Every six months or so I trawl through all the recent editions of The Lawyer magazine in an attempt to identify key trends, weak signals and outliers amongst the large law firms to inform law firm strategy discussions amongst the firms that I work with.
Is there any real growth?
Commercial law is a $300 billion industry yet no firm has more than 1% share. The UK legal market is estimated at £26.1 billion. The Lawyer notes “The magic circle has seen its revenue market share of the UK top 10 contract by more than 15 per cent over the last decade as global consolidation takes hold of the sector”. It also comments “The Lawyer UK 200 last year showed that the average increase in revenues across the top 100 was 4.73%. In the top 50 it was 5.16% with magic circle firms exhibiting much lower growth at 1.17%. The only increase in organic revenues came from a handful of gold middle firms like Mishcon de Raya and RPC” (12th May 2014). It seems that profit growth is through acquisition and scale economies rather than true market or revenue growth.
Financial results highlights
I extracted the following results to illustrate the disparity between revenue and profit growth
|Allen & Overy||
|£532m profit PEP up 7%|
|Berwin Leighton Paisner||
|PEP up 35.2%|
|Bird & Bird||
£259m / 4%
|Net profit down|
£73.4m / 7%
|PEP expected to rise to about £350,000|
£36.2m / 9.3%
|Clyde & Co||
£365m / 8.5%
|PEP up 3.45%|
£191m / 2%
|£25m profit (up 23%) After four mergers|
£32.6m / 16%
|PEP up 29% (to £524,000)|
£111m / 0.4%
|PEP up 3%|
£17.2m / 14.6%
|15.6% rise in profits|
£116 m/ 0.3%
|PEP up 10.5%|
£142m / 25.9%
|PEP up 46.6%|
£121m / 8%
|PEP up 19.3%|
£57.9m / 18%
£87m / 6%
|Net profit up by 2% to £24.1m|
Changing business models need new performance metrics
Whilst there are plenty of new business models with outsourcing and the use of paralegals, there isn’t as much attention being paid to the new metrics that are needed to measure business performance in these new models. Obviously, absolute profitability is a measure but it’s a blunt instrument when most legal businesses have both winners and losers in their portfolios of markets and services and experiment with investment in new markets, products/services and pricing models. But there was a piece about the decline of RPL (Revenue Per Lawyer) as a useful measure.
All eyes on internal issues
The onslaught of regulatory changes continues meaning that firms have had to focus on numerous internal issues such as LLP tax changes and the resultant debt issues. Increased price pressure – a sure-fire indicator of a lack of differentiation in the market – means that efficiency drives dominate the management agenda. But perhaps this means that some have taken their eye off the ball in terms of new needs and opportunities within the external market?
Limited strategic choices
Large firms feed their appetite for growth with international expansion to ensure their place in the global arena whereas smaller firms settle into niches. But there seems to be few other strategies coming into play which leaves the market open to a bolder disrupter with a focus on differentiated new services, innovative pricing or true cost leadership.
International expansion continues apace
While the larger firms continue to seek growth in lucrative and fast-growing overseas markets, the improved economy has bought the spotlight back onto the domestic market. Several firms are now relocating their back office staff to lower overhead UK locations rather than outsourcing or offshoring. In key markets – such as Asia Pacific – international firms are seen to be stalling while local firms are consolidating.
Increasingly strategic role of in-house lawyers attracting young talent
Not only are in-house lawyer salaries on the increase (especially in the North although Leeds seems to be falling out of favour) but The Lawyer recently reported that in-house job advertisements are now outweighing those of private practice (“Since 2009 the number of in-house roles advertised in The Lawyers rose by 30%). With Generation X showing less interest in the traditional partnership route (research indicates that 65% young lawyers do not aspire to be partners), the lure of a more strategic and commercial role and an opportunity to take a seat at the Board room table may see more defections to the in-house stream. And as firms are focusing on recruiting/training less expensive paralegals the talent pipeline is contracting.
The challenge of innovation and adding value
This still appears to be an area where firms are struggling. When asked about innovation, client feedback from in-house lawyers and general counsel indicates that secondments are seen as valuable and increasing in popularity. Research in the Management Guide indicated that most in-house lawyers indicated they had seen no innovation – others mention innovation in fees, management information, secondments, free helplines, project management compliance and training software, helplines, Skype, threshold calculators, conference facilities and e-research.
There were only a few examples of more innovative services – Olswang’s Peer Partnership Programme where in-house lawyers are partnered with a private practice counterpart, BLP’s London based roundtables focusing on careers and A&L Goodbody’s CPD mobile tracker (14th July 2014). It was interesting to note, however, that Schillings integrated its legal, risk consulting and cyber-security offerings to high net worth individuals and its revenue rose 30% on the previous year (5 May 2014). Just Costs specialises in legal costs and has recovered £290m for its clients.
New entrants – The second coming of the accountants
Both PWC and EY have registered for ABS to grow their legal capabilities. Whilst the largest firms remain complacent about the possible impact – looking to the previous unsuccessful foray – medium sized firms may have more to worry about as smaller accountants look to quietly grow their legal capabilities to provide a one-stop-shop – particularly where mergers, acquisitions and tax are concerned – to SME clients. Those serving the public sector watch as local authorities move from shared service to ABS models.
Public M&A down while private equity deals are up
Whilst the Magic Circle firms might be losing out to the slow-down in the public M&A market, the international players and niche practices are benefitting from an increase in PE deals. And the resulting musical chairs of the leading players are witnessed in numerous team transfers featured in the media.
In-house role as part of lawyer training
In the past in-house lawyers started their careers in private practice and then moved into an in-house role. There are increasing reports of lawyers taking an in-house role and then returning to their firms. But it seems that now increasingly in-house teams are growing their own and perhaps sending their young lawyers into private practice for a spell before bringing them home. One wonders if it will become the norm – to instil commerciality and build a foundation of industry knowledge – that private practice lawyers in the future might spend some time in-house as part of their training?
Feeling the strain and diversity
Increased pressure to meet whatever targets are set means that stress management features regularly with the largest firms adopting employee assistance and other strategies to defend against lawyer (and support staff) burn-out or possibly later legal action. Meanwhile, the effort to increase diversity is seen in numerous programmes.