Britain breeds the better entrepreneurs

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US v UK firms – part 2

US law firms claim to offer a more competitive and ‘entrepreneurial’ edge. They recruit partners who build books of business. They pay more. So they must be more ‘entrepreneurial’, right?

‘People equate higher profits with being enterprising,’ says Jeff Zindani, founder of legal sector M&A broker Acquira, ‘but this is not necessarily the case. In fact, shorter-term pursuit of profits can actively harm the longer-term health of your business.’ This poses the question: are US firms really as innovative as they like to think?

The US has a reputation for being business-friendly, with the world’s most successful companies, a huge unified market and an ethos of hard work. But it can also be a conservative and bureaucratic culture – and nowhere is this more evident than in the legal profession. ‘The key differentiator with the US is that in the UK firms can attract external investment,’ says Zindani. ‘The UK is much more sophisticated than anywhere else in allowing outsiders to help scale up and inject new ideas.’

One major area of divergence is how American Bar Association rule 5.4 prohibits non-lawyer ownership of law firms. While Arizona abolished rule 5.4 in 2020 and Utah is currently trialling alternative legal services providers (ALSPs), major states such as New York and California continue to jealously guard lawyers’ monopoly on legal services ownership.

Arguments sometimes revolve around the risks that non-lawyers might prioritise profits over ethical duties to clients. US vested interests (that is, big firms) also use failures in the UK to justify resistance, or point to potentially unpalatable ownership, such as when private equity swallows a leading legal brand: ‘This would be unimaginable in the US,’ observes Zindani, not only because of the fact of external ownership, but who owns it.

Since the UK’s Legal Services Act 2007 green-lit alternative business structures, hundreds of firms have sought external support and funding, transforming our legal market. There followed a spate of listings, including DWF Group and The Ince Group. But interest in London Stock Exchange listings (along with all other sectors) has cooled to a standstill in recent years. And where traditional corporate financing fails, private equity steps in.

Zindani’s recent report, Private Equity’s Next Frontier: Transforming UK Law Firms, outlines how in the last five years PE has made serious inroads into the profession, with Inflexion, for example, investing more than £400m. ‘If regulation is more relaxed, it will encourage more open business and innovation,’ Zindani explains. ‘The US remains a closed shop, hindered by old-fashioned regulation ditched in the UK years ago.’ An example of how this works in practice is Keystone Law, which started as a small virtual law firm, brought in scale-up investors who took a percentage and is now a listed company. It has grown tenfold in 10 years.

Keystone Law was one of the first virtual firms (set up in 2002, the same year as FisherBroyles in the US), but since then the UK market has exploded with new ideas that take the idea of alternative models and enterprises to a different level – a level that is unique in global professional services.

Chambers’ NewLaw guide’s global sections on Contract Lifecycle Management, Flexible Legal Staffing and Legal Process Outsourcing include businesses created by nine UK firms, but none from US firms. These include Herbert Smith Freehills; Eversheds Sutherland; DWF Legal Operations; A&O Shearman’s Peerpoint; Linklaters’ Re-link; Pinsent Masons; Addleshaw Goddard; Ashurst; and Fieldfisher’s Condor ALS.

Freshfields’ legal services support functions, which lower costs and provide more integrated services, are divested to its ‘Hub’. This was originally located in Manchester but now also operates from many other cities, operating 24/7 and in over 30 languages. Clyde & Co has Cyber One, helping clients manage and respond to cyber risks, and also casualty innovation platform Clyde & Co Newton, a suite of products to help insurers expedite casualty insurance claims handling.

Hogan Lovells’ Science Unit provides scientific support in areas such as pharmaceuticals, energy, technology and chemicals for liability risk management, regulation, insurance, litigation and due diligence. The team includes qualified scientists/lawyers and is entirely UK-based and staffed. ‘The Science Unit benefited from being launched and developed in London,’ explains Hogan Lovells’ head of global sustainability, policy and strategy Dr Marion Palmer, ‘which as one of the larger offices had the breadth and volume of scientific work to enable it to rapidly become an established, cost-effective resource, greatly appreciated by firm clients.’

Even when US firms have interesting and alternative fee-generating services like Dechert’s World Compass and World Passport, these projects are usually initiated and led from London. A&O Shearman’s Fuse (tech innovation service) and Peerpoint (a flexible legal staffing platform) came from the legacy Allen & Overy, not Shearman & Sterling. Certainly, the US has lots of innovative ALSPs, but they tend to be separate entities from the traditional big law firms.

Mishcon de Reya’s MDR Lab is a very unusual and notable entrepreneurial model, set up specifically to invest in early-stage legaltech companies. There is nothing remotely similar to this model in the US.

Why is it that UK firms have embraced deregulation and committed themselves so wholeheartedly to ALSPs and more innovative business models? The answer is probably that US law firms tend to operate a traditional model: premium rates with low overheads equal higher profits.

With a client base derived from the world’s biggest economy, instructions are easier to come by than for non-US firms, and many US firms can grow and build a business as their own clients expand. Hence less impetus to innovate.

When it comes to thinking outside the box, UK firms are streets ahead.