2008.6.10 – 17:23
I’m back from the two-day "Future of the Global Law Firm" symposium at Georgetown Law School, which was organized by Prof. Mitt Regan of Georgetown, Prof. Larry Ribstein of the University of Illinois, and myself. You may read other coverage of this elsewhere, as in attendance were Aric Press of The American Lawyer, Leigh Jones of The National Law Journal, David Lat of AboveTheLaw, and other reporters.
But herewith the "Adam Smith, Esq." report:
We had about 130 attendees, roughly one-quarter academics and legal scholars and three-quarters practitioners and senior law firm leaders, from the US, the UK, Canada, and Australia. Seven panels over the course of Thursday and Friday through lunch tackled:
- The emerging dynamics of global competition.
- Ownership and capital structure, including the possibility and the desirability of outside (that is, non-lawyer) investment in law firms.
- Ethics and professional values.
- Perspectives from corporate law and finance.
- Organizational and cultural dynamics, and
- Lessons from other professional service firms.
Among those attending were:
- Ralph Baxter, CEO of Orrick, who delivered the keynote Friday morning
- Ted Burke, CEO of Freshfields, who delivered the keynote Thursday morning
- Stuart Popham, senior partner of Clifford Chance, who spoke after dinner on Thursday
- Practitioner/panelists included:
- Richard L. Weisman, Partner;former Managing Partner, China offices, Baker &
McKenzie
- Mark Kirsch, Chair of Global Litigation and Dispute Resolution, Clifford Chance
- Stephen Denyer, International Development Partner, Allen & Overy
- Andrew Grech, Managing Director, Slater & Gordon
- Steven Mark, Legal Services Commissioner, New South Wales, Australia
- Osama Rahman, Ministry of Justice, United Kingdom
- Yours Truly
- Anthony Davis, Lawyers for the Profession Practice Group, Hinshaw & CulbertsonLLP
- Steven Krane, Chair, Law Firm Practice Group, Proskauer Rose;Chair, American Bar
Association Standing Committee on Ethics and Professional Responsibility
- JeffreyHaidet, Chairman, McKenna Long & Aldridge
- William Perlstein, Co-Managing Partner, WilmerHale
- Lee Miller, Joint Chief Executive Officer, DLA Piper
- James Jones, Senior Vice-President, Hildebrandt International
- Christopher Simmons, Managing Partner, Washington Metro Market,
PricewaterhouseCoopers
- Ward Bower, Principal, Altman Weil, Inc.
- Academics who presented papers included:
- Peter Sherer, Professor, Haskayne School of Business, University of Calgary, Predicting
the Future of Large US Corporate Law Firms: AmLaw 2025
- Stephen Mayson, Professor, Legal Services Policy Institute, College of Law of England
and Wales, London, Global Law Firms: A Strategy Looking for a Market?
- Laurel Terry, Professor, Penn State Dickinson School of Law, The EU’s Professional
Services Competition Initiative: Is the EU Very Far Behind Australia and the UK With
Respect to Publicly Traded Law Firms?
- Christine Parker, Professor, University of Melbourne Law School, Australia, Peering
Over the Ethical Precipice: Incorporation, Listing, and the Ethical Responsibilities of
Law Firms
- Elizabeth Chambliss, Professor, New York Law School, Law Firm General Counsel: The
Paradox of Institutional Success?
- John Flood, Professor, University of Westminster School of Law, Future Directions in
the UK Legal Profession: Life After the Legal Services Act 2007
- Larry Ribstein, Professor, University of Illinois School of Law, The Law Firm as Firm
- Gordon Smith, Professor, J. Reuben Clark Law School, Brigham Young University,
Form, Function, and Fiduciary Law
- Timothy Morris, Professor and Director, Clifford Chance Centre for the Management of
Professional Service Firms, Said Business School, University of Oxford, Navigating the
Process of Innovation in Professional Service Firms
- William Henderson, Professor, Indiana University School of Law, Are We Selling Results
or Resumes? The Underexplored Linkage Between Human Resource Strategies and
Firm-Specific Capital
- Andrew von Nordenflycht, Professor, Segal Graduate School of Business, Simon Fraser
University, The Demise of Professional Partnership? The Emergence and Diffusion of
Publicly-Traded Professional Service Firms
- Roy Suddaby, Professor, University of Alberta, School of Business, Post-
Professionalism: How Multidisciplinary Accounting Firms are Reshaping Professional
Institutions
If I were rationed to just one word to encapsulate the conference’s theme, it would be: Change.
Lawyers are notoriously poor at coping with change: Indeed, recent psychological research indicates that change is not just hard, but actually causes physical and mental discomfort. (One managing partner recounted being faced with a near insurrection among half a dozen partners when he had the temerity to relocate their Washington, DC office by all of one short city block. I must confess that that may set a new bar for resistance to change.)
Yet change is in our futures, like it or not. More than once the observation was made that from the invention of the Cravath System around the turn of the 20th Century through about 1985, the profession looked remarkably stable, but that the last 20 years have seen revolutionary changes and the next decade promises further departures at least as radical as those we’ve just experienced.
Among the overall trends driving change are
- Segmentatation, meaning the increasing gap between firms able to win the highest-level, most complex work for the most demanding (and price-insensitive) clients, and other firms forced to compete on the basis of price and increasingly high client expectations for service quality, responsiveness, and consistency. Once price becomes a material part of a client’s selection criteria, unfortunately, firms have put one foot on an escalator that goes in only one direction. And segmentation is driving the evolution of our industry not just at the top, in AmLaw 25 land, but at every level of the industry, including regional firms, boutiques, and even "the 22 lawyer firm in Vienna, Virginia."
- Globalization. It’s no longer the exceptional corporation that has substantial business abroad, it’s the exceptional corporation that doesn’t. This trend is not going to reverse or decelerate. 20 years ago the percentage of lawyers working at NLJ 250 firms who were in overseas offices was just a few percent. Today it’s nearly 17% and grew 11% in just the last year alone.
- Consolidation. 20 years ago the AmLaw 50 accounted for about 6% of all private, for-profit law firm revenue in the US. Today they capture over 25% of that revenue.
Other themes?
Scarcely a panelist failed to mention—or concentrate on—the "war for talent" and the challenges posed to the traditional law firm career ladder by Gen Y. (Yes, the usual caveats were added about how it can be misleading to generalize about an age cohort, since individual differences always outweigh broad demographic brush-strokes, but the point is universally acknowledged nevertheless.)
A particularly painful reality on this landscape is that, for about the past 30 years, essentially 50% of law school graduates have been women, yet throughout most of that time span, the number of female partners in the AmLaw 100 has hovered at a fairly constant 15-18%. Finally, I believe, firms are going to face up to the reality that they need to take fresh approaches to the dilemma created by the fact that the prime child-bearing and family-starting years happen to coincide quite nicely with the path-to-partnership tournament years. Proposals for innovative "off-ramp" and "on-ramp" programs were floated, some potentially in conjunction with forward-looking law schools (like Georgetown) to "de-couple" those time frames.
But the overall tone of the symposium was the simultaneous thrust of excitement and challenge balanced against the uncertain and the unknown.
Would outside equity ownership be a boon or a curse?
Why exactly do law firms need capital? Aren’t we labor-intensive businesses, not capital intensive (A: As currently conceived, we are. But why is the current static model necessarily the model for a dynamic future?)
What has been the history of other professional service firms that have invited outside investors?
Will outsourcing and globalization in general (permitting work to be done in the lowest-cost jurisdiction, be that IT and HR support, or paralegal or e-discovery services) supplant the model of teams of extremely high-priced and highly educated professionals operating out of Class AAA space in the center of the world’s financial capitals?
Will we lose the partnership ethos? (Laura Empson of Cass Business School gave a particularly nice presentation on this at lunchtime Thursday, positing that useful ways of thinking about partnership might be as analogous to The Three Musketeers, to Henry V’s famous "band of brothers" speech before the Battle of Agincourt, to a buccaneer pirate ship, or, at last, to "Gone With the Wind.")
Can the partnership ethos survive outside the legal form of a partnership? (Yes, seemed to be the consensus–albeit challenging to do so.)
Would outside ownership actually threaten ethical behavior in law firms? In this connection, three salient points were made:
- We see no evidence of publicly owned companies in other industries behaving unethically as a pattern: No airlines cutting corners on safety, no pharmaceutical companies cavalier about product tampering, and, to be sure, no one questioning Goldman Sachs’ advice since their IPO.
- Could the pressure to achieve profits from passive, minority-interest outside shareholders possibly be greater than the competitive pressures to achieve maximum PPP from the press, and to retain and attract talented partners?
- And lastly, note this well: In the famous flameouts of Enron, Worldcom, et al., the "whistleblowers" with integrity were inside the corporations, not in external auditing or law firms. If anything, this data point suggests that professionals in publicly held firms do not surrender their ethical obligations at the door.
Should we be optimistic about the overall global demand for law? I believe we should. After all, don’t globalizing corporations require more, not less, legal advice? (As strange as it may seem to say, could we need, in a word, more lawyers?) The "rule of law" is not, after all, self-executing.
Clients are becoming more demanding, to be sure, but it’s misapprehending the situation to think it’s all about fees or price; rather, it’s about actually comprehending the clients’ businesses. In a sense, isn’t this development "back to the future," back to a day when lawyers intimately knew their clients and were institutionally close to them in ways that are unusual today? More than a few name-brand law firms, according to their managing partners, are investing more in institutionalizing the client relationship than they are in any other recent initiative, even to the point of creating a "client relationship" dimension as a third organizational dimensional matrix on top of the familiar two of practice groups and geographical footprint.
The value of human capital–the "war for talent" again–has never been higher. But it’s now beyond partners and associates to non-lawyer staff and C-suite executives. Among all these groups, lawyers included, it’s no longer enough to be merely technically excellent. Today’s clients and today’s environment call for people with high levels of "emotional intelligence" and right-brain capabilities. If this is right, we need to re-think the ideal profile of a partner (and I believe strongly that it’s right).
Also, if we value human capital, what’s to fear from "outsourcing?" Isn’t that just another way of saving a generation of associates from the equivalent of being consigned to working in the textile mills of e-discovery? (Whenever politicians rail against NAFTA or other free trade agreements, I always wonder which voters are out there desperately hoping their children have the opportunity to grow up and go to work in a textile mill.) Perhaps young associates should be exposed to one and only one tour of duty in e-discovery, but we know for a fact that too much of that is why on average they leave after 2.5-3.0 years. Wouldn’t you?
Finally, as to the future, my own belief is that assuming the Legal Services Act comes into effect as currently scheduled in the UK, the inevitable flow of money from some firms that will take advantage of outside investment (and there will be some firms) will sluice into the US. Trying to stop the flow through prohibition and regulation will only lead to feckless, disruptive, and pointless excursions into attempted micro-management of global law firms’ capital structure, an effort unrealistic at its core and doomed to swift failure. If you doubt money’s vibrant ability to find its own level, I have three words for you: "campaign finance reform."
At the point where bar associations here, sclerotic and paleolithic as they are, are forced to confront a new marketplace reality, they will actually have no alternative but to respond in ways that recognize and accommodate that reality, and to get over their hundred years’ war against genuine competition in the profession. And, it is my devout hope, they will awaken to the need for a "level playing field" in our global economy.
On this point, the insanity of firms’ being potentially subject to 51 different jurisdictional bar authorities in the United States was, without exception, roundly denounced. GE (for example) gets to choose whether it wishes to be incorporated in Connecticut, New York, California, Delaware, or somewhere else entirely. Why shouldn’t Latham have the same choice?
The conversation on this topic, brief as it was, focused on acknowledging the blisteringly obvious antique anomaly of "presence-based" regulation. The only interesting note to add is that corporate clients would presumably be roundly in favor of unitary law firm bar regulation since it would at once obviate the need to hire duplicative local counsel in jurisdictions far and wide for no commercial, economic, or strategic purpose.
Do we have all the answers?
I’ve never been at a conference before where so many readily admitted to so few answers. But that’s the way entrepreneurship and innovation proceed. Not by knowing to a fare-thee-well what all will work, by specifying it exhaustively in advance, but by experimenting. New businesses are not created by figuring out in advance every possible contingency that could go wrong and only launching then; they’re created by the "ready, fire, aim," mindset. Or, as I said in a prior life as CEO of a dot-com, "mid-course corrections are my middle name."
In my own presentation, I took issue with the assumption that our industry is not capital-intensive by opining that that’s static, not dynamic, thinking, constituting a great failure of imagination. And by analogy I used evolution’s famous "Cambrian Explosion" (great video courtesy of WGBH here) . If you’re not familiar with this, the story is simple:
- For the first 3-1/2 billion of the Earth’s 4-billion years, all nature knew how to produce were single-celled organisms: Algae, fungi, protozoa, etc.
- Then, from about 530-580-million years ago, evolution came upon and exploited the miraculous invention of multi-cellular organisms.
- Every single order of Animalia that exists today was invented during the Cambrian explosion.
- There were a huge number of dead ends, wrong turns, mistaken detours, and fundamentally bad designs (creatures with five eyes)
- But there was a never-before-or-since efflorescence of innovation including such truly useful structures as eyes, ears, scent, and four limbs. (Four limbs, if you’re interested in mobility, are Truly Useful. There’s a reason cars have four wheels.)
Do we know where it’s all going, or where, as some linear extrapolations had it, where we’ll be in 2025 as an industry? Not on your life.
But could you or I imagine such a conference even as recently as three years ago? Not I.
Hope to see you three years hence at the next conference.
Updates: 29 April 2008
Two addenda which have come in since I originally published this. The
first is an article, which is self-explanatory, and the second is an incisive
comment by the General Counsel of a Fortune 500.
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"U.S. Law Firm IPOs Inevitable, Legal Scholars Say"
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IP Law360, By Ron Zapata
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Date:
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4/16/2008 5:36:24 PM
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Details:
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With Australia already allowing publicly traded law firms and the
U.K. expected to follow suit, many legal experts believe it is only a
matter of time before the U.S. sees its first initial public offering
for a law firm.
U.S. bar associations, however, will have to deal with professional ethics
questions and opposition from legal traditionalists before allowing changes
in law firm structures.
Several leading scholars and law practitioners are in Washington, D.C.,
this week at a Georgetown University Law Center symposium titled “The
Future of the Global Law Firm” to discuss IPOs and other market forces
that firms may face
Most U.S. state bar associations currently ban ownership interest in a
law firm by nonlawyers, with the District of Columbia offering limited
exceptions.
The bar associations base their rules on the American Bar Association’s
Model Rules, which state, “A lawyer shall not form a partnership
with a nonlawyer if any of the activities of the partnership consist of
the practice of law.”
The rule is in place to maintain the independence of lawyers and prevent
interference or obligations to nonlawyers that may interfere with lawyer-client
relationships.
Many experts say the rule is outdated and does not consider current forms
of investment.
“I don’t think a public ownership model would compromise what
lawyers do,” said Larry E. Ribstein, a professor at the University
of Illinois College of Law who focuses on partnership law. “I think
that is a perception to overcome.”
While the ethical constraints were put in place to prevent diverging interests
from interfering with an attorney’s obligations, Ribstein said interests
of a nonlawyer-shareholder and a lawyer would actually converge.
“An outside owner wants a lawyer to earn profits. A lawyer earns
profits through good work for clients,“ Ribstein said. “There’s
no firm that succeeds by being bad to its customers.”
Critics of publicly held law firms see a scenario where an investor could
interfere with a firm’s client relations.
A major investor could dissuade a firm from representing the investor’s
competitor or a firm could divulge client secrets in accordance with public
disclosure rules but in violation of attorney-client privilege.
“I’m certainly not ready to open up the floodgates on nonlawyer investment,” said
Lucian Pera, an attorney with Adams and Reese LLP who counsels firms on
ethics and professional responsibility issues.
Still, he pointed out, pressures that could lead lawyers to forgo their
professional responsibilities for firm profitability already exist. Nonlawyer
ownership rules have also had their exceptions, without any catastrophic
effects, Pera noted.
The District of Columbia is the only U.S. jurisdiction to allow lawyers
to join nonlawyers in partnerships that practice law. But the exception
only applies to nonlawyers who assist a firm in legal services to clients
and agree to abide by lawyers’ professional code of conduct.
Pera also noted that “captive law firms,” consisting of lawyers
who are employees of an insurance company and are limited to the representation
of insured customers, also flirt with the boundaries of the ethics rules.
“How is that different from if some private investor worries about
the profitability of a law firm?” Pera asked.
Ronald D. Rotunda, a legal ethics professor at George Mason University
School of Law, noted that many ethics rules have responded to economic
pressures.
Such pressures to U.S. law firms may come from the U.K., where law firms
could take advantage of the passage late last year of the Legal Services
Bill.
Expected to take effect by 2011, the bill would allow British law firms
to go public and sell firm stakes to private investors or merge with banks
and supermarkets.
Ralph Baxter, chairman and CEO of Orrick Herrington & Sutcliffe
LLP, said the U.S. should follow the U.K.’s development closely,
focusing on what public harms and good are caused by outside investment
of law firms, he said.
Bruce MacEwen, founder and publisher of law firm economics publication
Adam Smith, Esq., said it is almost inevitable that U.S. firms will incorporate
a public ownership model. The impetus for bar associations to change their
rules may be when British firms take advantage of the new U.K. law by buying
some “nice lateral talent” in New York, he said.
“As soon as they do that, the New York State Bar is going to erupt,” MacEwen
said. “Once money gets deployed in this market to make those firms
more competitive, U.S. managing partners are going to say they need a level
playing field.”
But questions remain regarding whether publicly traded law firms in other
countries could expand in the U.S., given that most state bar rules do
not allow lawyers to work for nonlawyer-owned firms, said William J. Perlstein,
co-managing partner of Wilmer Cutler Pickering Hale and Dorr LLP.
Law firms in the U.S. have not given much thought to investment in firms
from nonlawyers because the law profession is normally resistant to change
and is generally not capital-intensive, he said.
“The return that you would have to pay to an investor is undoubtedly
considerably higher than the return you pay to a bank to borrow,” Perlstein
said. “The question is, why would I want to do that if I’m in a business
where capital is not, for most firms, a limiting factor in terms of expansion
and operations of a law firm?”
But MacEwen warned that firms that believe they do not need the massive
infusion of capital from a public offering are “underestimating the
dynamism of capitalism.”
Plaintiffs firms, which tend to work on a contingency fee basis and thus
need up-front capital to help fund litigation, could use a capital infusion.
The first firm to go public was Slater & Gordon, Australia’s largest
plaintiffs firm. It was listed on the Australian Stock Exchange in May
2007 and netted AU$35 million.
Slater & Gordon, which sold about one-third of the firm in the IPO,
reported in February that its half-year profits were up 56% since the IPO,
and it increased its estimate for annual profits for the fiscal year by
12%.
Since its IPO, Slater & Gordon has opened several new offices throughout
Australia and acquired other firms.
Australia’s Integrated Legal Holdings Ltd., which owns a number of independently
run law firms, also went public, listing on the ASX in August 2007 and
raising more than AU$12 million through its oversubscribed offering. The
company reported half-year profits of AU$895,412 and AU$4.5 million in
revenue.
Brett Davies, a lawyer whose firm is part of ILH, said there had been no
issues to date regarding conflicts about a lawyer’s duty to uphold the
ethics of the court, to maintain a client’s confidentiality and to inform
investors about necessary company developments.
Davies said there were several advantages to going public and abandoning
the “old partnership model,” which the current generation of
lawyers is not always interested in maintaining.
“Often they do not want that long-term tenure or the joint financial
liability with other partners,” Davies said. “So, our business
plan is transforming the structure of law firms to make them more appealing
and therefore fast-track growth.”
Ribstein said law may become a component of a variety of services that
firms will offer. “We might see lawyers operating out of Wal-Marts,” he
said — a competitive threat that could bring further opposition
to nonlawyer-owned firms.
“Resistance in the U.S. could be from lawyers in small towns and
cities who feel this would lead to a large retailer opening a series of
law offices,” said Perlstein, who noted that small firms were usually
more active in local bar associations.
Baxter said he would have an “open mind” about
allowing nonlawyer ownership of firms — a topic that was one of the
focuses of his annual Law Firm Leaders Forums last month.
“The practice of law in private law firms has changed so fundamentally
that we need to examine periodically whether or not our long-established
rules continue to be appropriate in this changed circumstance,” Baxter said.
With the consolidation of large U.S. law firm practices creating significant
capital requirements, Baxter said current ethics rules
should be examined with an eye on determining the best way to raise capital.
MacEwen said it was only a matter of time before nonlawyer ownership of
U.S. firms were allowed.
“There are over 15 firms with more than $1 billion in annual revenue,” MacEwen
said. “These are big enterprises, and to pretend you can run
it as an Athenian democracy, that idea went away a long time ago.”
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Second, we have our astute GC’s thoughts:
"Bruce — Sounds like an interesting conference. It’s a shame that
in-house counsel appear to be poorly represented – after all, we are
the reason for existence of most private practice counsel (and ultimately the
source of revenue to support the legal education system). Those attending
have a high degree of interest in maintenance of the current extremely profitable
and robust status quo as opposed to being agents for change. The in-house
community needs legal service providers as we simply cannot in-source all our
work. As such we need our law firms to be profitable. We can move
to a world where law firms are merely suppliers or one where they are partners
and accept risk and reward in exchange for value — but in either case, change
must occur. That change must take place at the law schools which need
to train and produce counselors not lawyers (i.e., more focus on practical
delivery of real world legal services) and at the law firms that must change
their economic model to focus on profits through cost reductions as opposed
to top line revenue growth. We simply must begin a dialogue to focus
on value — and that means achieving the business client’s objectives effectively
and efficiently. Generally speaking, clients are not interested in winning
cases or answering interesting questions of law — we are interested in reaching
our business objectives profitably and with a focus on compliance and stakeholder
value. If there is indeed a war for talent, I do not believe it’s a
war that clients are asking law firms to fight, much less are willing to
pay for.”
As for the relative paucity of inhouse counsel, guilty as charged. As
one of the organizers of the conference, all I can offer in mitigation is that
we wanted law firm leaders to feel free to speak openly about their appetite
for change and we perhaps assumed a little too casually that the presence of
a large representation of GC’s would make people feel defensive or guarded. A
senior representative of the ACCA was there, however, and made some of the
very points advanced by our GC friend here.
I’ll continue to update this as additional commentary comes in.
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