Lessons Learned from the Credit Crunch and Prospects for 2014

1. Lessons Learned from the Credit Crunch and Prospects for 2014 Michael Hatchwell Copenhagen 16 January 2014

2. Introduction • We are living through a period of revolution in the way law firms are managed. • We have seen more innovation in this area in the past three years than the preceding thirty, and this trend is only set to continue. • These developments have ensured that the notion of a ‘traditional’ law firm is now obsolete. • I see two key factors, as the cause

3. Factor 1 – Financial Crisis of 2008 • Pre-2008 • plentiful work – transactional and non-transactional • little pressure to maximise efficiency • Post 2008 • reduced transactional work • reduction in building • funding sources evaporated

4. Factor 1 – Financial Crisis

5. Factor 1 – Financial Crisis • The volume of commercial property transactions occurring fell by some 30% between 2007/2008 and 2009/2010. • Aligning this with the sharp incline in UK business deaths over the same period (30%), a dire economic picture is painted. • Significantly for city firms, the number of merger and acquisitions occurring dropped to 55% of 2006/2007 levels in 2010/2011. • Key feature - length and spread of the recession from legal services perspective

6. Factor 1 – Financial Crisis • The obvious knock on effect of a reduction in economic activity is that the need for legal services was equally reduced. • 41% of UK law firms existing in 2007/2008 and 2010/2011 reported a decrease in turnover, and 29% of law firms reported a decrease of more than 10%.

7. Change in turnover over three year period from 2007/8 – 2010/11

8. Change in turnover over three year period from 2007/8 – 2010/11 • High profile casualties - Dewey & LeBoeuf in the US; HalliwellsCobbetts and Manches in the UK • Over 100 law firms in the UK failed to get insurance last September leading to closure or forced merger

9. More for Less • Less work available • Clients with tightened finances looking to maximise the value of service they receive • “More for less”, which Professor Richard Susskind coined, is the mantra of the new working world • Clients increasingly reluctant to pay high fees • Increased client sophistication • Much larger in-house legal teams are increasingly common • Hourly rates model under pressure or disappearing

10. More for Less • Client demand for better value • Reduction of revenue • Has forced the law firms to rethink their traditional business model

11. Factor 2 – Liberalised regime • At the same time as the global economy was shrinking, the Legal Services Act 2007 was passed into UK legislation • This bill liberalised the UK legal sector, approving the creation of two new types of legal practice to deliver legal services

12. Factor 2 – Liberalised regime • Alternative Business Structures (ABS) • allows non lawyers to invest and own law firms for the first time, subject to the approval of the Solicitors Regulation Authority • the potential is considerable • encourages outside influences into the legal sector bringing fresh ideas from those who have not been entrenched in the traditional firm culture. • more effective business models for the delivery of legal services

13. Case study – Fondia • No partners at all • Shareholder structure • Revenues have increased tenfold, from €1 million in 2007 to €10 in 2013. • Fondia’s success has been apparently been won in spite of not being recognised by the country’s bar association • In UK the Legal Services Act 2007 creates no such hindrance

14. Case Study – Riverview Law • The first UK commercial ABS, Riverview Law • Created in May 2011 • Eschews the partner model • Focuses ‘from the customer up’ • Offers clients annual contracts for continued legal work or fixed prices for specific pieces of work

15. Case Study – Riverview Law • Riverview still in its infancy • Posted a loss of £3.2 million in its first 16 months of trading attributed to marketing and start up costs • Claims to be course to double in size over the next year • Announced a strategic alliance with law firm DMH Stallard pointing towards a healthier future

16. Case Study – Riverview Law • Traditional law firms no longer protected by ownership limited to lawyers • This is forcing considerable rethinking as there is and will be an inevitable surge in competitiveness

17. Reinventing the Wheel • With competition for work reaching new levels of ferocity, and the threat of ABSs now in existence, the key question is ‘what are established law firms doing to adapt?

18. Mergers • One of the most visible trends developing in recent times is that law firms are merging: • Number of mergers from 2009 to 2012:

19. Mergers – Why merge? • Historically firms have favoured organic growth • allows a firm’s partners to retain more control • preserves the brand • allows selective and targeted growth • Mergers the new way forward for many firms • costs. Facilities, technology, knowledge and other resources are all shared making both practices more efficient • Firms need to consolidate to survive. Mergers are being driven by necessity as much as strategic implementation. Cost cutting is at the forefront of these decisions

20. Mergers – Why merge? • Mergers save costs and increase efficiencies • Facilities and technology (development and support), • Knowledge management • Resources shared to deal with: • Increased regulation • Increased compliance • Greater recourse to capital when necessary • Training lawyers to evolve and to change • People building

21. Mergers – Why merge? • Complementary mergers can provide immediate access to new clients and provide services previously unavailable to existing clients • DAC Beachcroft ‘s merger with Davies Arnold Cooper – a good example of the instant effect a merger can have on a firm’s revenues • Merged in 2011, the newly merged firm posted its first accounts, revenues of £163.5, a 22% improvement on Beachcroft’s previous turnover of £134 million) • Of that figure, £8.5 million was attributed to organic growth post merger

22. Multi Disciplinary Practice • Another upshot of the Legal Services Act 2007 is the possibility for firms to offer non legal services • One stop shop for: • Legal • Accountancy • Surveying • Smith & Williamson’s annual law firm (2012/2013) reports that of 54 of the top 100 law firms it interviewed • 16 expressed an interest in joining with a non-solicitors firm in the next two years

23. Outsourcing • Another trend is outsourcing of low level legal work. • Prime motivation • cost cutting • satisfies increasingly sophisticated clients’ demands • obtaining good quality service for less • Clients no longer happy to pay relatively high hourly rates for work which can be done by much cheaper support staff

24. Outsourcing • Ashurst recently transferred 150 of its support staff to a new low cost office in Glasgow, making 120 employees at its London office redundant in the process • The Glasgow office focuses on recurring activity, such as document review, and business support services, such as IT, Finance and HR

25. Outsourcing • It is key that firms are seen to be proactively trying to provide their client’s with greater value • James Collis, Ashurst’s managing partner, states “Clients want their law firms to take responsibility for efficient sourcing of services without compromising on quality... consistency and continuous improvement in service quality are key to our business”

26. Providing Cheaper Services • A similar innovation is the creation of quasi legal roles such as the ‘legal analyst’ • carrying out some of the functions traditionally done by a paralegal role or trainee solicitor but for a cheaper rate

27. Response to Change • Most firms are finding these innovations have been thrust upon them, as opposed to embraced • As Jordan Furlong opined in The Lawyer magazine: “When it comes to adopting potentially beneficial initiatives at firms, partners could be likened to turkeys not voting for Christmas”

28. De-equitisation • Many firms still have partners who are not justifying their share of the firm’s profits • Greater scrutiny of personal performance is becoming the norm

29. De-equitisation • Combine this with the clients’ unwillingness to pay large sums for partners when a junior solicitor might suffice, it is not hard to see why the axe has begun to fall at the top of several firms • The de-equitisation of 12% of CMS Cameron McKenna’s partnership (16 in total) in 2009 has not been an isolated incident, but rather part of a wider trend which has been ongoing for the past 3 years

30. De-equitisation • Smith & Williamson’s survey of 9 of the 15 top 30 law UK law firms responded as follows: • 9 of 15 firms reported that they were already in the throes of de-equitising partners or had recently done so • 6 of 15 firms stated that they were considering it

31. De-equitisation • De-equitisation raises wider questions as to whether the partnership model is the suitable business model for a modern law firm at all • Why do law firms insist on traditional models when there is rarely any upside exit ?

32. De-equitisation • Professor Stephen Mayson argues that the partnership model had fostered a culture in which motivating factors of equity promotion were misplaced • Lawyers were promoted to encourage their loyalty, because they were technically good and had ‘done their time’. • The vital question should be: ‘what can a partner do for the firm’

33. De-equitisation • Annual statistics from the SRA monitoring law firms operating in the UK confirm that there is an increasing move towards corporate structures: • As of 31 December 2008, 38% of all UK law firms were a partnership. 9% were LLP’s and 13% were incorporated companies • As of 31 December 2012, 27% of all UK law firms were a partnership, 14% were LLP’s and 27% were incorporated companies

34. Opportunities in Recession • Shrinking in difficult markets growing in[to] others • Considerable talent not making partner due to profit pressure in larger firms – great recruitment opportunity • New business models create real opportunity • Provide complimentary services • Opportunity to create stronger ties to clients by adding value

35. Opportunities in Recession • Opportunity to re-shape and restructure the traditional law firm • Bringing in non-legal managers • Attracting private equity • Conveyor belt lawyering – appealing to some and • Focus on quality of service • Forcing the profession on to a much better managed

36. Trends – all of the above + • Polarisation of law firms • The business of law rather than the legal profession • Multi-disciplinary Practices • Bringing in non-legal managers • Medium sized was £20m-£30m becoming £50-75m • Non legal management teams running firms • Cash collections first and foremost • Business Builders – a key priority

37. Conclusion • The recession has been very challenging for many firms and remains so, but it also presents many opportunities, and 2014 should be a year of considerable change. • What is certain is that the practice of law is changing fundamentally

38. Michael Hatchwell • Partner, Corporate Department • 6 Agar Street, London WC2N 4HN. • Direct Dial: +44 (0)20 7759 1325 • Fax: +44 (0)20 7437 8216 • DX: 40003 Covent Garden • Website: www.davenportlyons.com