Talking about a revolution
08 September 2014
Clients are making it clear that they want nothing short of a revolution in the way legal services are delivered to them. It’s the biggest change the profession has faced in nearly 200 years and it’s one that A&O is determined to play a lead role in, say David Morley and Wim Dejonghe.
It’s not uncommon for industry leaders to talk in quite florid terms about radical change in their sectors. But the language being used to describe the current state of upheaval in the legal services market has, for some time now, been growing increasingly intense.
David Morley, A&O’s senior partner, and Wim Dejonghe, global managing partner, do not mince their words when reflecting on the challenges faced by traditional law firms as their clients look for a new, more cost effective yet still high quality, approach to buying billions of pounds of legal services each year.
“It’s quite simply a revolution; arguably the biggest revolution in legal services in nearly 200 years,” says David. “Market and client demands are changing and very quickly and we are determined to be at the forefront of meeting that demand for change.”
For Wim the big traditional law firms are at a “strategic turning point”.
The overall market for services is not shrinking; it’s actually getting bigger, he says. But the share of that market being taken by the top end law firms is contracting, as clients look to buy a range of services from lower cost providers, specialist contract lawyers and other new entrants into the market.
“The big firm model is under cost pressure and big firms have to decide whether they stick with a diminishing market for 'pure' premium work or they accept that, in order to win a greater share of the premium work, they must combine it with alternative delivery models. Do they rise to the cost challenge, or shrink to the diminishing top end? Shrinking is not for us,” he says.
The evidence is mounting
The shake up of legal services has not come overnight – but it has certainly been hastened by the financial crisis, which left many companies and financial institutions looking urgently for new ways to improve their cost and operating efficiency.
In a sense, that suggests the focus on cost is cyclical. But the evidence looks different.
David again: “If you look at, say, a big American bank - it might be spending USD1.4bn on legal services every year. That’s the sort of huge number that attracts the close attention of chief financial officers. When every other cost in the business is under scrutiny, why wouldn’t that one be? We believe we’re dealing with a structural change here and it won’t go away when the economy recovers.”
With legislative and regulatory burdens also growing, companies are increasingly caught in a pincer movement, facing the twin pressures of cost and complexity. It has left many simply wanting to tear up the old ways of doing things.
To understand this better, A&O this year undertook a major survey of nearly 200 buyers of legal services with a combined annual spend of GBP3.5bn, publishing the results in a report called “Unbundling a market: the appetite for new legal services models”.
The report provides clear evidence of how the market has changed already, and how these buyers expect it to change in the next five years. Some 86% of respondents said they were under pressure to deliver greater value at less cost. Many in-house legal teams are now smaller and working with budgets that are either cut or frozen. Across the range of alternative legal providers – from contract lawyers, to document review services, online services, legal consultancy, managed services and hybrid solutions – respondents predicted that their use of these would grow significantly in the next five years (see graphic)
If the report’s findings made stark reading for traditional law firms, they were not altogether surprising, insists Wim. Much of A&O’s planning in recent years has been focused on these changing client needs. “One GC quoted in the report said that any traditional law firm waiting around for the market to go back to the way it was a few years will become ‘redundant”. Basically we agree with that.”
And from A&O’s perspective two main issues – one defensive, the other offensive - are underpinning the need for change, says David. The firm knows that its success is based on the strength of client relationships. Cede too much ground to other providers and pretty soon someone else – one of the accountancy giants, perhaps, or a big contract law firm - will come along and gladly take the relationship off A&O’s hands.
But it’s also about a willingness to change. “We believe we should be at the frontiers of this change. We won’t get everything right, but there’s an advantage in being out there in front demonstrating to clients that we’re actively taking this forward. They like the sound of the hybrid model we are developing where we combine a range of different services into an integrated, seamless whole, with premium law firm work at its core; and we use technology, process and project management to create a totally new kind of legal solution for our clients.”
Being out in front, of course, brings risks. Some firms will prefer to be a fast follower rather than an early adopter, the strategy so successfully pursued by Japan’s carmakers, Wim points out. But A&O is determined to grab a first mover advantage.
“It’s scary being out in front. Some of our partners are asking – who else is doing this? And the answer is: no one, really,” says David, adding: “Lawyers prefer to work with a precedent.”
So is A&O trying to create a new precedent – a model that will serve the industry for the next 100 years?
In truth it is more experimental than that, at this stage.
“We may be creating a precedent – we don’t know,” says Wim. “There’s no one model; no right and wrong. We’re just thinking about the best way to deliver a range of services and how we can best configure ourselves to do that. If others decide to follow, that’s fine. The important thing is we are willing to take a risk, because we know clients are crying out for change.”
Seed funding to a solution-driven approach
A&O has started strongly in developing a hybrid menu of services. Its Legal Services Centre (LSC) in Belfast has grown strongly since it was established just 18 months ago. It’s growing profitably, and it’s giving A&O a clear advantage in boosting market share in key markets. It has already handled 300 instructions from across the firm’s global network and across practice areas – bringing a lower cost approach for our clients to increasingly complex matters. The team of lawyers has grown from 20 to 60 and more will be recruited soon.
Online legal services is continuing to grow strongly and the introduction of Peerpoint – A&O’s scheme to create a pool of contract lawyers who work flexibly to meet peaks in client demand – has added another string to the bow both in controlling costs and in attracting talent that may not want to follow the traditional legal industry career path. Other initiatives are under consideration.
They are what Wim describes as seed capital – an attempt to test out new ideas and then to build on what is successful.
“The next step is to ask: should this become part of our overall offering, sitting along side the high end transactional work we do for clients? But now we want to sit down with a number of clients, go through their projects and ask each other: how can we do this differently?
“We’ll have some hiccups, of course. But let’s try and learn from each other and, if this trial and error approach works, then we will move to a proper programme of change to allow us to offer clients a solution-driven approach.”
Initial feedback from existing and prospective clients has been very positive, but a strong theme is emerging. Clients want to move to lower cost solutions, but without any loss of quality. And the added complexity of managing multiple suppliers is also a worry. Many are encouraging A&O to act as a one-stop shop, providing services, project management and quality assurance.
As David puts it: “Finding more cost-effective ways to deliver high quality service is the theme that has got to underpin all this. Clients tell us: ‘don’t come along and offer us an unbranded service. We’re not interested in something that you are not backing as an A&O service, because we can go to 20 other people for that.’
“GCs want someone who can offer lower costs, who can take 100 interconnected problems of their desk in one go and who can give a clear assurance that the quality of the work will remain of the highest standard.”
Revolutions, of course, have a habit of changing all the rules and significant challenges lie ahead. Has A&O got the right skills – skills that have been more deeply honed in the IT sector and in the Accountancy profession – to provide that sort of complex project management and a more fluid approach to resourcing?
“That’s where proper change management comes in,” says Wim. “Unless we can transform ourselves to the point where this new approach is part of the basic offering to clients and our basic thinking as a firm - unless we can get the entire fabric of the firm into the logic of this new approach – it will remain a nice sideshow, but will not fundamentally change anything.”
Threat versus opportunity
It’s clear not all traditional firms are thinking along the same lines. Noticeable too that much of the most innovative thinking is happening in Europe, and, in particular, in the UK, where the Legal Services Act has opened the market to new entrants, including non-lawyers. The U.S. – where legally, law firms still have to be run by qualified lawyers – change is coming more slowly.
But it’s clear what path A&O is on.
After a period of steady focus on growing the firm’s global network of offices in recent years – it has grown from  to  in the [x] years David and Wim have been leading the firm – the emphasis has switched. Although there may be a further five to eight offices added, with Africa and Latin America seen as prime targets for further expansion, the network is nearing completion. Now the focus is on meeting this growing client demand for change in service delivery while maintaining a high-performance culture in the firm that will allow A&O to continue to assure clients that service will remain of the highest quality.
David sums up the changed world bluntly: “In the 10 years up to 2007 there wasn’t a single year when revenues grew by less than 10%, and it was an industry-wide thing. But since then it’s all changed. The old world is not coming back and for those who think it is – dream on!
“Now we need to be much more on the front foot about driving the business forward. That means picking your markets carefully, being more strategic, managing your costs more tightly, getting out of businesses where you can’t make money and into those where you can. It means having the right balance in the partnership and preserving that high performance culture. That’s the path we are on.”
Wim agrees: “We’re not here to be number three or number seven in the market, we want to be number one. We’re an ambitious organisation with ambitious people. Some see the changes happening around us a huge threat. We see them as a fantastic opportunity.”