Irresistible forces

Alex Novarese, The In-House Lawyer: Looking at the top of the market, how is buying behaviour changing?

Donny Ching, Royal Dutch Shell: I see increasing sophistication in sourcing legal services. I am sure you all have experienced tenders and reverse tenders. More corporates are looking at using different tools, also driven by the contracting and procurement [C&P] organisation. Procuring legal services used to be the last bastion, where C&P could not touch. That is changing. We hired our own pricing analyst sourcing officer a couple of years ago. He has done phenomenal work and opened our eyes to what is possible.

Alex Novarese: In what way?

Donny Ching: He came from a law firm, so knows how you guys price. That insight created a balance in how we structured fee arrangements. What was groundbreaking was that he helped us to break down, for example, our litigation into bitesize chunks and then look at the structures we could put in place. We drove a lot of risk-sharing discussions with the firms, to the point where we have one or two firms whose rates are pegged to the oil price. It got people thinking.

Alex Novarese: Rates are pegged to the oil price?

Donny Ching: Yes, we set the base oil price and if it goes below certain threshold levels, we get an increasing level of discount to their rates.

Alex Novarese: Kate, how responsive have you found top law firms to the cost pressures clients are dealing with?

Kate Cheetham, Lloyds Banking Group: They have been more understanding, but it is always a challenge. We have a procurement team at Lloyds and have worked with them for a number of years. They helped us to run our panels and fee structures. We have also worked with them to establish how we procure and deliver legal services for the group. It is not legal advice; it is legal services.

The things that are making a difference to us now are how well firms engage with technology. We recently reviewed one of our lending platforms and the law firm we worked with we chose because of the way their head of technology and their automation team worked to come up with an automated document solution. When we look at how we deliver our legal services, it is a combination: some law firms, some third-party providers, some technology companies and the in-house team. It is deciding how we can best bring it together.

Alex Novarese: What is the biggest client need not currently being met by elite law firms?

Kate Cheetham: Collaboration. There are some baby steps, such as splitting up types of work so that one firm does one bit and the other firm does another. How do firms stop trying to be all things to all people and have the confidence to specialise? Collaboration is the biggest area, but real engagement with technology is also up there.

Donny Ching: It is about helping us by looking around the corners. You all have the capacity to help us, because of the number of industries you serve and see what disruptors are happening in other industries, which will come home to roost in my industry. We are very focused on one industry, so we are pretty myopic when it comes to risks. There is a lot you can add to us and you could be our early warning system.

Alex Novarese: Bill, how far have American law firms gone down the road in terms of experimenting with business models or commitments to technology?

Bill Voge, Latham & Watkins: We’ve invested a significant amount of time looking at the impact of AI, including analysing what other firms
are doing. We came to the conclusion that some of the American firms were not that far behind the announced progress of the Magic Circle. The only other conclusion was that nobody was having any major breakthroughs. There are firms investing heavily, but they aren’t always the ones you expect.

Guy Norman, Clifford Chance: Everyone is scrambling to face the technology challenge and going about it slightly differently. A key question is: should we be looking for new concepts entirely, which will provide alternative revenue streams, or simply products or enhancements, which will be offered cheaply or even free to clients as part of the relationship package?

Andrew Ballheimer, Allen & Overy: My sense is both. American firms are probably ahead of the English firms in using technology in litigation. English firms are catching up and in other aspects it is very open, with some Magic Circle firms ahead of the game. As an industry, our skillset, product mix, delivery and leverage model is going to change. Not in two years’ time, but certainly within ten years’ time.

However, it is accelerating and clients are expecting more. On AI, all of us have this issue: do we build out our own or hold off and just buy a licence when it is developed?

Jason Glover, Simpson Thacher & Bartlett: Can you really create technological innovation that is proprietorial?

Ian Bagshaw, White & Case: A lot of law firms are pursuing a technology strategy with no clear end. This is all part of a wider margin protection push, but how many law firms could have a margin enhancement officer, saying: ‘In three years’ time, unless we take the following steps, our margin is going from 35% to 27% because the C&P guys are coming?’ What we find is the best of all the worlds is a low-leverage model with a focus on project management and a clear responsibility for delivering quality on budget. This gives us a real internal purpose and AI is one part of that programme over the next five years.

Ben Tidswell, Ashurst: A lot of the investment going into technology is not doing anything more than bringing it up to a level which is basic delivery. The question is: what is the value of the investment that goes above that? That value is going to be about deepening the relationship. It is using technology so that you feel like you are sitting in your office or in the office of the two or three firms that are doing it.

Kate Cheetham: If you look at litigation disclosure, advances have fundamentally changed the nature of it. With technology, people tend to overestimate the change in the short term and massively underestimate it in the long term.

Alex Novarese: Compare a law firm that is top decile at getting, retaining and motivating talent to a law firm which is top decile at systems and technology. Which one wins?

Jason Glover: The former.

Alex Novarese: Why?

Jason Glover: Unless you take the view that AI is going to replace humans, the humans and their capacity is the thing that is going to win out. I take the point it is a combination of the two, but I do not see how a systems-based firm with average lawyers can trump the other kind.

Donny Ching: What we are willing to pay a premium for is judgement and no computer system is ever going to be able to do that, at least in our lifetime.

Michael Shaw, The Royal Bank of Scotland: They are two different business models.

Guy Norman: There is a related point here. If I go to Donny and I say, ‘I am interested in the very top slice of your high-quality work,’ Donny would say: ‘I do not want a law firm only interested in the top slice; I want a holistic relationship.’ It is then incumbent on law firms like mine to make sure that we can service at least a portion of that work in a way which is efficient.

Michael Shaw: This is the trend that we have seen over a period of time. When I started at Clifford Chance, we did a whole swathe of work which has been taken by other firms who can do it more cheaply, so clients do not instruct you to do that anymore. They do go to you for the higher-end stuff.

Guy Norman: That is an ever-decreasing slice.

Michael Shaw: Yes, and it is dangerous over a period of time. Alex, the answer to your question is that any firm who starts in that top decile that thinks it is going to stay there simply by having great lawyers, but does not put in the best technologies, will not be top-decile anymore, because the others who get both of those will get it right.

Alex Novarese: How much is high-end transactional work becoming commoditised?

Ian Bagshaw: It is all commoditised! Systemisation is often frowned on within law firms, yet almost all origination is more perspiration than inspiration. Going to the heart of your question, can US firms do FTSE 100 work? Of course. What we are seeing now is a slew of procurement opportunities where firms are procuring services but sometimes reserving ‘takeover defence work’. The walls are coming down for US firms, particularly if you can do public M&A to a high standard.

Andrew Ballheimer: Is it commoditisation or an increase in efficiency of execution? At the top end of the market, there is space for most firms at least.

Guy Norman: If you look at a public M&A deal, which might turn competitive or hostile, you are every minute of every day making judgement calls based on your experience. Judgement calls that will literally determine the outcome of the project one way or the other. I would not go as far as to say that everything is commoditised.

Jane Rogers, Ropes & Gray: I agree. It is the judgement, the experience and the commercial advice that you are giving. You mentioned trusted advisers earlier. You are going to need to tell them where you are coming from and what you have seen, and help them with that strategic plotting to get through the deal.

Michael Shaw: I think AI will be far more impactful. I worry how we are going to train the lawyers of the future. All the things we grew up on once upon a time have become commoditised. That trend is suddenly going to accelerate dramatically and we are going to find that we do not need so many young lawyers anymore. Do you never think: ‘How do I get them to have the judgement and experience that Guy Norman has?’

Matthew Elliott, Kirkland & Ellis: Just because you take in fewer, they still need the fundamentals of being a good practitioner from which they can learn.

Michael Shaw: Sure. So how do you do that?

Matthew Elliott: I was at Linklaters for 18 years before I joined Kirkland and there were a number of products that came out years ago, whereby you could put in a series of entries, and it spat out a sales and purchase agreement. Being one of a number of control freaks around this table, I was never confident that the end product was something that I was comfortable serving up blind. I do not think it negates the need to train.

Michael Shaw: It is not that it negates the need to train; I just think it is going to be really difficult to train young lawyers. I hope the solution will be to go back to the model where you have one senior person, with one junior attached to them.

Edward Braham, Freshfields Bruckhaus Deringer: Some of us had to black-line with a ruler and pen. I cannot begin to make a case as to why that was remotely helpful to my career. Life moves on. Where it gets interesting is in the transition period, because the person who understands both the current ways of doing things and the new ways, will always have an advantage in that period. The people who join the firm in four years’ time are going to have a very interesting time.

Ted Greeno, Quinn Emanuel Urquhart & Sullivan: Apart from electronic disclosure, I do not see technology having nearly so much impact on commercial litigation as on corporate work. Every case is different, which means the documents we produce for litigation are all very different. All this probably means that, in future, there will be more litigators than corporate lawyers! This is true of any activity where there is a great deal of human interaction, and for which you constantly need to make judgements and be able to adjust constantly against unknown variables.

Edward Braham: If you want to be at the higher end, the premium is on people who have very strong human skills and very good problem-solving skills.

Jason Glover: Do you think that that skillset is something that can be run with the high-leverage levels you currently have, or do you have to cut the leverage?

Edward Braham: It can be, but whether you would want to is another matter. All this changes the business model.

Andrew Ballheimer: If you fast-forward, it is a much more interesting job and higher end in terms of the value chain. I also think the skillset and background of our future incoming associates are going [to change]. I was struck that 94% of our intake of trainees have a humanities background. That sort of background is not necessarily appropriate for the future.

Donny Ching: I had an interesting conversation with our technology people in Shell recently around who is going to train the young engineers of the future. He looked at me and said: ‘The computer is going to train them.’ That is a different mindset.

Michael Shaw: You are underestimating the pace of change. We are already using AI to answer customers’ queries – both external and internal customers. Unless we tell them, they do not know when they are typing in their question that they are not dealing with a person. It answers a huge range of questions already and learns all the time, so that breadth is growing day by day. We are now trialling avatars: a three-dimensional representation of a person that you can see and literally speak to in the same way. You no longer have to type – you can talk to it and it talks back. Who needs your young lawyer? AI will do it for you.

Matthew Elliott: Would you want to have advice from a non-person?

Michael Shaw: Did you think a few years ago we would be happy to get into a car that did not have a driver? One of the biggest industries is about to be completely wiped out.

Ian Bagshaw: The thing about law firms, unlike the accountants – you cannot get everyone together and say: ‘We will all club in and decide how we are going to solve our problems.’ The accountants have all done that because they all have the same back-office systems working in the same places. Law firms have been slow to change.

Ben Tidswell: The accountants have embraced the process aspects. The leverage in an accounting firm is just phenomenally different from the firms around this table.

Alex Novarese: Looking at London, are people still confident about it as a global hub?

Nick Shilton, SSQ: Absolutely. For all the noise about Brexit, there
was a hiatus immediately after the referendum result. Summer hit
early last year, from our perspective, but otherwise we had a record
year last year and we will have an even better year this year. A lot of
that is driven by London. Some firms will be more spooked than
others. We see no let-up, however, in the demand for talent – either partners or associates.

Alex Novarese: Bill, how do you feel about London on a three-to-five-year basis?

Bill Voge: London was a tough market last year, but we have bounced back. We are in London for the long haul. If we are going to be a global law firm, we need to have the talent in London and we have not slowed down at all. Feedback from our bank clients is that, following Brexit, each of them will have some portion of their talent relocated to Europe. However, London will continue to be a major centre for financial and business transactions. Ten years from now when we are all telling our kids what Brexit was, London will still be here.

Alex Novarese: They will probably still be doing Brexit at that point.

Bill Voge: They might, but it has been a centre of gravity for high-end legal services for 100 years and it is not going to change because of Brexit. That is our view and all the evidence suggests that our clients are going down that same path. For the clients we serve, Brexit is a little disruption.

Alex Novarese: Do you feel any more bullish about any mainland European markets?

Bill Voge: We have tracked every one of our clients. Right now, I would see Frankfurt as more of a beneficiary than Paris, Paris more than Dublin and Dublin more than Amsterdam. It depends on whether you are looking at insurance or banking, or just at multinationals who depend on their London headquarters to do business in Europe, which are now hedging their bets and putting some people on the ground.

It will come down to compliance, but the insurance and banking businesses are the ones that will send some personnel to the continent. It will help those cities, but I do not think it is going to have a major impact on London.

Alex Novarese: Do people still feel that English law is holding its currency on a global level?

Edward Braham: The practical issue is that we need the negotiations to come out in a way that supports clients doing what they want. On a global scale, legal services are regulated based on a combination of nationality and qualification. The EU has done a very good job on legal services – legal services may have the best single market that exists for services. Underneath that sit the closed shops of the ’60s and ’70s. If you rip out the EU directives, you go straight back to a patchwork of 1970s national regulation. The question is whether the client interest is taken into account or whether access to legal services on the Continent becomes akin to India. For instance, English lawyers may not be able to fly in and fly out to give advice, even just on English law, or EU27 lawyers may no longer be partners in an English law firm.

Alex Novarese: Surely, English law is not going to be stronger globally in five years. It has been losing ground in certain products anyway.

Andrew Ballheimer: I do not think it hurts English law; it may, however, have an impact on London as the major global financial centre.

Bill Voge: We would be well placed if banks in London started saying, ‘Go with New York law’, but there will be no wholesale reversal. There is not a chance that English law will slip away as the primary choice of law in documentation that it is now.

Donny Ching: That is exactly what we see. There will be some customers in Germany or France who will start banging the table, saying: ‘We want French law now,’ etc, but it is a bigger world out there.

Guy Norman: We are aware of one national bank that has changed its documentation into their own national law, but that is a complete one-off. The only slight threat is that we do need to ensure that English law remains completely accessible, transparent and clear.

Edward Braham: The government has that point on board and is dealing with it. There is some very good work going on supported by the government, the judiciary, professional organisations and City institutions.

Ian Bagshaw: Brexit plus Corbyn is a big problem. If you look at what happened in Paris, when Hollande put the tax rate up to 65%+, that accelerates a huge change in human capital. When I see Jeremy Corbyn at Glastonbury, I am more worried than when we lost the Brexit vote. Together it equals talent flight from London.

Alex Novarese: Looking at the last ten years, American advisers have advanced at the expense of London rivals. Are American law firms just going to take over?

Jason Glover: It is overplayed, this US versus UK thing. The difference is that the large UK firms are inhibited by size. If you are a smaller US firm, you are much more nimble and able to pick areas where you can add true value to clients. I would feel more confident about the UK firms long term if you saw more of a reduction of the UK firms’ revenues. You probably have to reduce revenues and headcount but increase profitability.

Guy Norman: Are the US firms going to increase their breadth of coverage and client penetration, and therefore be able to attract more people out of the UK firms? That is a question yet to be answered.

Alex Novarese: You do not think that it is being answered? I would say it is being answered quite definitively.

We hired our own pricing analyst sourcing officer a couple of years ago. He has done phenomenal work and opened our eyes to what is possible.
Donny Ching, Royal Dutch Shell

Guy Norman: People often say to us: ‘You have lost a lot of private equity people to US firms,’ but the number of people who have not left, despite being pursued, is a more interesting part of the equation. People focus on the number of leavers, but it is quite a small percentage.

Jonathan Field: There are two areas now that we get asked about more than anything: one is European M&A and the second is investigations, regulatory and white-collar crime. Magic Circle firms were making a fortune from that, but US firms are serious. If I could find 100 regulatory, white-collar crime partners tomorrow, I could place them. If US firms win those battles, that would be an interesting development.

Ian Bagshaw: The quality of US firms in London is improving all the time. The energy and the opportunity to disrupt a market, for some people, is a challenge that they want to take, irrespective of money. US firms have also been helped by an FX rate and UK firms have been hindered by not really being global. They are not in the biggest legal market in the world in any material way.

It is easier for US firms to invest in London now than it has ever been, because they can get the better talent and feel the benefits of a raging economy giving them more capital to invest.

Michael Shaw: I think the answer is yes: the American law firms are going to win out over a period of time.

Donny Ching: There is space for two. It is about quality.

Nick Shilton: There are significant numbers of US firms that have been very successful in London. There are as many who have either failed, or are in the process of failing.

Kate Cheetham: If I were a US firm, perhaps I would not want to be a Magic Circle firm. If you say that people who move to US firms want to work in a smaller firm with a different culture and client base, etc, then you do not want to lose that. The interesting question is how far [US law firms] invest in some of those other areas that they have not invested in so far and to what extent will we see that, as clients, as a go-to rather than the Magic Circle experience that we get at the moment?

Alex Novarese: This is the point where we have to draw a line. Thank you.

alex.novarese@legalease.co.uk