• By Jaap Bosman

Read 'Death of a Law Firm' - Chapter 2


Chapter 2 – It’s not like it used to be

Over that past two decades, the global legal market has changed significantly. Law firms have expanded considerably outside their home jurisdictions. Some of them have followed their core clients as they have grown into international corporate or financial institutions. Others have aimed to secure the cross-border work generated by international clients, winning the market share from local firms that lack an international brand. At the same time strong national firms seem to thrive with a higher turnover than ever. There is however a clear pattern emerging as to how the segmentation of the legal market will look in the coming decade.

The very top segment of the global legal market is dominated by the Global Elite firms, a small group of firms that get called in for ‘bet the farm’ matters of the Fortune Global 500 companies as well as mega transactions and initial public offerings (IPOs) where money is no object. Bordering on the Global Elite we find other non-globalised top-tier US law firms, predominantly based in New York, as well as the London Magic Circle. This segment occasionally picks a deal from the Global Elite but generally handle similar matters, also servicing the Fortune Global 500 companies, but on a slightly smaller scale. The mid-market segment is led by the International Business Law firms (IBLs) together with strong national champions, the large independent national law firms, that focus on upper mid-tier work with the occasional large deal. Below that, we find the mid-market firms who are typically involved in a high volume of a client’s standard business operations on a local level and, beneath that, the ones that efficiently perform commodity bulk work at competitive prices.

The members of the Global Elite have carved out a niche for themselves in which they virtually monopolise all the international mega transactions. The long-standing relationships of several Wall Street law firms with investment and commercial banking clients have made these firms emerge as pre-eminent amongst business law firms. When a ‘bet the farm’ matter comes along anywhere globally, it will only be given to a hand full of firms, like Skadden, Sullivan & Cromwell, Wachtell Lipton, Cravath, Weil Gotshal, Davis Polk or Cleary Gotlieb. The leading Wall Street firms started competing in the European market during the late 1990s; however, they had already established their presence there decades before through representative offices only practising US law. The large industrial and economic restructuring of Europe that took place in the 1990s invited the Wall Street law firms to the party since they had expertise and competence that the European firms lacked. Ever since then, they have remained focused on the very high-end segment of the legal market in Europe as well as globally; to the extent that they have established a near monopoly. A MergerMarket league table of top 10 law firms by deal value advising on mergers and acquisitions in Europe, as of 1 January 2014 until the second quarter of 2015, is almost entirely dominated by Global Elite and Magic Circle firms. The only IBL firm among them is Latham & Watkins. Cravath is number eleven. On 2 June 2015, the front page headline of Financial Times read “US deal making smashes records set in dotcom and debt booms”. The month of May 2015 had been the biggest M&A month ever in US bound deals – with an incredible $243bn - surpassing that of 2007 and 2000 respectively. This number is mainly attributable to a handful of very large deals. Looking at the law firms involved, the earnings of this M&A boom stay within the Global Elite. Many of these firms do not even have a significant office in the jurisdiction that they dominate. They tend to be present only in international financial centres since their matters are largely financially driven and dominant expertise in capital markets is key. The firms that belong to today’s Global Elite all have a strong US base. This is presumably why the Magic Circle firms are running just one step behind; none of them have a significant presence in the US, while the Global Elite tend to have a strong presence in the UK.

According to The American Lawyer Global 100 overview based on the numbers of 2013, there are 27 law firms with a turnover above $1bn and five of those have a turnover of more than $2bn. The global legal services market had total turnover of $610.4bn in 2013 according to Datamonitor, which is a cautious calculation. The CityUK Legal Services Report 2015 estimates the global legal market to be worth around $650bn in 2013/14. If the total turnover is $610.4bn, the top five law firms together represent 1,9% of that market and the top 27 represent 5.8%. One could conclude that there is room to grow. The three highest grossing law firms of The American Lawyer Global 100 overview are not Global Elite or Magic Circle: they are IBLs. The emerging IBLs have seen an opportunity to compete for cross-border work outside the competitive scope of corporate transactions. They handle mid-market to upper mid-market transactions, as well as litigation, real estate and higher value commercial work. This category is in transition and is spread out over several segments of the legal market, ranging from lower mid-market to upper mid-market. Examples of IBLs which are competing in the upper segments of the legal market are Latham & Watkins and Mayer Brown. There is also a group of IBLs that has emerged as Goliaths and are continuing to build in size. These firms are determined to be present wherever their current and future clients may do business. In 2012, SNR Denton unveiled its union with French firm Salans and Canadian outfit Fraser Milner Casgrain to become Dentons. In 2015, Dentons announced a merger with China’s largest law firm Dacheng, vaulting the firm from 2,368 lawyers to about 6,400 with an instant presence throughout China. It has since gone on to announce mergers that will take it into the US and further into Asia. Squire Sanders and Hogan Lovells have also undergone transatlantic mergers to take their present form. US law firm Squire, Sanders & Dempsey and the British firm of Hammonds formed a gargantuan firm with 1,275 lawyers in 37 offices and 17 countries through their merger in the beginning of 2011. Norton Rose has likewise opened in Australia, South Africa and Canada on the back of three mergers with local firms. DLA Piper, being the largest law firm in the world based on turnover, is continuing to build its position globally through mergers and exclusive alliances.

A growing number of IBLs are incorporated as a Swiss verein (an association of member organisations recognised under Swiss law), which gives them flexibility to vary their compensation structure per market. The fast expanding firms mentioned above – Dentons, Squire Sanders, Hogan Lovells, Norton Rose and DLA Piper, as well as Baker & McKenzie –are all incorporated as Swiss vereins. Baker & McKenzie was the first major law firm to become a Swiss verein, in 2004. Swiss vereins were originally designed for the (international) affiliation of non-profit entities, sports clubs or unions. Amnesty International, the World Wildlife Fund (WWF) and the Fédération Internationale de Football Association (FIFA), to name a few, are all Swiss vereins. A Swiss verein law firm is formed through articles of association without creating of an entity that actually practices law. Instead, the member law firms independently render legal services and severally accept the liabilities that accompany such work. Thus, members do not share commercial or professional liability for the debts or actions of other member firms. They also do not share the profits. The articles of association must be written and approved by at least two persons who will function as officers in the company. A governing Board, such as a Board of Directors must be elected, with each elected official meeting the requirements set forth in Swiss law. Auditors who will monitor the financial dealings of the organisation must also be identified. A Swiss verein allows a collection of law firms, organised under different corporate or partnership structures in different countries, to present themselves internationally under one single brand without having to comply with the regulations and tax codes of each other’s countries. This conveniently avoids potential restrictive bar association regulations and complicated tax reporting. As a result, it is the ideal form for law firms that are aiming to take on large mergers. But not sharing profit also removes the very incentive for partners to share clients and work between the member partnerships. Critics argue that merged partners who continue to operate independently after the merger are in effect only a marketing platform. Interestingly, being incorporated as a Swiss verein has been used as a defence argument in cases on conflict of interest. Dentons argued in May 2015, before the US International Trade Commission, that the Swiss verein structure essentially established an “ethical screen” between its Canadian and US entities. Dentons US LLP was set to represent RevoLaze LLC in a patent suit against Gap Inc. Gap filed the motion to disqualify Dentons arguing that Gap had long been a client of Dentons Canada, which placed the firm in a conflict of interest. Judge Charles Bullock rejected Dentons’ argument that the Swiss verein structure would in any way be an argument against conflict of interest: “Dentons holds itself out to the public as a unified global law firm in order to attract business, and Dentons’ continued representation in the face of a direct conflict would both contradict this public image and negatively impact the law profession as a whole.” Dentons has challenged the decision citing that it had an “acute interest” in the US International Trade Commission reconsidering this matter. Swiss verein law firms have argued that member firms do not share privileged information with other member firms unless they are retained by, and working together for a client, on the same matter. This latest decision by the US International Trade Commission however, may give them pause for thought. Another concern when it comes to ‘file sharing’ is the one connected to the large international firms that have formed through mergers involving Chinese law firms. Western corporate clients are not comfortable with their files being potentially accessible by law firms who are still Chinese firms, only operating under an international name. Whether such concerns are justified or not is beyond the scope of this book, however, it may be another stumbling block for the Swiss vereins that have entered China.

There are other international firms that have expanded through mergers while keeping a more traditional profit-sharing structure in place, such as Herbert Smith Freehills and Ashurst, both UK firms. Another thing that IBLs, and all the Global Elite firms, have in common is that they originate in the US, or have a dominant US part. This is not only because large and medium cross-border transactions are increasingly done under US law and that businesses everywhere turn to US capital markets to raise funds, but also because the global legal market is affected by the extraterritoriality of US law. A country of such economic power that claims so much extraterritorial jurisdiction will create a need for US legal advice nearly anywhere globally.

The national champions are increasingly disadvantaged in the larger corporate and institutional market. The international firms bring a number of competitive advantages that a national firm finds hard to replicate, such as cross-border capabilities, international reputation and brand, and significant resources both in branding and support to fee earners, including the use of legal process outsourcing. In markets where the international firms have strengthened their local capabilities it has often left the national firms with lower value local work. National law firms are faced with the choice of opening supporting offices in other jurisdictions in order to facilitate transactions across time zones and cultures or to form some form of alliance. Having a supporting office outside of the firm jurisdiction is often unprofitable. The lawyers are paid on expat terms, often including an allowance for the expatriation of the whole family. The partners that are sent out to a satellite office rarely have a workload that requires them to maintain full speed, not to mention the considerably lower leverage they can maintain. Choosing to recruit locally is a risk, diluting the strength of the partnership, as was made clear in many of the stories of the failed law firms in Chapter 1. An office abroad also means taking on currency risk as well as coping with the differences in liabilities across different jurisdictions. The level of the billing rates also fluctuates across jurisdictions and markets. Local firms experience this effect through the inflated rates often carried by an international deal. Having said all this, there may still be convincing reasons to open an office abroad. The most notable scramble to open an office in recent years has been focused on China. To date, the vast majority of foreign law firms’ offices in China are not profitable. Yet, a case can be made for some of them that a foot on the ground there is very helpful.

Alliances

Some top-tier national law firms seek their solution to the dilemma of whether or not to have an international presence in some form of alliance with national champions in other jurisdictions. Indeed, even one Magic Circle firm chose to operate with an alliance. London based Slaughter and May relies on referral relationships with its ‘best friends’ for nearly all of its international work. A best friend network is an international club formed by a handful of law firms in different countries where the members will refer matters almost exclusively to each other. Linklaters also forged alliances in Australia and South Africa in 2012. Exclusive alliances have been characterised as an uneasy compromise between a full merger and a loose referral arrangement. An alliance may be a loose confederation of separate offices or practices but it is meant to bring the client the benefit of one engagement letter, one lead partner and one invoice. It may be a preferred way to compete against the international firms’ dominance while bringing what many clients are looking for: local expertise in every jurisdiction. Another group of top-20 European firms teamed up in 2012 based on that idea: Italy’s Chiomenti Studio Legale, Spanish firm Cuatrecasas Gonçalves Pereira, France’s Gide Loyrette Nouel and German firm Gleiss Lutz. Recently a more unusual type of alliance cropped up, designed to fulfil the wishes of one single client with a global brand: The Nike Alliance. The Customised Alliance for Nike is a purpose-built one-stop-shop consisting of 21 firms covering 17 jurisdictions all working for Nike. They have all agreed to offer a flat-fee rate to Nike across the jurisdictions, as well as consistent working procedures. Each jurisdiction has a firm that fits Nike’s needs. The alliance was initiated by Kennedy van der Laan, a Dutch national mid-tier firm with a focus on IT and IP. The alliance is managed from Amsterdam by a dedicated team and the firms regularly get together to share information and best practices. While looking into the Nike Alliance, The Lawyer magazine reported that Nike is not the first company to go down this route. Construction support services giant Carillion has operated a ‘Carillion Network’ for a number of years, asking its panel of firms to operate collaboratively in a bid to improve efficiency.

Mergers and spin-offs

Beyond the IBLs there are a number of expanding law firms that do not entirely fit the mentioned moulds. These are firms that have chosen to merge for instant presence in one or two more major markets without entering the category of the IBLs. In 2011, London based Ashurst announced its merger with Australian firm Blake Dawson and instantly gained a foothold in Hong Kong, Singapore, Tokyo, Shanghai and Jakarta. Australia is an appealing market for law firms looking to expand because of the country’s trading ties with China, along with a wealth of natural resources. Likewise, in 2012, UK’s Herbert Smith and Australia’s Freehills voted to combine after Herbert Smith saw its alliance with Gleiss Lutz (Germany) and Stibbe (Netherlands) fall apart due to those firms’ unwillingness to merge. The merger between King & Wood in China with Mallesons Stephen Jaques in Australia, and SJ Berwin in Europe, formed the first and only global law firm based out of Asia and the largest law firm headquartered outside of the US or EU. According to Acritas’ Global Elite Law Firm Brand Index, King & Wood Mallesons has the second-fastest growing brand in the world, following Norton Rose Fulbright.

Looking at the European market, mergers are relatively rare. This is simply because there is little need for any law firm to establish a bigger presence in any single European country. The individual markets do not represent sufficient opportunities for growth. Furthermore, there is not enough cross-border workflow between European countries to warrant a cross-border merger of law firms. No client is asking for such a development. Instead, the trend towards groups of partners leaving to form boutique businesses continues expeditiously. Most commonly, this is due to law firms shedding partners in practice areas that no longer fit the firm’s focus. These partners feel undervalued and leave their firms to form boutique outfits with top quality advice offered at competitive rates since they do not have the same cost structure as the full service firms. This trend started in the area of intellectual property and information technology (IT) about a decade ago, but since then other areas have emerged, including boutique M&A firms that are highly profitable. In France, for example, during the past three years, the emergence of the boutique firms has been pronounced. Darrois Villey Maillot Brochier, Gide Loyrette Nouel, Hogan Lovells and Sullivan & Cromwell all said adieu to partners in Paris as they set off on their own.

At the same time as law firms merge or break up in the ever-shifting legal market, the lateral movement of individual partners has become more frequent. Nearly every week there is an update on lateral moves between competing firms. In 2012, even a partner from Cravath - thought to be the last bastion of the true partnership - left for another firm (Kirkland & Ellis). In London we have in recent years witnessed a war for talent between US and Magic Circle firms, which have sent the latter scrambling to review their rigid lockstep system that prevents lucrative signing fees or other incentives that lure rainmakers. The Magic Circle firms often argue that lockstep directly incentivises partners to cooperate for the greater good of the firm. But lockstep is also arguably a weakness when it comes to attracting and retaining top partner talent. In the US market there were 2,736 lateral moves at the top 200 law firms in the period between October 1, 2013 and September 30, 2014, according to The American Lawyer Lateral Report 2015. In 2001, that number was 1,998 which means that the past decade has seen an increase in partner mobility of more than 70%. This will not subside. Once a partner makes that move, there is nothing but attractive work and profit that will make him or her stay put. A survey conducted by Motive Legal Consulting, encompassing 2,869 lateral partner moves in London from 1 January 2006 to 31 December 31 2013, concluded that nearly a third of the laterally hired partners had moved on again. This suggests that once partners start moving, it is not unlikely that he or she will move again.

Networks

The international networks that give members access to other jurisdictions on a non-exclusive basis are at the loose end of alliance structures. There are numerous international networks. Chambers and Partners lists 10 of them as the global elite of networks: First Law International, Interlaw, Interlex Group, Lex Mundi, Meritas, Multilaw, PRAC, TAGLaw, TerraLex, World Law Group, and World Services Group, Inc. A law firm network may not be essential to the members’ strategy but it offers valuable opportunistic elements. Founded in 1989, Lex Mundi is the premier network of law firms with a global membership of 160 firms, including firms working in less common jurisdictions where it might be difficult to find a reliable partner. Lex Mundi has one member from the upper tier of each jurisdiction. There is a rigorous procedure to be permitted into the network and periodic membership reviews ensure all members keep up the quality of their work and service levels. For example, in recent years the need for African presence has become more pressing and a network like Lex Mundi offers instant access to 17 law firms throughout the continent, which have been subjected to the same scrutiny as all other members. The most successful networks, such as Lex Mundi, know that a personal relationship between referring firms and partners is key for the trust that is needed for serious referrals. They have a structure in place to ensure multiple face-to-face meeting opportunities between members every year. Networks like these can give national law firms the international reach that they need. Convincing the client of the value of the network, however, is often down to the marketing of the individual firm on a pitch-by-pitch basis. Many networks have a marketing or business development outfit of their own, but it is a hard battle to coordinate and convince a group of strong and independent firms to co-brand. The true weak point of a network stems from another factor: at the larger law firms a network membership is typically used as a reward for a senior partner who in the past has done great service to the firm. Each member firm has a contact partner who represents the firm at annual network gatherings and conferences. They get to fly all over the world to events hosted by top-tier law firms that will do their utmost to be the most generous of hosts. Expenses are rarely spared. The contact partner is also often the first to receive referrals from a member in the network, which contributes to keeping the practice of the contact partner running. The problem with this system is that these contact partners tend to be lone wolves and are rarely able to have enough sway in their own partnership to be able to implement the promises made by the network. Referrals and joint pitching, the raison d’être of an international network, has to be done on a broad front within the law firms but to many partners the network might be largely unknown. Referrals are based on trust between individual partners. This organisational flaw says nothing about the quality of the network, but it does mean that it has unused potential. Networks are rarely anchored properly within the member firms of the largest jurisdictions.

Accountants and Alternative Business Structures

In an overview of the current legal market and what this may look like in the coming decade, it is worth taking a look at the Big Four accountants. Recently they have reiterated their ambition to establish a global legal services arm, which will offer many of the business as usual services their clients require. It is a development that should be taken seriously simply due to the standing of the Big Four and their level of penetration with clients. The large accountants previous attempt to capture a share of the legal market was halted when the Enron scandal brought down Andersen. Accountants had to move away from bundling services and sold off their non-tax legal branches. But with the turmoil in the legal market after 2008, the Big Four started to see renewed opportunities and have recently started to move fast. The Economist reported in March 2015 that the combined annual revenues of the Big Four’s accounting networks, $120bn, exceed the $89bn generated by the 100 largest law firms combined. This provides them with impressive fire power. In 2014, EY announced that they had recruited a Freshfields partner, Richard Norbruis, to handle the global expansion of their law practice. EY launched legal services in 29 countries around the world, including Australia, China, Japan, Mexico, and 14 separate countries in Africa. Its legal services cover transactional, commercial, and employment practices, with a strong focus on the financial services and banking industries. The same year, the head of PwC’s legal arm (PwC Legal) announced the firm’s ambition to become a global top-20 legal services player within the next five years. It told The Lawyer in an interview that “the firm was targeting revenues of $1bn - doubling from 2013’s almost $500m across the firm’s legal offering - with particular growth earmarked for Asia and Africa.” In the UK, the Legal Services Act 2007 came into effect in 2011 allowing non-lawyers in professional, management or ownership roles to offer regulated legal services in England and Wales. PwC has, under the Legal Services Act, been granted an alternative business structure (ABS) licence in order to provide legal services to clients. Deloitte is on the same path with Deloitte Legal. The ambition of the Big Four is a force to be reckoned with. They have the client contacts and, unlike law firms, they do not have an information gap regarding client’s operations, and are armed with operational excellence. Accountancy firms are prevented from owning law firms in the US, Brazil and India. But they are allowed to own law firms in Britain, Australia and Mexico and, through collaboration and cost sharing, can offer legal services in jurisdictions such as France, Germany, Spain, Italy, Japan and China. This give the Big Four an advantage over international law firms in the enormous growth market of China. For some reason Chinese regulations allows international accounting firms, but not international law firms, to offer domestic legal services in China. Western accountancy firms have expanded extensively in China through the acquisition of Chinese accountancy firms. The Big Four accountancy firms have enjoyed a dominant position in China’s accounting and auditing industry for decades without many restrictions. By expanding into legal advisory work they aim to build on the amount of work they are already doing for top Chinese companies. In such an emerging market they may be able to catch more high-value legal work than they have been able to catch so far in the western markets.

Beyond the Big Four, business savvy in-house counsel have access to a new breed of service providers that allow them flexibility in response to an ever-changing flow of work. A new type of company is honing in on that perfect combination of legal expertise and the business processes and tools of the Big Four. Take Axiom Law for example. They offer secondments - all alumni of the best law firms and companies - to in-house legal departments. These range from part to full time and from remote to onsite secondments. When a larger project comes along, Axiom offers legal project management or the delivery of complex legal processes like commercial contracts, derivatives agreements and compliance activities. Their teams include technologists, process engineers, management consultants and expert lawyers, set on delivering not just legal advice; they develop entire solutions for any client’s largest area of ‘inside’ spend.

It may be the Legal Services Act that brought on the atmosphere of liberalisation in the UK market and opened possibilities that are attractive to entrepreneurial thinkers and new market entrants. Once a certain number of large companies have legal departments above a certain size, this creates a market of its own and new entrants will spring up to reap the profits, especially if legal hurdles have been cleared. Another example is LawVest, a holding company part-owned by multinational law firm DLA Piper, which operates a law firm under the name Riverview Law, offering clients a fixed-rate contract, rather than billing by the hour. Riverview Law is run from less expensive offices in the UK’s northwest. Clients pay an annual fee for all their legal needs except for litigation.

Changes to the rules that define the legal market will continue to occur. The regulatory objectives of the Legal Services Act are to remove restrictions to competition and improve access to justice. In the past few years there is also an increasing debate about whether legal privilege should apply to transactional lawyers. An M&A lawyer is part of a transactional team in a corporate acquisition in the same way as the financial advisors, tax advisors and accountants. Why should the advice provided by the lawyer be legally protected while the advice of the others is not? Legal privilege has been put in place to ensure an open and unrestricted conversation between client and lawyer without fear that it may be used against the client in a court of law. Such a privilege may have no obvious place in business acquisitions. The privilege of legal privilege might soon be a thing of the past and corporate transaction lawyers will again find themselves in a changed market.

Changes on client side

Since 2008, clients - driven to a large extent by an economic imperative to bring down the overall costs of legal services – started to take control of key decisions. Clients with a global presence have in the past few years been weeding out their law firm panels because they were no longer corresponding to their needs. An increasing share of companies’ legal work tends to be done in-house. The position of the in-house lawyer has undergone a transformation in the past decade. Before the global financial crisis struck, most general counsel were more concerned with the quality of services than the price of them. These days general counsel are almost without exception pressured by budget cuts and looking more closely at the value-price relation. Another change that has occurred in comparison to before the crisis is that general counsel more frequently have a seat at the Board and are participating on a daily basis in the strategic decision-making of the company.

Over the five past years I have been involved in an annual research into the evolving role of the in-house lawyer. A notable change that happened right before our eyes during those five years is how in-house legal departments have been increasing in size and quality. They now more often than not contain young, smart and very ambitious lawyers. In-house legal departments in successful companies are streamlined, efficient and very talented. Half of the in-house lawyers in an international company typically have many years of experience in a law firm. National law firms that have been unwilling to change or expand their partnership structure, have created an excess talent pool of young, smart lawyers that have been snapped up by growing international companies. A good friend of mine, a former partner of a top tier law firm, was brought in to set up an in-house litigation department for a large international insurance group. This litigation unit now works as a purpose-built law firm with its offices inside the walls of its one client. The in-house lawyers we came across during our research, are not only smart and ambitious, they have unparalleled sector knowledge, an attuned business sense and their approach is always very practical. These in-house lawyers have come to expect that the panel law firms they work with for external advice will have to be clued up on their business - a smaller panel will foster a closer relationship - as well as offering a seamless international reach. Looking at the spread of the Fortune Global 500 companies between 2000 and today, they have gone from being mainly located in the US and EU to being spread across the globe. They have also come to expect more of their panel firms. In a large company, the legal department is regularly assisted by procurement professionals who will handle the process of panel appointments. They have cost and efficiency targets with objective measurements that apply equally to all bidders. They have a clear role within the company that often not even the preferences of the legal department can override. Often, requests for proposals will require value-added services, such as secondments, access to information systems and templates. These are more easily absorbed by an IBL, while it might be a real burden for a much smaller national law firm. The procurement department charged with appointing a panel of law firms will go for the best package deal even if this means a small compromise on quality in one or two jurisdictions. This new type of international client has provided the IBLs with an advantage, at the expense of the national law firm. Indeed, the ‘cost of sales’ has dramatically increased for a law firm. It must invest more non-chargeable time into obtaining and maintaining a client relationship.

It used to be that, with the sales departments in companies, in-house legal departments had a ‘bad reputation’. They were seen as stumbling blocks within companies. The commercial people felt that if you handed anything to Legal it would take weeks before they responded you and they would only give reasons as to why something could not be done. This is because in-house lawyers acted the same as lawyers in general: covering their asses. Reasons for not giving a straight answer could have included the possibility of being wrong, not wanting the responsibility and in general having difficulty evaluating options in a descending order from ‘preferable’ to ‘not recommended’. This has changed. The Boards and leadership of companies decided to change the parameters. First, the legal department had to start working more as a team. Second, and most crucial, they introduced the concept of ‘risk appetite’. Different companies have different risk appetite. When looking into a possible way forward, members of the legal department will quantify the risk on the one hand and quantify the gains on the other. The particular risk appetite of their company will tell them how much risk they can accept in return for potential gains and leads them to answer the Board accordingly with a recommendation. At some point in time I was responsible for the commercial activities of an international retail chain. The Board came to me and said that all competitors used a form of lottery as a marketing tool in one of their main markets, could we not do the same? Holding a lottery, or a game of chance, without a gambling license was forbidden in this particular jurisdiction. What the competitors were doing to try to circumvent these rules was to choose the winners amongst customers beforehand and then ask all customers to participate. I referred the question to our external lawyer and I received back the uninspired conclusion that there was legislation in force that forbade this kind of game of chance. The answer I wanted to receive is as follows: “Although there is indeed a law that technically forbids this kind of lottery it is considered out-dated and is no longer enforced. If you do go ahead and use this promotional tool, ensure that the gains exceed the potential fine of €25,000.” Lawyers in a law firm work as a consequence of an external stimulus: they act when asked by their client. They wait for an instruction. Working in a law firm is a reactive occupation. The lawyers that want to make the switch to become an in-house counsel will have to switch to a more proactive stance. In a law firm there is no Board of Directors that will impose a different way of working. There is no concept of risk appetite for a law firm. If there was, the risk appetite would be zero. The core of their contribution to the process is that they are asked to look at something and give an opinion. In a sense they are constantly asked to give a guarantee as to whether something can be done or not. Lawyers will face serious consequences if they are wrong. This leads them to be cautious. Therefore, clients do not always receive the kind of advice they want. A client is not looking for zero risk, he is looking for a weighing of risks that answers ‘should I do it or not?’ This disparity between the needs of corporate clients and the risk aversity of law firm advisors seems hard to bridge.

Regularly IT has been announced as the dead ringer for the traditional law firm. The days of using interns to plough through a massive number of documents at relatively low but profitable rates are quickly disappearing. Automation and smart software has changed the due diligence and discovery procedures and are making a move to take over many tasks performed by law firm trainees and even junior associates. During a recent trip to the US, I was shown demonstrations of several programmes being introduced to the market and it was evident that these will fast replace low-end human legal work. Software is being created that will be well-suited for information gathering tasks as it will be more precise and able to search through much more data than a human being. These programmes are at present limited to unsophisticated work and, although it is difficult to say how far they can go, we know for sure they can go further than where they are at present. On the horizon we can see the likes of the mythical Watson looming. The artificially intelligent computer system developed by IBM was catapulted to fame in 2011 by winning the TV quiz show Jeopardy in competition against humans. This computer system is capable of answering questions posed in natural language and uses multiple algorithms simultaneously to come to a probable answer. But it is nonsense to say that it will ever replace lawyers. And yet, many persist in saying so. Most people only repeat what they have heard from someone else. If you type in ‘Watson’ and ‘lawyer’ in Google, the hits are innumerable. A string of self-proclaimed gurus that parrot each other are responsible for the hype about the highly improbable, insignificant and low-impact prediction that computers will replace lawyers. In 2013, two economists at the University of Oxford Martin Programme on the Impacts of Future Technology, Carl Benedikt Frey and Michael A. Osborne, conducted the study “The future of employment: how susceptible are jobs to computerisation?”. The study, prompted by computers taking over many cognitive tasks thanks to the availability of big data, examines what parameters have an impact on the likelihood of computerisation and looks into more than 700 types of jobs to categorise them according to levels of probability. Jobs requiring perception and manipulation, creative and social intelligence were identified as those least likely to be computerized. Jobs that involve consulting other people, negotiating agreements, resolving problems and co-ordinating activities require a great deal of social intelligence, which computers are unlikely to take over. "Most management, business, and finance occupations, which are intensive in generalist tasks requiring social intelligence, are largely confined to the low risk category," the study says. In an article in the Washington Post on 27 June, 2015, “Job Terminator: Can robots learn your skills?” written by Shelly Tan, the paper has used the University of Oxford study to predict the likelihood of lawyers being replaced by computers, resulting in a probability of 3,46%. Paralegals and Legal Assistants on the other hand didn’t do so well, with a probability of 94,46% that their jobs will be replaced by computer software, because their work is simply more routine. Even so, the topic of Watson in the legal world lingers. The technological revolution will always be around the corner and the theory of computers replacing lawyers will never quite be discredited. In the meantime, the media, wrongly assuming that the legal profession consists of antediluvian, backwards looking people, will forever present it with a tone of doom.

Key points:

  • Top of the market transactional work and ‘bet the farm’ matters are almost monopolised by the Global Elite.

  • An ever-growing category of mid-market global law firms has emerged and they are now taking an increasing part of the market in almost every jurisdiction.

  • On a national level, newly formed small boutique firms, with lower costs, are getting mandates from clients and have become serious competition for the incumbent firms.

  • New competitors such as the Big Four and alternative business structures are slowly but surely eating their way into the legal market.

  • In-house legal departments are better equipped, staffed and organised than ever before. Downward pressure on the cost of outside legal counsel remains strong and will increase.

  • Smart and intelligent computer software has matured over the past decade and is now capable of carrying out tasks performed by trainees, junior lawyers and paralegals. This undermines the business model.

For LegalBusinessWorld. All rights belong to Jaap Bosman and Lisa Hakanson.

ISBN-13: 978-9082427806

Photo copying, printing or downloading not allowed.

To obtain a hard copy visit www.deathofalawfirm.com


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