The lawyer vs. the law firm

So I’ve been thinking a lot about law firm mergers lately (especially between large Canadian firms and their much larger international counterparts). That in turn has led me to think about cross-selling, why it’s so important to the success of these newly merged firms (and others), and about the relative failure of firms to make cross-selling work. And these in turn have led me to my final post of the year, in which I usually try to assess the state of the legal market and what we can expect in the coming year.

At the end of 2009, I recommended we get ready for the rise of the client. As 2010 drew to  a close, I talked about the emergence of a truly competitive market for legal services. And as 2011 rattled off this mortal coil, lawyers’ increasingly precarious position in the market left me feeling generally apocalyptic. I don’t have anything quite so Armageddon-esque to suggest this year — Mayans notwithstanding, I feel pretty safe in predicting we’ll all wake up on Dec. 22. But I can forecast that a fundamental conflict at the heart of the private legal market will start to be addressed this year: the core, critical, and maybe irresolvable conflict between a law firm and its lawyers.

Mergers

Let’s arrive at that conclusion by the same route I took to get there, and start with mergers.

Law firm mergers are odd beasts: they rarely have the same causes or produce the same effects as in the corporate world. When businesses merge, the general idea is to combine production facilities and reduce inefficiencies to lower costs while eliminating a competitor from the landscape. When law firms join together, however, they generally don’t conduct layoffs (quite the opposite — they usually boast about their larger workforce), they don’t reduce inefficiencies (more commonly, their inefficiency grows), and the lawyers with whom they’ve merged are encouraged to do more business, not less. Combining two law firms is a little like bringing together two big Lego towers to form a much larger one by adding a few bridging pieces.

So if firms neither seek nor obtain the streamlining benefits of merging, why are they merging in the first place? I posed that question in my article “Why Are You Growing?” in the most recent “Strategic Growth” edition of the Edge International Review, and I couldn’t find a very persuasive answer. I suggested, in fact, that at more than a few firms, merging isn’t so much an outgrowth of strategy as a replacement for it.

I went on to dispute the idea, buried deep among the assumptions inherent in law firm mergers, that when it comes to lawyers, “more is better.” Getting bigger, I observed, isn’t really the point of law firm growth. Becoming more effective, more valuable and more profitable is the point — and when you’re dealing with lawyers, adding more of them could actually interfere with those objectives, because lawyers are hard to manage in any firm and virtually impossible to manage in massive ones.

Cross-Selling

Which brings me to cross-selling (and to some observations borne out of an online conversation with Toby Brown).

One advantage frequently put forward in defence of global law firm mergers is the prospect of more business generated through cross-selling. With more partners in more offices in more key regions, the theory goes, there will be more opportunity for partners to reach out and generate new work from new partners in new offices, and to return the favour in kind.

It’s an excellent theory, undermined only by a larger practical problem: lawyers rarely cross-sell. In any firm “midsize” or larger — and I’ve now come to define that as any firm where you can’t fit all the lawyers into a workable cocktail party — most partners do not successfully cross-sell, and many don’t really try that hard. In most of these law firms, individual lawyers — not the firm itself — control client relationships. Therefore, a client will be referred internally only if his or her lawyer chooses to make that happen. Quite often, the lawyer does not.

Lawyers, as we know, guard their clients jealously, even from colleagues in their own practice groups. They will make no referral, and especially no long-distance referral, if they so much as suspect that the attorney or practice group to whom the client would be referred might fumble the ball, overbill the client, or otherwise make the referring lawyer look bad and potentially threaten the client relationship.

Now, you can certainly blame partner compensation systems in part for this problem, if they fail to appropriately reward cross-selling, although that’s the least of the sins to lay at their feet. Fundamentally, however, lawyers’ reluctance to cross-sell their partners can be traced to the breakdown of internal relationships and internal trust among a firm’s lawyers — or maybe more accurately, the failure of trusting relationships to develop in the first place.

Even in firms of 30 or 40 lawyers, these elements can be found wanting; but in a firm of hundreds or even thousands of lawyers, in multiple cities, on several continents, that challenge can and does graduate from Herculean to Sisyphean. In firms that big, you simply don’t know most of your “partners,” and you likely never will. Absent a high degree of familiarity and trust, the risks vastly outweigh the rewards for the potential cross-seller. (My Edge colleagues Gerry Riskin and Michael White have written articles addressing some of these issues, by the way.)

Unfortunately, however, it’s not as simple as “fixing” trust and relationships within a large or newly merged firm, assuming that you could. The problem goes deeper than that, and it goes back to one of those buried assumptions about law firms. As a rule, the individual lawyer, not the firm, gets to decide whether or not the client can deal with another lawyer; basically, the client gets referred internally if the lawyer who controls the client feels like it.

When you stop and think about it, that’s kind of strange.

The Lawyer vs. The Law Firm

When you walk into a clothing store, the first salesperson who greets you (even if he works on commission) will happily pass you over to a colleague to answer questions, receive advice, or otherwise be part of the transaction. At a car dealership, the first salesperson with whom you deal (and I can guarantee she’s getting a commission) will be willing to do the same. They’re not doing this because they’re warm-hearted communitarians; they’re doing it because they work for the company, and the company considers that you are its customer, not the salesperson’s. And the company is correct to believe this. The salesperson’s individual interests in your time and attention do not trump those of the company.

“But,” you and every lawyer reading this will instantly respond, “law firms are not clothing stores. In a law firm, the partner works for herself, she’s an independent equity owner, and she might well have pulled in the client herself, and she’s the one whose services will be delivered to the client and on whom liability will rest. She should have every right to dictate what happens to the client with whom she deals.”

And that, to my way of thinking, is the problem. Because a law firm in which this is the dominant cultural belief is not a business. It is not a functional commercial enterprise in any sense with which we are familiar. It is, to be blunt, nothing. It’s a warehouse where lawyers share rent, utilities, and a library, but not risks, rewards, or professional aspirations. It’s a farmer’s market; a neighbourhood yard sale; a souk. Some lawyers still feel like debating the old saw, “Is law a profession or a business?” I’ll tell you this: the typical law firm described above is neither a profession nor a business. It’s a cheap knockoff of both that behaves like neither.

And it cannot stand. Not when so many other real, actual, conforming-to-the-laws-of-enterprise companies are entering this marketplace. In real businesses, the interests of individual product makers or service providers are aligned with and subsumed into the greater interests of the company. In real businesses, personal success and market validation are integrated with the success and validation of the company. In real businesses, the salespeople don’t own the customers. 

This is more than a bug or an inconvenience or a profitability hiccup for law firms: it’s an existential challenge. It goes to the heart of why a law firm even exists in the first place — what purpose the firm serves in and for the market. And it’s creating serious stress at some of law firms’ most vulnerable points. The strain is already showing.

The Pressure Points

Look again at cross-selling. Law firms need robust cross-selling, because it’s almost the only source of organic growth that flows from a partnership format (as opposed to a lawyer’s own individual efforts). Without cross-selling, lawyers must develop business alone, on their own initiative — raising the fundamental question of why they’re even in a partnership in the first place. A law firm needs its lawyers to cross-sell, but it can’t force them to do so, and lawyers consider their clients to be part of their personal inventory. When it comes to cross-selling, therefore, a law firm and its lawyers are locked in an ongoing struggle for control of the client relationship — but for the firm, it’s always been a losing battle, because extremely few firms have built anything approaching a collaborative business environment to enable client sharing. There’s no collaboration at a farmer’s market.

Look again at mergers. In Canada, all the talk is about the decisions by Fraser Milner Casgrain and Norton Rose Canada to accept mergers with global firms that have a large US presence. This has never happened before, because most midsize and large Canadian firms receive huge inflows of referral business from multiple US firms, and tying the knot with one US firm means cutting off all those other streams for conflicts reasons. But let’s press that assumption harder: What will happen to a firm that loses all those referrals? The referral work will likely go elsewhere, yes. The lawyers who received that work will likely leave too. The firm will be smaller. But it will also be more focused, more specialized, more globally integrated — and quite possibly, more profitable for the remaining partners. Because, again, being big is not the point. Being effective, valuable and profitable is.

A law firm that pursues a merger which will surely result in a near-term loss of both referral work and lawyers has made a fundamental decision: the collective interests of the enterprise supersede those of some of its individual partners. The firm is saying: “We accept that this course of action will cause conflicts problems for many partners, some of them insurmountable, and that we may lose those partners and their revenue. But we have a core business objective: to serve X clients in Y markets through the provision of Z services, and that can best be achieved through this merger.” That is not only a gauntlet flung in the face of many powerful lawyers: it is a statement of rebellion against the cultural assumption that lawyers control clients. It’s an assertion of institutional identity and independence by the law firm.

Not many law firms have the wherewithal to try this and succeed. But assertions like these will become more common, because they are becoming more necessary. This conflict has always simmered beneath the surface of law firms, submerged from sight, except when the occasional skirmish erupted above the waterline. But now the entire fight is coming out into the open. Legal services has become a dynamic, competitive, global market, and the main reason so many law firms are struggling within this new market is that they cannot respond institutionally. They are held back by their lawyers, hamstrung by their souk culture, unable to muster enough collective gravity and momentum to make critical decisions. But they’re trying, more than they ever have before. Law firms in the future absolutely must become more streamlined, systematized, managed, automated, and centralized in order to compete — but that’s not what many of their lawyers want. So who wins, the firm or its lawyers? That’s the coming battle.

There is no shortage of conventional wisdom with which to object, starting with the old standby that “Clients hire lawyers, not firms.” And that might well have been true, much of the time, for many years. But I’m coming to conclude that clients acted that way primarily, and possibly only, because that’s how lawyers trained them to act. There has only ever been one source of outside legal services: the law firm. Most law firms have only ever been driven by one strategic imperative: the interests of their most powerful partners. Clients choose lawyers in no small part because that’s what lawyers want them to do. But give clients an actual choice of providers that approach business and client relationships differently — which our incoming competitors will deliver, in spades — and you have the opportunity to create a brand new playing field with a potentially whole new set of rules.

The Outcome

The lawyer vs. the law firm is a fight that’s been spoiling for years, and it seems to me that starting in 2013, it’s on. Once that battle is finally joined and completed, I can see only two likely scenarios for law firms that experience it.

1. The full-service law firm partnership will collapse. There will be insufficient reason for a broad array of lawyers to band together in a partnership when that model provides them with very few business benefits. If your “partners” will cross-sell or refer to you only on a whim, why are they your partners? The large, “full-service,” multi-jurisdictional law partnership will shudder and start to break apart; small, local, intensely interlocked practice groups will peel off and become the new basic unit of private legal enterprise. That result is where all the foregoing pressures are leading right now — if firms cannot gather enough internal cohesion to establish a business-first, practitioner-second culture, then the centrifugal forces that have been slowly pulling law firms apart for years will finish the job.

2. The law firm partner will lose his or her position as the driver of internal legal business. As apocalyptic as that first option above might sound, this would be the truly revolutionary outcome. Law firms require generous cross-selling and enlightened referrals; lawyers control both and resist both; ergo, cross-selling and referrals must be taken out of the hands of individual lawyers, because otherwise the continued viability of the firm is threatened. Under this scenario, the firm wins the war and becomes the primary or even sole driving force behind its business decisions; the cost will be high, measured in an outflow of lost work and departing laterals, and the loss of blood might be more than some patients can survive. But in the larger picture, the cult of the corner partner begins to die off, and a new cultural imperative emerges to govern law firm behaviour.

Unsustainable situations can’t be sustained forever. Conflicts at some point have to be resolved, and there is no bigger conflict within law firms than this one. If law firms are not strong enough institutionally to wrest control of client business from individual partners and distribute referral and cross-selling opportunities in a more strategic fashion, then they lose their primary reason for existence. If lawyers are not strong enough to retain primary control over their sources of legal work, then they stop becoming independent legal entrepreneurs and become the functional equivalent of mere employees.

Either the center will hold, or it won’t. That’s the question; in 2013, law firms will start to learn their answer.

Jordan Furlong delivers dynamic and thought-provoking presentations to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.

The year of living dangerously

So there goes 2011, and from a legal marketplace perspective, you could probably call it the year of hanging on. Large law firms hung on in the face of flat-lined or diminishing revenues, in no small part through the wonders of de-equitization. Small law firms hung on despite an expanding sea of legal service providers targeting the consumer market. Corporate law departments hung on despite seeing their outside counsel budgets cut by as much as 25%, yet still managed not to force change in the market. Law schools hung on in the teeth of a growing storm of criticism that they had failed to look out for their students’ financial interests. Measured in terms of endurance and tenacity, at any rate, it was a pretty good year for the incumbents.

Now here comes 2012, and from where I’m standing, it looks like a year in which the limits of perseverance will be reached and breached. There are just too many places within the traditional legal community where resistance to change will weaken and ultimately collapse. I want to point out three in particular that strike me as especially noteworthy harbingers of some new realities.

Disappearing law firms: Mergers and acquisitions of law firms picked up pace in 2011, but here in December came word of some interesting variations on the theme. Bryan Cave “merged” with Denver-based Holme Roberts & Owen, while Arnold & Porter “merged” with San Francisco’s Howard Rice. I put “merged” in quotes because it’s a polite fiction to pretend that these were anything other than flat-out acquisitions of law firms that were experiencing serious pain. Holme Roberts suffered a string of partner defections and staff layoffs earlier this year, while Howard Rice had lost nearly half its complement of lawyers in the last nine years, including two senior partners in 2009.

You can expect to see a lot more of these kinds of deals in 2012, because a lot of firms are having a very tough time adjusting to the new rules of the market. Some firms, as I noted in a post last month, don’t even make it to the acquisition stage: they simply disappear. This AmLaw Daily article makes it even clearer that dissolutions of law firms took place throughout 2011, starting with Howrey LLP and continuing with smaller and midsize firms throughout the year. You can call it “consolidation” if you like, but it also bears a strong resemblance to a profession-wide culling of the herd. Many law firms are weaker than they appear from the outside, or even from the inside, depending on how transparent their internal financial disclosures turn out to be. Some bigger dominoes could start falling early in 2012.

The rise of Asia: It remains something of a puzzle to me that the merger of China’s King & Wood and Australia’s Mallesons hasn’t set alarm bells ringing across the global legal marketplace. Now the largest law firm based in the Asia-Pacific region, with more than 1,800 lawyers, King & Wood Mallesons is something we’ve never seen before. Put it this way: Mallesons was one of Australia’s biggest and most esteemed law firms, large enough to entertain lengthy merger talks with Clifford Chance and innovative enough to be the only two-time winner of the College of Law Practice Management’s InnovAction Awards. Yet which firm wound up with top billing? That should tell you something about how much influence Chinese law firms are set to wield.

Will King & Wood Mallesons be able to crack the rich Anglo-American legal market? I’m not sure that’s on their radar right now. There’s more than enough work in Asia and Oceania to keep them busy, and frankly, it would be understandable if they think that their corner of the world has more medium-term upside than the western corner. But other Chinese firms are quite happy to go west: in fact, the two biggest law firms in China, Dacheng and Yingke, are preparing to open bases in London. Then there’s small Chinese firm Broad & Bright, in merger discussions of its own with none other than Clifford Chance. Years from now, we’ll look back on 2011 as the year China began breaking into the global legal market.

Alternative Business Structures: And heeeere we go. Starting the first week of January, the UK’s Solicitors Regulation Authority will officially throw open the doors to applicants of all stripes that want to become Alternative Business Structures under the long-anticipated provisions of the Legal Services Act. Regular readers will know that the SRA expects at least a dozen applicants straight away, and that the initial group will include law firms, claims management companies, major retailers, accounting firms, loss adjusters,  private equity houses, legal expense insurers, banks, will-writing companies, and even, remarkably enough, in-house law departments. I don’t know about you, but that looks like a revolution to me.

It’s a revolution that won’t stop at the English Channel or the North Sea, either. There are too many UK companies and law firms with offices worldwide to believe that the contagion can be contained. We’ve already seen the influence of the Legal Services Act in the ABA’s planned endorsement of limited, lawyer-controlled multi-disciplinary partnerships (although the degree of innovation here is comparatively tiny) and the lawsuit launched by Jacoby & Meyers to the restrictions against non-lawyer ownership of firms. Whether these initiatives succeed is almost beside the point: even the specter of massive change in the UK is enough to drive limited reform efforts. What kind of response will the real thing generate?

Those are three reasons to think that 2012 will be the year that the pressure relentlessly building on the fault lines of the traditional legal marketplace will finally produce the quakes we’ve been expecting for a while. And here’s one more: macro-economic and geopolitical events will play a role in the legal market as well. Europe’s financial situation is unsustainable, and the odds of something truly ugly taking place there and spreading worldwide seem to increase every month. The 2008 Lehman Brothers collapse and the resulting western financial crisis was the first shock to hit the legal system and generated a tidal wave of change. The next one could be bigger.

If you like living dangerously, then by all means, plan for 2012 to be another year of raising rates, de-equitizing partners, downsizing staff and taking whatever other measures you feel will continue to prop up the artificial and increasingly archaic metric of profits per partner. Keep on doing what you’ve been doing lately, just more of it. You might yet manage quite well, if your financial position entering the year was rock solid,  your firm culture intensely positive and your relationships with clients extremely sound. But if you feel like your foundation is a little shaky, your strategic direction has meandered, or your morale is brittle, then I think you’d be well advised to pay close attention to what comes next. We were warned.

Jordan Furlong delivers dynamic and thought-provoking presentations to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.

Canada’s Big Bang

Earlier this fall, I gave a presentation to a Canadian law society that described the key trends in the current legal marketplace and forecast where they’re likely to lead in future. As part of the presentation, we discussed a series of hypothetical future developments that would require the profession’s regulators to respond. One of them went like this:

A new legal services company, GlobalLaw Inc., has risen suddenly and dramatically. Based in London, it has taken advantage of the non-lawyer equity provisions of the Legal Services Act to collect massive amounts of capital from investment banks. With this money, GlobalLaw has bought law firms and hired lawyers worldwide, created a huge and sophisticated online service infrastructure, and marketed itself aggressively in multiple jurisdictions. GlobalLaw has now announced plans to buy mid-sized firms in Vancouver, Calgary, Toronto and Montreal simultaneously, and to re-brand and operate them all as GlobalLaw offices. What do you do?

That scenario stopped being hypothetical yesterday, with the bombshell announcement by UK-based global law firm Norton Rose that it was merging with South Africa’s Deneys Reitz and Canada’s Ogilvy Renault. You can read the details in any number of places, including The American Lawyer, LegalWeek, the WSJ Law Blog, the Financial Post, and The Globe & Mail — a range of international coverage that underlines the fact that this, as Joe Biden might say, is a big freakin’ deal.

Norton Rose started the day with close to 2,000 lawyers in 31 cities on three continents, whereas Deneys and Ogilvy together total about 600 attorneys in eight cities, so this looks more like strategic acquisitions as part of a global expansion than a merger of near-equals. I can’t speak to the South African side of this deal, and I’m not even that interested in the logic of the moves from the firms’ respective strategic perspectives (though it sure looks sound to me). What I’m most interested in today is the impact of this development on Canada’s legal marketplace, which I think will be extraordinary.

Some context is necessary, especially if you’re not from around these parts: nothing like this has happened in the Canadian legal marketplace before. Baker & McKenzie was the first “global” firm to come to Canada, but its Toronto office opened in 1962, virtually the Mesozoic Era in law firm history. In 1999, Tory Tory DesLauriers & Binnington consummated Canada’s first (and to date only) cross-border merger with New York’s Haythe & Curley, a union that took something of a star-crossed turn for both firms. In 2008, pulses quickened briefly on a report, immediately denied by all parties, that DLA Piper was in talks with national giant Fasken Martineau DuMoulin. And that’s pretty much the entire notable history of foreign forays into the Canadian legal market, until yesterday.

So you can understand why much of Canada’s legal profession looked like a poleaxed mule when this news broke. Before yesterday, the largest law firm in Canada was Borden Ladner Gervais with 753 lawyers; with this merger, Norton Rose will have more than three times that number. The Canadian firm with the most overseas offices was Macleod Dixon with four, followed by Faskens with three; Norton Rose will soon have nearly 35 offices outside Canada. This is like Gulliver buying a house in Lilliput; or, to borrow a metaphor from the US-Canada relationship, like the elephant moving in next to the mice. This is the world arriving on your doorstep without calling ahead — all the talk about globalization suddenly turned into the reality of a legal behemoth setting up shop down the street.

Norton Rose OR (as the new firm will be officially known) seems likely to affect the Canadian marketplace in a number of ways. Obviously, with a critical mass of lawyers in cities across Europe, Asia, the Middle East and Australasia, Norton Rose will be a serious contender to pick up Canadian multinational clients (or the Canadian work of multinationals with head offices elsewhere). That platform will be equally attractive to potential lateral hires at other Canadian firms who’ll want to know whether there are wider horizons than those they’re currently flying. Aside from possible client and partner losses, incumbent Canadian firms will also be faced with new management pressures: as the Legal Post‘s Mitch Kowalksi points out, Norton Rose brings unprecedented financial transparency (the firm makes its annual report public) as well as superior knowledge management and online services to Canada. All of this changes the competitive calculus of a law firm marketplace that traditionally has behaved more like a cozy fraternity of genteel rivals.

I can see two other Canadian impacts flowing from this merger. The first is the fact that a precedent for global mergers has now been set, and precedent is both a reassuring and a galvanizing strategic force: nothing motivates a law firm more than removing the fear of going first while simultaneously creating the fear of going last. Will we see a stampede of Canadian firms rushing into global mergers? Not likely. But a lot of executive committees will meet to talk about what this merger means for them and whether there are similar overseas opportunities that their firms must now consider. There’s been a sense here that there are too many large firms in Canada for a population and a capital base this size: the Potash Corporation of Saskatchewan notwithstanding, this country is not and isn’t likely to become the world’s corporate headquarters. Some people think that if the law of conflicts of interest were loosened, a wave of national mergers would soon follow. This is a marketplace more than ready for change and consolidation.

But here’s something else to think about: Norton Rose is on a major expansion tear. Last June, the firm made headlines when it merged with Australia’s well-regarded Deacons. Deneys Reitz itself was Chambers’ African Law Firm of the Year in 2006 and maintains a strong commercial law presence in the continent’s biggest economy. (It’s beyond debate that Norton Rose must be looking very hard at potential US merger partners as we speak.) Ogilvy Renault is not a “national” firm as we understand the term — it has little presence west of Toronto (though its Calgary office, opened last year, has grown to eight lawyers), and it still houses more lawyers in Quebec’s capital (Quebec City) than in Canada’s (Ottawa). But it represents global companies like Bombardier, SNC Lavalin and Royal Bank of Canada, and is widely considered a “blue chip” firm within the Canadian profession.

All of which is to say, each of these three firms brought serious credentials to the table, yet each agreed to give up their names and identities to join another firm. So we’re learning that global platform matters, and global capacity matters, and maybe above all, global brand matters — we might very well be on our way to the Legal Transformation Project‘s suggested outcome of a future filled with megafirms and boutiques.

But we might also keep this in mind: the Alternative Business Structure (ABS) provisions of the UK’s Legal Services Act come into effect next fall, and any law firm aiming to be a global powerhouse would want to consider all available options to finance and pursue such a strategy. And I do know this: any global law firm with an office in Canada and with access to global private capital would turn this country’s legal profession upside down, from acquiring talent to investing in online infrastructure to marketing its brand to forcing law societies across Canada to look hard at regulations surrounding non-lawyer investment in or ownership of law firms.

This is all extremely early days yet, and the merger won’t even take effect until next June. But my feeling is that something very big happened in this country’s legal profession yesterday. The sudden deregulation of financial markets in England on October 27, 1986, has come to be called the “Big Bang,” and the coming introduction of ABSs in England & Wales on October 6, 2011, has already been anointed as the legal profession’s own explosion. Well, that was one very loud sound we heard across Canada on November 15, 2010.

Mind the dragon

I’ve written fairly extensively about India and its continuing and future impact on the legal services marketplace. I’ve not paid as much attention to China, but that country’s effect on the legal industry in the 21st century will be profound and could happen sooner than is widely expected. This is a brief note to acknowledge that fact and to suggest you keep a close eye on China’s developing role in the global legal marketplace.

We all know the basics: China is already an economic giant whose engine has kept the global economy from tanking completely over the last couple of years. It holds nearly $1 trillion in US currency, it’s gobbling up natural resources everywhere from Canada to Africa to feed its phenomenal growth, and it’s widely considered the odds-on favourite to dominate, or at least co-dominate, the world in the decades to come. But its legal industry doesn’t seem to be considered a global threat by its western counterparts, thanks in part to a paucity of English speakers, the lack of common-law fluency, and difficulties with the enforcement of the rule of law in China generally.

While all of that may be true, it’s no reason to dismiss or take lightly the opportunities and threats presented by China’s recent but substantial interest in the provision of legal services. Firms that look upon China solely as a source of clients, rather than of potential competition, could be making a mistake. Here are four quick reasons to take China’s legal industry seriously.

1. Growth. China’s legal profession is growing astonishingly fast, from a nearly zero baseline. Thirty years ago, the entire country had only 212 lawyers in 79 law firms; today, those numbers are 150,000 and 14,000, respectively, a huge jump but still proportionally well below the American lawyer-to-population ratio. And there are many more Chinese lawyers on the way: Sida Liu of the University of Wisconsin-Madison told the Georgetown Law Firm Evolution conference in March that China had opened a staggering 500 new law schools in the last ten years. That’s probably too many for anyone’s good, but the critical mass will be there.

2. Sophistication. Chinese law firms are acquiring business and management skills faster than their Western counterparts did at similar stages of development. Leading Chinese (and Indian) firms are moving from eat-what-you-kill arrangements to lockstep partnerships, seeking to establish long-term enterprises that prioritize the firm’s welfare above the individual’s (something that comes more easily in China, culturally speaking, than in the west). Devotees of David Maister’s one-firm firm will recognize this approach. And interestingly, some Chinese firms are already talking about merit-based pay for associates — something still not widespread among US or UK firms.

3. Talent. In China’s legal talent wars, Western lawyers and firms are more often emerging on the losing side. This is happening in law firms — one example that stunned the Magic Circle was the departure of a top Clifford Chance capital markets partner to Shanghai firm King & Wood. But it’s also happening, more importantly, among clients: homegrown in-house counsel are becoming far more common in the Chinese offices of global companies, particularly thanks to their skill at navigating difficult compliance issues in a still-developing business environment. These lawyers have often been trained in foreign firms and law departments, but they’re now flexing their muscles independently.

4. Power. China is working to minimize or overcome those features of its society and economy that limit its global capacities. While English is not nearly as common in China as in India, the Chinese government is busily teaching 200 million of its citizens the language. China needn’t depend heavily on American or English business, not when it’s cutting $60 billion gas deals with Australia or looking to increase $60 billion worth of annual trade with India. One scholar argues that the gap between Chinese law and that practised in the west is narrowing. And as my Edge colleague Rob Millard has pointed out, as economic power diffuses from west to east, the day may well come when Chinese law, not Anglo-American common-law, is the default system for business transactions.

These are all reasons why China’s law firms and legal professionals deserve serious pondering in any consideration of the future legal services marketplace. But here’s one more, and it might end up being the most significant: China’s government has no qualms about owning and directing corporate entities on a global basis. China boasts the world’s two biggest banks and five more in the top 50 worldwide, and the government is an extremely active stakeholder in those banks and their business decisions. Picture the law firm equivalent: a global legal services provider financed and directed by a Chinese state apparatus with pockets so deep it makes massive LPOs look like garage startups by comparison. If you think competing with privately funded service providers with billions at their disposal would be tough, think about competing with a law firm backed by about a trillion US dollars and an extremely persuasive board of directors. That’s a law firm business model no one is contemplating in the West, and it would be a game-changer of the highest order.

This is not, let me emphasize, yet another paean to China’s imminent and inevitable rise to mega-power status: this is a country with plenty of challenges and problems, many of which figure to cause significant trouble and misery inside its borders within the next decade. Nor does it pretend to be an in-depth examination of China’s legal profession, which has issues of its own to cope with. Many things can and likely will still happen to push China off its current trajectory and slow its progress — but these should be delays, not failures. Corporations and governments worldwide are thinking hard about what to do when China truly hits its stride; the legal sector should be doing the same.

India: Beyond legal process outsourcing

The symmetry was remarkable. Magic Circle icon Clifford Chance caused major waves in the mainstream legal media this week by announcing plans to cut up to 80 lawyers from its flagship London office, about 10% of the legal professionals there. The move, following layoff notices issued to 20 litigation associates in CC’s New York office in October, was generally taken as further evidence of the deepening recession and perhaps of Clifford Chance’s particular vulnerability thereto. So was its subsequent decision to ask its partners to contribute an average of £150,000 each to the firm’s partnership funds, similar to a move made by rival Eversheds late last year.

But Clifford Chance was also making smaller headlines a long way from both London and New York. From New Delhi came word that the firm was in talks with Indian law firm AZB & Partners about an alliance that would involve client referrals, joint training, consultation and joint marketing. Since foreign law firms are prohibited from practising law in India (more on that shortly), these firms instead have been forming strategic partnerships with Indian firms that could, were the legislative environment to change, rapidly segue into full-bore mergers. Other Magic Circle operations and some US firms have made similar  advances, but Clifford Chance is also the only firm to set up its own wholly-owned back-office and document management company in India.

Clifford Chance also cropped up in the news in late December when the Mumbai High Court ruled in its favour in a taxation dispute, reducing by more than $2 million the amount it owes to the Commissioner of Income Tax on fees earned on four energy infrastructure projects undertaken in India in the late 1990s.  Add to that CC’s controversial September hire of a top capital markets partner away from a leading Indian firm to its Singapore office, and its near-miss merger with Australian giant Malleson Stephen Jacques late last year, and this is a firm that’s making some serious investments in the southeast corner of the world map.

And rightly so. According to the Times, there were nearly 600 cross-border mergers and acquisitions in 2007 that involved an Indian element; on top of that, India’s government has launched an infrastructure program that reportedly will require $500 billion in foreign investment. The word “salivating” appears frequently  in media reports to describe global law firms’ anticipation of entering India and claiming a piece of what most people agree — recession or no recession — is an economic powder keg. But legislation prevents foreign law firms from operating in India and caps the number of equity partners in an Indian law firm at 20.

For the moment, anyway. Last month also brought word that the Limited Liability Partnership Act 2008 has now passed both houses of the Indian Parliament, such that the first Indian LLPs could be set up as early as April 1. The introduction of LLPs to India had causes and will have effects far beyond the legal profession, of course; but one of the expected results of the new LLP law is to constitute the first irrevocable steps towards the entry of foreign law firms and the general liberalization of the Indian legal marketplace. Add to that the anticipated resolution of a long-running court challenge to India’s legal marketplace laws by foreign firms White & Case and Chadbourne Parke, and you can understand why firms like Clifford Chance, despite financial challenges to their Atlantic operations, are intensely focused on India.

Now, this will still take time: very little happens overnight in India, and powerful political interests in Indian law firms oppose change. On top of that, a general election will be held this spring, and frankly, the Indian government has a lot more important and serious things on its mind to deal with these days. But this flurry of activity does illustrate why legal process outsourcing, the subject most often associated with India’s legal profession, is not the long-term future there.

Don’t get me wrong: LPO is still going strong and likely will accelerate, given mounting cost pressures on in-house departments in the US and UK. This month’s edition of Corporate Counsel magazine explores the Indian LPO market in depth, with this telling quote from Microsoft’s worldwide IP operations chief about patent outsourcing to Indian lawyers: “We went there to save money,” he acknowledges. “We stayed and expanded because we liked the quality of the work.” It wasn’t just okay, it was better. And India’s legal community continues to ramp up LPO capacity. The latest evidence is a post-graduate diploma in legal process outsourcing now being offered by the the Indira Gandhi National Open University — the world’s largest university, by the way — and leading Indian legal talent management house Rainmaker T&R. Indian LPO isn’t going away anytime soon.

But LPO is the starting point for India’s legal community, not its final destination. Indian lawyers give nothing away to their western counterparts on acumen, and they seem to be considerably ahead of them on efficiency and work ethic. When clients keep looking at the hourly rates charged by most Indian lawyers — between $20 and $40, according to the Corporate Counsel article — eventually, they stop asking, “Why are they so cheap?” And they start asking, “Why are our western lawyers so expensive?” That paradigmatic perspective shift is coming faster than many law firms think.

It would be unwise to suppose that Indian lawyers will forever be content to take on low-level legal work from western clients. I suspect that India’s lawyers regard a lot of current LPO work as useful training exercises to learn about western legal work habits, preferences and processes — stepping stones on the way to bigger and better things. I’m not about to bet against them, and events of the past several weeks indicate that even in the teeth of a recession, some pretty smart global law firms feel the same way.

Globalize your thinking

It’s with some reluctance that I link to The American Lawyer‘s Global 100 rankings (or at least, to the article about the rankings — the actual list is subscriber-only). I have an aversion to anything that roughly equates “law firm success” with “profit per equity partner,” which most of these rankings tend to do, because there’s a lot more to most law firms than that.

But the article, which details how UK firms have vaulted past their US rivals into the Global 100’s upper echelons, is instructive for at least one reason, illustrated in this excerpt: “The irony is that the English firms have succeeded by following the lesson of their American peers: They’ve hedged their bets. For U.S. firms, in the past that has meant a healthy dose of litigation and bankruptcy work to balance a corporate shortfall. For the British, the strategy has been geographic: spreading their risk across several continents.”

With respect, referring to the Magic Circle firms’ international expansion as “hedging their bets” is to misconstrue offence for defence. It certainly makes sense to diversify a firm’s practice areas, a lesson Cadwalader learned a little too late. But that’s not a growth strategy, it’s a risk management tactic — a way of minimizing the damage inevitably associated with any practice area that’s prone (as most are) to waxing and waning.

Striking out into developing markets and placing a stake in foreign ground is the opposite of risk aversion — it’s an assertive approach that will certainly hurt overall profits for a number of years and could potentially blow up altogether. But in a global economy, it’s a risk that’s rapidly becoming a reality of doing business. Any firm that does or wants to count major entities among its clients can’t be content with a heavily fortified home base and a few outposts on the perimeter. Continue Reading

Eversheds: how to set new client standards

I was jazzed a year ago when Eversheds struck a deal with Tyco to become the service and manufacturing multinational’s primary outside counsel, reducing Tyco’s complement of law firms for most legal matters from 250 to 1. Those who doubted the wisdom of the arrangement at the time worried that Tyco would miss out on other firms’ offerings and would suffer from Eversheds’ inevitable sense of complacency, while the firm would be at a greater risk of business-losing conflicts. Even when international gas and engineering giant Linde struck a similar deal shortly afterwards with DLA Piper, there was still uncertainty over this kind of approach.

Well, one year on, says The Lawyer, Tyco is still partnering with Eversheds and singing its praises, especially since the firm must get Tyco to sign off on every legal task it performs on the client’s behalf in order to get paid for it. So how did Eversheds do? Today, it’s now sitting on no fewer than six similar arrangements with other companies, each of which looked at the Tyco deal and were impressed by what they saw. Now other London-based firms are trying to emulate Eversheds’ approach, including Hammonds and Pinsent Masons. So I’d say, on the whole, that this has been a pretty successful undertaking so far.

What really impressed me here, though, is how Tyco’s partnership with Eversheds indirectly helped bring the six other companies on board. When Eversheds first proposed the present arrangement to Tyco, it proffered two cutting-edge software programs: Dealtrack, a budgeting and cost management tool, and Rapid Resolution, a project management application for litigation. But Tyco wanted more: it wanted a way to precisely estimate the total amount it was spending on its legal services company-wide.

Eversheds rose to the challenge and integrated Dealtrack and Rapid Resolution into a more powerful new program called the Global Account Management System (GAMS). “The system breaks down a company’s legal spend by country, jurisdiction or practice area, providing a heat map [of] where money is being either wasted or used efficiently,” says The Lawyer. But there’s more to it than even that. Continue Reading

Pro bono without borders

A press release came my way today from McCarthy Tétrault, announcing that the firm is the first Canadian “Partner Without Borders” of the Quebec division of Avocats Sans Frontieres. [Edit] ASF is an international NGO devoted to providing legal assistance and representation to vulnerable individuals and groups in developing countries or those in crisis. The organization is active in 30 countries, working with local groups on a completely pro bono basis. ASF Quebec has a number of law firm sponsors already, but McCarthys is the first to become un partenaire. Good for them.

Any law firm worth its charter has always been active in its community, of course, but in this age of megafirms with global reach, we’re starting to see super-national firms display a truly remarkable degree of involvement in issues and organizations that transcend the usual local undertakings. Check out DLA Piper, whose New Perimeter project is an incredible piece of work: a worldwide pro bono initiative that has seen 13,000 lawyer hours contributed to, inter alia, drafting new judicial laws in Kosovo, restructuring a micro-lending project, developing a worldwide food bank system and creating a human rights center in southern Africa. This is work on the scale of the CBA’s sterling International Development Committee, but supported by a for-profit firm rather than a non-profit association.

It would be naive to overlook the obvious marketing and recruitment benefits of McCarthy’s move here: the press release highlights the firm’s other pro bono efforts, including its support of Pro Bono Students Canada. This obviously invests the firm with some cachet among law students and new lawyers, many of whom take overseas development work very seriously. McCarthys, of course, will have to back up this commitment with active participation in Avocats Sans Frontieres (and now I have Peter Gabriel’s Games Without Frontiers stuck in my head), because students can also tell real commitments from mere gestures. But I prefer to think McCarthys means what it says here about its pro bono commitment, and that what we’re seeing really is the white-hot trend of globalization applied to the age-old tradition of lawyers’ community service.

Offshore reflections

It’s a few weeks late, but this article about offshore legal services published early last month in The Hindu is worth a read, although it’s not offered on the basis that all its contents should necessarily be taken at face value. It comes across rather as a corporate Q-and-A for SDD Global Solutions, an Indian legal services PKO, and some might differ with company president Russell Smith’s uncompromising opinions on the state of Western law practice. In fairness, not every shot he fires is accurate — but a lot of them sure are.

What’s particularly interesting about this article, however, is the unattractive picture of the Western legal profession that comes through — this is the image the profession has managed to develop for itself throughout the rest of the world. If your North American or European firm wants to be a global player in the law, you should be aware that your reputation is now preceding you.

Some highlights: Continue Reading

Law practice in the 21st century

This article was first posted at Slaw on September 29th, 2006.

Earlier this month, I visited San Francisco for the first time. I’d long been fascinated by the thought of a city built on a geological time bomb, and walking its streets was quite an experience.

Everyone knows there’ll be a massive seismic rupture underneath the city someday. But San Franciscans are neither hot nor bothered by it; they go about their lives in their historic city. Their chances of being engulfed in an earthquake remain extraordinarily small, and there’s nothing they can do to prevent it anyway, so why worry?

I think you could draw a few parallels between San Francisco and the legal profession. Great forces are in motion, seismic change is in the offing, and while prosperity reigns today, ripping upheaval is inevitable. I don’t pretend for a moment that lawyers are threatened with annihilation – so long as there’s law, there’ll be lawyers – but after the strike comes, we’ll have trouble recognizing the landscape. Continue Reading