdictions that they do not have foreign offices. Nobody, apart from possiblyDentons, is going to have offices in all these places.
I admire whatDentons has done. Frankly, it is amazing to have gone from where it started from to where it is today in such a short time. We will know in five years’ time whether it is going to work.
Chris Lowe: There are key jurisdictions for what we do, and if you can power up your sector focus, there is lots of room for all kinds of firms to play in sectors like tech, pharma, transport or energy.
If you are going to have international networks, they have to deliver better productivity, more efficiency, integrated client relationships and no silo plays. On a properly managed lockstep basis, if you get it right, that pushes growth and if you can get that growth going all is well and good. As soon as you start to slow down then you are dead, because if the bicycle is not going forward, it is falling over.
Alan Barr: With our preferred firm network, the quality and the size are there and we are not a bicycle that needs to keep going forward. If the clients do not want to do any business with the Middle East for two years that is not a problem for us, and then if there is a massive degree of activity we can pick it up then. Like most of our strategies; it is lower risk.
Chris Lowe: The challenge is if you are not growing you are not delivering opportunities and career paths for talented lawyers. It is not just about growing for the sake of growing; it is about powering our practice groups into the sector.
Alan Barr: You are right. If the momentum really gets going, you have got more gears than us. We will get into top gear a lot sooner than you do.
Chris Lowe: Don’t forget there is also a reverse!
Husam Hourani, Al Tamimi & Co: It is very much client-driven. It is based on where new clients want to be and ultimately where they want you to expand to support them.
David Patient: It may not always be client-driven; it could sometimes be down to ego.
Mark McAteer: How much of the success of firms in this 25-50 bracket in the UK is being driven by US referrals?
David Patient: There are still a vast number of US firms that do not have offices here who refer work. I would not say that it is fuelling mid-tiers’ success, but it can be an interesting line of business for a firm like ours. We get more referral business out of the US than any other jurisdiction, so focusing on the US and being available to get referral business is important.
The second bit is referral business out of London offices of US law firms. We certainly do not want to support a firm which has a strong corporate practice competing with ours. However, there are some very interesting opportunities. Disputes and sometimes the regulatory stuff can be good business, but it is just a small part of a bigger piece.
Mark McAteer: How important are US sponsors?
David Patient: There are certainly a very large number of very significant funds in the US – investors who you have never heard of – who suddenly now appear on transactions. How do you get that work? Most of those funds will be coming over with their US law firms, many of whom will be here already. We pick up some just from our reputation in the private equity field, but we just see more and more of that business.
Andrew Saul: The US is a very important market and it is work coming from law firms but also coming increasingly direct from companies. We have got three offices in the US but none of them do US law, and they are there largely to look after the client base there.
Jenny Hardy: We have got a focused sales programme in the US, co-ordinated with Canada, again based on sectors and geography, which generates significant revenue. US law firms based in London are less important to us in terms of referrals, but there has always been an element of that.
Chris Lowe: The biggest challenge for firms going into the US is the reward structure, because of the originations versus managed lockstep cultures. They are very difficult to mix. We have a New York office that was established in 1990, where we have seen some good growth.
For us, growth is coming through investing in our sectors in the US, where we are actively looking to add to our talent base. It’s different from the concept of the transatlantic firm elsewhere, which I don’t think has really worked. I don’t know who has done it successfully, largely because of the reward structure.
Mark McAteer: I wanted to touch on polarisation. There was a popular article written for us by Charlie Geffen at Gibson Dunn. He argued that it is very difficult for law firms to excel at both strategic advisory and process-driven execution work. Any thoughts?
Alan Barr: The more interesting thing he did point out is that there are three types of work and the middle one was: ‘What is the law?’ That was quite telling. Clients now expect to be told that for free. They access websites and get precedents and if all you are doing is telling them what the law is, they aren’t willing to pay so much.
There has always been a distinction between the true process-driven firm that chooses to do mortgage recovery for a large building society and the one that wants to act on the building society merger. The idea that you would become purely advisory like a consultancy firm as a law firm and not to be able to deliver the process when you then advised, I would struggle with that.
Most clients would feel slightly cheated when you gave your advice and then said: ‘We’re not interested in doing the implementation.’
David Patient: Most successful law firms are going to do both.
Michael Chissick: I see law firms a bit like airlines. We have got first class, business class, premium economy and economy, and the airlines can only fly if they have got all four cabins full. Most of us in the mid-tier, certainly at Fieldfisher, are running loads of different models. For many years we have been talking about the commoditising, the rocket science and the stuff in between, and it would be very nice if we could all do the rocket science at a premium rate. The world is way more complex, and certainly over the next few years the UK legal market is one of the most competitive as well.
There are some very interesting developments around technology, disaggregation, artificial intelligence (AI) and practice management systems, understanding profitability and pricing. They are all adding to a complex market, but not that many of us in the mid-tier can just say: ‘We only do rocket science or transaction law.’
Andrew Saul: One of the interesting challenges will be what the boundaries of AI are over the next few years and how much that creeps into the judgement, experience and insight model we have.
Alan Barr: There is also a huge growth in in-house teams. Our two- to three-year qualified lawyers are targeted continually to join them.
Mark McAteer: How do you reconcile demand from the client to be more efficient and to provide that kind of service when you have a structure where you have mouths to feed and junior lawyers to train?
Michael Chissick: When I trained the client was happy to pay for you to watch a completion. Now the client only wants one lawyer at that completion.
We do take very seriously that we are now competing with people who do not have to make those investments. AI is very interesting, but if we were to get anIBM Watson licence it is millions and the investment we are all going to have to make could be quite huge.
Mark McAteer: Do you feel that the advantages being touted by alternative providers are overplayed in terms of value?
Michael Chissick: It is also a quality thing. I know one of the providers who seconds people to clients. They have just come over from Australia and have never trained them or even checked them. It is just a body. Where we are coming from is: we are quality. We do provide people and second them to clients, but they are people who we have known for many years and have often trained. It is a different approach and they are not great value. The challenge is, if you speak to a lot of GCs, they are managing large budgets and very large teams so more and more of what you hear is: ‘I want innovation.’
We now have how many innovation awards? We are a profession which is very innovative, but it is feeding this machine where GCs say: ‘Be innovative. Be innovative. Be innovative. Be more creative.’ That is an interesting challenge for the legal profession. We have created a rod for our back by being so competitive.
The big four looms
Jenny Hardy: I see [accountancy-tied firms] as strong competition for us. They have the know-how. They have the client relationships. They have the sector expertise. And if you look at their ambition, they are playing to win.
Jonathan Watmough: I agree.
Mark McAteer: How successful are they at flipping work to their legal arms from other parts of the business?
Samir Kantaria, Al Tamimi & Co: I have certainly seen a mixed bag of where their accountancy or consultancy side does not trust their legal side, because they are still in their infancy stage. They say: ‘We would like to but it is a very important client for us. We do not want to ruin relationships so we would rather that you did it.’
But they have got a strategy there. They do have an advantage, so as part of an M&A transaction where someone is doing the financial due diligence and then it makes sense for them to do the legal.
Alan Barr: For so long as there are accountancy firms run by accountants as number one citizens, then they will not attract the very best lawyers simply because accountants think differently to lawyers. They are much more systems-driven. Lawyers see themselves as true owners of the business and are out there to try to win and be creative.
The number of times where we get partners in some of the Big Four turning around to us and saying: ‘It would be much easier if you did this because by the time I put it through London and all the people to check this, it is going to take a couple of weeks. Could you do this?’ It is ridiculous. But they do pose a serious threat because they have huge firepower.
Michael Chissick: They are run by lawyers now. They are huge enterprises. If you speak to people who know their plans, because of the rotation of audit rules [and] because audit is less valuable, they will in the next few years be the largest law firms in the UK and we ignore them at our peril. They are moving into the mid-tier space because they do not want to upset the Magic Circle at the moment, which is referring the work to them. To think that they are not eating our lunch as we speak is to ignore possibly the biggest threat.
I have lost two partners toPwC, who incidentally collect all our information in the survey which we had been giving them each year, right down to our IT and staff costs and everything else. They are attracting mid-tier lawyers, paying premium rates and not expecting the same level of following because they have this internal network. They can say to a very bright lawyer: ‘Come here. If you work thePwC,EY orKPMG network we will feed you work and we will give you a platform.’ It is very compelling.
Samir Kantaria: We have just lost a senior associate from one of our teams who was probably three-to-five years away from partnership, and they have come in and offered them partnership. To him it was an absolute no-brainer. There is no expectation of any following because they are saying: ‘We have got enough work within our network. We need someone to service that.’
Michael Chissick: They are taking that associate on because their plan is to dominate legal services in the next three to seven years. We have to deliver every quarter. If we have a bad quarter it is very difficult.
Jonathan Watmough: They can kill the mid-tier on price if they want to. They have got all the overheads. They have got all of the infrastructure. They have got all the IT.
Mark McAteer: Food for thought. Thank you for your time.
- Alan Barr Senior partner, Burges Salmon
- Michael Chissick Managing partner, Fieldfisher
- Jenny Hardy Strategic development director, Gowling WLG
- Husam Hourani Managing partner, UAE, Al Tamimi & Co
- Samir Kantaria Partner, Al Tamimi & Co
- Chris Lowe Co-managing partner, Watson Farley & Williams
- Mark McAteer Managing editor, Legal Business
- David Patient Managing partner, Travers Smith
- Andrew Saul Senior partner, Osborne Clarke
- Jonathan Watmough Managing partner, RPC