When times are tough, it’s good to talk – no matter how big or how tough you think you are. But the annual Global Managing Partners Summit in London, chaired by Law Society vice-president Robert Heslett and Gazette editor Paul Rogerson, kicked off with an observation that this year’s financial reporting season has been marked by an uncharacteristic bashfulness about releasing results.

The reasons are fairly obvious. Tony Williams, principal at legal management consultancy Jomati, predicted that reported revenues would fall by up to 15% among the UK’s top firms, while profit per equity partner (PEP) would fall by up to 30% among the top 10. ‘The worst I have seen at any major firm is a 70% fall in revenues,’ he said.

Adding some US weight to the gloomy predictions, Dan DiPietro, global head of the law firm group at Citi Private Bank, unveiled research on the experiences of US firms over the past two years – and suggested that the findings would be mirrored in the UK legal market.

Citi’s research, encompassing 175 US firms, showed staggering falls in demand for legal services, in the average number of hours each lawyer is billing, and in rates charged by each firm. In fact, demand for legal services in the US in the first quarter of this year shrank by 6% compared with the first quarter of 2008, while the average hours billed per lawyer fell 8.2%. Billing rates that increased by 6.7% in 2008 were growing by only 2.4% in the first quarter of 2009. Two-thirds of respondents predicted flat or declining demand for the rest of the year.

David Childs (pictured right), global managing partner at magic circle firm Clifford Chance, gave an early indication of his firm’s financial performance for the year to 30 April – the first estimates to come from within the UK’s magic circle. Childs revealed that revenues at the firm fell by around 5%. Although he did not reveal estimates for profits or PEP, he admitted that profits would be down ‘significantly’. The firm’s ongoing redundancy consultation will claim 15% of equity partners, he said, and he expects to announce further falls in profitability in 2010.

Childs currently has a crowded agenda running the world’s biggest law firm. This autumn, he plans to roll out a new, stringent partner appraisals system to replace the firm’s existing ‘maximise your capacity’ appraisals. ‘We kidded ourselves that our partner appraisals system was good,’ he said. ‘I have learned that rigorous partner management is essential.’ Without going into detail on the exact makeup of the new appraisal regime, Childs warned that each partner would no longer be appraised by a friend.

Cost-cutting is also on the agenda. Childs said that Clifford Chance has managed to save £40m in costs between 2004 and 2007, in part by reducing spending on IT. Also, during this time, the ratio of fee-earners to secretaries has been doubled from two fee-earners per secretary to four. ‘I see no reason why fee-earners shouldn’t have a secretary based in India,’ he said. A new cost-saving plan developed in 2004 aims to reduce costs by another £30m by 2011. ‘I have told all our offices to reduce costs by 5%. I wish I [had] said 7.5%.’

One arrow in Clifford Chance’s bow is its global shared services centre in New Delhi, opened in 2007, to which it outsources low-value legal work. ‘If it’s not high value, we will move it to another location,’ said Childs. ‘Indian lawyers are often as good as, if not better, than English lawyers.’ Childs revealed that Clifford Chance pays around £7,500 annually to support an Indian lawyer in its New Delhi centre, whereas a lawyer in the firm’s London office doing equivalent work costs the firm £55,000 a year.

Jomati’s Williams predicted that firms would grow their outsourcing rather than recruit lawyers from their home countries. ‘Outsourcing will play an increasing role in removing aspects of front-office, not just back-office, work,’ he said. ‘Some general counsel at investment banks carry out 80% of their equity research in India. This makes them well aware of the potential for outsourcing legal work.’

One general counsel of a major global corporation said they had developed a relationship with an Indian outsourcing firm and gone on to build a specialist team to undertake low-value work. ‘It’s a lot nicer to be paying £50 rather than £550 an hour,’ they said. ‘I’m working with some of my panel firms in England and around the world to work towards this sort of cost-effectiveness.’

The debate on outsourcing to India revealed staggering estimates for cost savings. However, speaking about the opening of the Indian legal market to foreign law firms, the chief of one of India’s biggest law firms turned this on its head. ‘Why move to a market where the competition functions at up to a tenth of the fee rates at comparable expertise?’ asked Shardul Shroff, managing partner at Amarchand Mangaldas. ‘Firms are rushing to a low-profit area.’

Shroff pointed to intense competition between domestic Indian firms over fees, and gave an example of his firm’s bid for work with drinks giant Coca-Cola. ‘When they re-entered India, they paid us at rates comparable to a mid-sized US firm,’ he said. ‘A few years later, they acquired 66 bottling companies in India, and put the legal work out to tender. Their general counsel said: "I have received other bids from firms charging one-sixth to one-tenth of what you charge. Please give us the same rates.’’’

Shroff predicted that domestic firms would profit from the entry of an international firm into the Indian legal market. ‘I will be the happiest person if international firms come to India because my income will double,’ he said.

Shroff believes that the Indian minister of commerce, and not the Indian minister of law, holds the power to open the country’s market to foreign firms. ‘Lawyers in the west are addressing their questions to the wrong man,’ he said, while suggesting that aggressive negotiation tactics – the ‘East India complex’ – have already set the liberalisation programme back years.

‘Indian law firms are not going to give up their hard-earned positions. The Indian legal profession is still in its elementary stages. In the west, the profession has developed into a business that provides services. Nobody has addressed the question as to what commonality exists between the two,’ he said.

Shifting the focus to the future of legal business worldwide, Alan Hodgart, consultant at business advisers H4 Partners, predicted that the corporate legal market will mature to create four distinct types of law firms: global elite firms, business law firms, small- to mid- cap firms, and specialist firms.

A global elite of eight to 10 firms has already started to emerge, comprising magic circle firms and top US firms undertaking highly complex transactions, Hodgart suggested. ‘It’s a closed market,’ he added. ‘Other firms are probably prevented from joining it.’ The emerging global elite are not full-service law firms, but instead focus their energies on the highest-value transactions. Hodgart suggested that a typical firm in this global elite would have 12,000 lawyers distributed across 12 global offices.

Below the global elite, a new breed of business law firms will arise: ‘Big corporates have the choice of going to a big name law firm, but for other work, they will head to the business law firms,’ he said. ‘You don’t always need the £750-an-hour partner.’ Business law firms will offer a wider range of services than the global elite firms, but Hodgart suggested they would need to focus on three practice areas. ‘If you can focus on three reasonably sized practice areas for a given client, it’s very hard for them to get rid of you, because they would have to untangle three relationships.’ A business law firm would have up to 5,000 lawyers in 50 offices around the world, clustered around the locations of major corporations. ‘Business law firms will focus on getting to know the chief executives at the head offices of the corporation, and using that relationship to influence all the offices of that corporation around the world,’ Hodgart said. He suggested that 30 firms are already battling to claim the business law territory, but competition would cause some to drop out.

One tier below, small- to mid-cap firms would operate as smaller scale business law firms, and serve smaller clients. Below the small- to mid-cap firms, specialist firms have begun to emerge where partners from the global elite and business law sectors have gone on to form their own boutiques.

Between the segments there will be no middle ground, Hodgart stressed. ‘A firm trying to play across too many market segments has probably got its capability out of alignment, or just doesn’t recognise what its segments are. Anyone who crosses over these lines, or tries to offer all services at once, will fail.’

Before the emergence of this new four-tier landscape, existing law firms will need to merge and acquire. Jomati’s Williams predicted a wave of consolidation among mid-size firms over the next 12 to 18 months, and even mergers between the world’s largest firms. ‘We are a highly unconsolidated business,’ he said. ‘We need to get quality rainmakers to consolidate the client base.’ He said he has ‘no doubt’ that some ‘major incursions’ will be made by US firms into the UK market over the next two years: ‘We haven’t yet got a global elite,’ he said, while predicting that such an elite will emerge in around five years: ‘Firms will need a really strong European and US capability.’

Williams predicted that law firms with revenues between £5m and £20m would, when permitted, call on private equity firms to fund mergers and acquisitions during the rush to consolidate. ‘The banks would traditionally have provided the capital, but that’s not going to happen now,’ he said. ‘There are some investors looking to take 10- to 20-year stakes.’ Shroff was quick to point out that the growing buying power of Indian companies could provide India with its own opportunities in liberalised British markets. ‘If legal practices are opened up to non-lawyers, and investment by non-lawyers, what is to stop us visiting you in your own market?’

As law firms merge, acquire and move into the positions envisaged by Hodgart, changes will also need to occur within firms themselves. Out of the ‘finder, minder and grinder’ partners in any law firm, conventional wisdom among speakers and delegates was that the ‘finders’ have the most important role, and will become ever more important to their firms in the coming years.

‘The role of the partner has to change,’ said Hodgart. ‘We can’t afford to have partners who are primarily doing the legal work. The cost of a partner has to be recovered by them supervising a range of work, while generating incoming business. If you have a partner doing legal work, you have an expensive resource that’s not winning the firm more business. A partner cannot sit there and do work that a junior can do. We need fewer partners in each firm, and I think many firms know this.

‘Business development is simply having a conversation with another consenting adult over the age of 21. If you can’t do that, you should be locked up.’

Hodgart suggested that many ‘minder and grinder’ partners need to be transformed into business development partners, which could often be achieved by changing their misguided perception of what is required of such a ‘finder.’

Clifford Chance’s Childs expressed similar sentiments. ‘You need your relationship partners to feel that the weight of the firm is on their shoulders,’ he said. ‘We offer them a lot of business development support, but one of the problems in a lockstep firm is how to reward them for their efforts.’

But who should be at the helm to guide firms through falling profits, the opening up of foreign jurisdictions and the predicted wave of mass consolidation? Not lawyers, according to Childs. ‘Law firms shouldn’t be run by lawyers,’ he said. ‘You need high-quality professionals with a lot of business experience. Hire the talent to look after the firm, and tell your partners to treat them nicely.’

  • The Global Managing Partners Summit 2009 was organised by Chilli Marketing Solutions. The Gazette was the media partner for the event.