How are Magic Circle law firms responding to the more for less challenge? In-depth research

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1 How are Magic Circle law firms responding to the more for less challenge? In-depth research July 2015 Report summary Purpose Methodology Major sources To conduct research on the client query. Secondary research using recognised databases and freely available sources General web search

2 Client Query As clients of law firms seek to reduce spending on legal, they are increasingly asking the firms to provide more value at a reduced cost. How are Magic Circle law firms responding to this more for less challenge? An international law firm headquartered in the US Evalueserve. All Rights Reserved 2

3 Table of contents 1 Introduction New service delivery models Operating models of selected law firms... 7 a. Allen & Overy... 7 b. Clifford Chance c. Freshfields Bruckhaus Deringer d. Linklaters e. Slaughter and May Conclusion Evalueserve. All Rights Reserved 3

4 1 Introduction Downward pricing pressure is the key challenge facing UK law firms The UK legal market, which suffered a setback due to the 2008 financial crisis, is on the path to recovery, with leading players posting positive figures in 1Q2015. As per a 2014 survey by PwC, of the top 100 UK-based law firms by annual global fee income, 80% reported an increase in total fee income during , as compared with about 63% during However, fee income per chargeable hour is falling for all law firms. The following graph depicts the drop in fee income over , 2 Top 10 Top Top Fee income per chargeable hour for UK law firms Top Top UK law firm's average chargeable hour Top 10 1,263 1,373 1,209 1,232 1,452 1,559 Top 3 priorities for finance over the next 12 months (%) Pricing and Profitability Process efficiency Business analysis / reporting Working capital IT automation Review finance function Other As can be seen from the graph above, in 2014, fee income per chargeable hour decreased by 8.1% for the top 10 firms, 2.8% for the top firms and 9.3% for the top firms. At the same time, the number of chargeable hours increased for all firms to near-2008 levels. This suggests that although firms are getting more work, they are decreasing their charges. The primary reason for this decrease is downward pressure on pricing from clients. o The liberalisation of the legal market in 2011 put clients in a better position to negotiate prices. The 2007 Legal Services Act introduced alternative business structures (ABS), under which non-lawyers in professional, management or ownership roles can team up with lawyers to offer regulated legal in England and Wales. According to the Solicitors Regulation Authority (SRA), more than 300 ABS-licenced firms have entered the UK legal market since 2011, and more are in the pipeline, giving clients more to choose from. The latest entrant in the UK legal market is US-based online legal provider LegalZoom, which entered the market in January According to a Thomson Reuters survey of 25 finance directors in the top 100 law firms (including 9 from the top 25) in the UK, this pressure is increasingly threatening the profitability of commercial law firms (Graph 3 above). In the survey, 75% respondents agreed that pricing pressure is the biggest risk to their firm's profitability. The remaining said it posed a medium risk. According to Sam Steer, head of large law at Thomson Reuters' legal division, It will be critical for law firm leaders to focus on how their firms can respond effectively to client demands for more efficiency and cost effectiveness in the delivery of legal. That will mean, among other things, a willingness to adopt more flexible approaches that allow firms to tailor staffing and leverage technology to support work processes. It will also mean that firms may have to consider pricing models that meet the needs of particular clients in particular situations.' 1 Legal Week - UK Top 50: leading firms put economic woes behind them as revenues hit 14bn high 2 Legal sector returns to solid growth - PwC annual law firm survey - Press room Evalueserve. All Rights Reserved 4

5 2 New service delivery models Law firms are adopting more varied and flexible ways of working to gain efficiencies and ensure they remain competitive. Many are experimenting with new service delivery models to adapt to changing client requirements. How they leverage technology to deliver these models is expected to act as a key differentiator. In the words of Wim Dejonghe, managing partner at Allen & Overy, The traditional law firm model is under pressure and you have to decide whether you stick with a diminishing market for pure premium work or accept that, to win a greater share of the premium work, you have to combine it with alternative delivery models. 3 The following are some alternative service delivery models UK law firms are adopting: 4 3 Law firms seek business process improvements - FT.com 4 e-business - Continuity through flexibility - Alumni Yearbook Allen & Overy Evalueserve. All Rights Reserved 5

6 The following table gives an overview of the alternate delivery models along with some examples of UK law firms that are adapting to these models to respond to client demands and meet the profitability pressure. Alternative service delivery models Overview Examples Contract lawyers Contract lawyers are self-employed, independent lawyers engaged on contract for short periods or a fixed term to provide flexible project support or to fill an absentee position for a law firm and its clients. In 2011, Eversheds LLP launched its temporary legal resource, Eversheds Agile, which provides flexibility and adds value to the organisation. Simmons & Simmons launched its contract lawyer service, Simmons & Simmons Adaptive, in October Document review This model involves outsourcing to organisations that review high volumes of legal documents at a lower cost. Such organisations often employ reviewers who have not had any legal training. Their are often used in litigation or for due diligence. In November 2014, Hogan Lovells opened its low-cost support centre in Birmingham to provide support in document review, due diligence and real estate licencing. Online legal This model involves providing standardised legal advice available only online and often accessed through a subscription service. Samuel Phillips provides online through a website that delivers online employment law. It has also created an iphone app that provides information regarding employment laws and compliance issues. Legal consultancy Through this model, independent consultants advise on the management and operation of a legal department or the structuring of a large piece of work. On 16 February 2015, Eversheds expanded its consulting arm, Eversheds Consulting, with the launch of a financial regulatory compliance offering. This service has both lawyers and consultants, who act as a one-stop shop for regulatory advice and assistance for clients. Hybrid legal solutions This model involves a combination of two or more of the above, often combined with process and technology innovations. Bird & Bird launched Virtual General Counsel in The service allows the firm to do work that was traditionally undertaken by inhouse legal teams. As part of this service, a partner acts as a local lawyer, who allocates work to a lawyer according to his/her specialisation Evalueserve. All Rights Reserved 6

7 3 Operating models of selected law firms a. Allen & Overy Among the Magic Circle law firms, Allen & Overy (A&O) is experimenting the most with alternative delivery models. The firm has an IT board (comprising partners and others from across A&O) that is responsible for considering potential IT investments and prioritising investment decisions. In addition, it has a global head of e-business to oversee the strategy, development and marketing of its legal. Currently, the position is held by Marc-Henri Chamay. 5 Online legal Aosphere 2015 A&O s online legal service business, Derivative Services (re-launched as Aosphere in January 2015), provides online subscription products to help clients reduce legal, regulatory and operational risks. The service has over 200 client institutions (including asset managers, corporate clients and financial institutions) from around the globe and about 9,500 individual user accounts. It is based in London and Belfast, and employs 25 senior lawyers and support staff. 6 The business was created to integrate a range of new service capabilities and delivery models with the firm's core high-end legal practice. It achieved an average annual growth rate in excess of 25% over , reaching GBP7.5m in ongoing subscriptions in Re-launch of online legal service: In January 2015, A&O re-launched its online Derivative Services as Aosphere, as part of its strategic vision to integrate a range of new service capabilities and delivery models with its core high-end legal practice. The business is headed by Marc-Henri Chamay. 5 Unbundling a market - Allen & Overy 6 Allen & Overy expands online with launch of aosphere, Allen & Overy, 13 January Evalueserve. All Rights Reserved 7

8 Hybrid legal solutions Consultingstyle approach to solving clients legal problems 2014 A group of 10 A&O partners is developing a consulting-style approach to solving clients legal problems. This approach involves deploying technology, business processes and project management tools to combine traditional law firm and new legal into hybrid legal solutions. 7 A&O s senior partner David Morley said clients like the 'sound of the hybrid model we are developing where we combine a range of different into an integrated, seamless whole, with premium law firm work at its core.' NA Contract lawyers Peerpoint Peerpoint provides a panel of experienced, high-calibre lawyers on contract for A&O and its clients. It enhances A&O s client service offering by providing an alternative and additional capability, and is more closely aligned with the changing patterns of work. International roll out of Peerpoint: In February 2015, A&O started the international roll-out of Peerpoint with a soft launch in Hong Kong. According to Peerpoint CEO Richard Punt, 'There are a number of markets where Peerpoint's strategic value could be at least as significant as in London. We have to be careful about the pace of expansion so we will be selective but Asia is at the top of agenda.' He confirmed that the firm views the service as a global opportunity. Low-cost hub Shared Services Centre (SSC) in 2011 SSC: The hub delivers core internal The hubs were set up to enable the firm to deliver efficiencies and cost-effectiveness in its business as well as to cater to clients Expansion of SSC and LSC: In October 2014, A&O announced plans to add up to 100 new roles at its Belfast office over the next five 7 e-business - Continuity through flexibility - Alumni Yearbook Allen & Overy; Talking about a revolution, Allen & Overy, 8 September Introducing Peerpoint - Allen & Overy; Two leaders, one goal - Alumni Yearbook Allen & Overy Evalueserve. All Rights Reserved 8

9 Document review Belfast, Northern Ireland Legal Services Centre (LSC) in Belfast, Northern Ireland 2011 business support processes. LSC: The centre is led by an experienced partner and comprises junior legal professionals who handle transaction-related work, including document reviews, drafting and research tasks. They are supervised by qualified associate solicitors, each with at least six years of post-qualification experience. demand for alternative resourcing models. The LSC and the SSC helped reduce A&O's FY2014 operating costs by GBP15m. years. Of the 100 roles, 70 will be legal and will enable A&O to expand its LSC, which currently has fewer than 50 fee-earners. 'This additional resource will ensure we can meet this growing demand and that we remain at the forefront of changes in our market,' said Jane Townsend, head of the LSC. The two centres together employ 380 people. 9 9 Online service take two: Allen & Overy re-launches e-business, 14 January Evalueserve. All Rights Reserved 9

10 b. Clifford Chance Clifford Chance was one of the first law firms to invest in an offshore centre in India, demonstrating its readiness to invest in new ways of working. In January 2015, as part of its renewed focus on innovation and change, the firm appointed its Amsterdam managing partner, Bas Boris Visser, as global head of innovation and business change. In his new role, Visser will lead the firm's strategy to anticipate, respond and adapt to the key factors shaping the global legal industry, including new technologies and market entrants. 10 The firm has a dedicated team, called Continuous Improvement, which identifies scope for efficiencies in its traditional working methods. It applies scientific methods to determine the best approach to carry out a piece of work. So far, the team has worked on more than 100 projects to improve service and cut costs. It has reported increased efficiencies in several areas of operations, including in the compilation of transaction bibles and document reviews. In addition, the firm runs an initiative to improve lawyers' efficiency and to allocate its fee earners' workloads effectively. On 19 July 2013, it recruited three external coaches, known as black belts in efficiency, to lead training workshops aimed at helping the firm's lawyers identify inefficiencies in the way they work. Online legal Competition/Antitrust courses, antibribery/anticorruption courses 2013 Clifford Chance and Thomson Reuters' competition/anti-trust courses are subscription-based online courses. They help employees in an organisation learn about competition and EU anti-trust laws of the EU, the US, Japan, China, Russia, India and Canada. The service is available in 20 languages. Clifford Chance and Thomson Reuters' anti-corruption/antibribery elearning course is a subscription-based service. It offers compliance training for senior managers and business users working in customerfacing roles such as sales, The courses enhance Clifford Chance s client service offerings. NA 10 Clifford Chance Delivering value to our clients Evalueserve. All Rights Reserved 10

11 marketing and procurement. It is available in 10 languages. Document review Knowledge Centre in New Delhi, India 2007 The centre provides transaction and case support to Clifford Chance lawyers outside India. In FY2014, it worked on 1,500 matters for 31 offices across the Clifford Chance network. The centre was set up to help the firm operate costeffectively while providing a high level of support to its teams outside India. In November 2013, Clifford Chance said it was looking to refer more legal support work to its New Delhi support function, through the use of resource management. Low-cost hub Global Shared Service Centre in New Delhi, India 2007 The centre provides research, analytics and administration to all Clifford Chance offices and personnel, and supports the firm s finance, IT and HR functions. It employs about 20% of the firms' overall business support staff at its New Delhi base. 11 The centre was set up to provide a more flexible cost model, increased efficiency and better business continuity capability. The LSC and the SSC helped reduce A&O's FY2014 operating costs by GBP15m. NA 11 LexisNexis, accessed on 26 February Evalueserve. All Rights Reserved 11

12 c. Freshfields Bruckhaus Deringer According to David Aitman, global managing partner of Freshfields Bruckhaus Deringer (Freshfields), the firm constantly strives to evolve the way in which it provides in order to ensure optimal and efficient delivery. It has a number of ongoing projects that will help keep it ahead in terms of technical legal developments and ensure that the firm has the most streamlined and responsive model among its peers. Lowcost hub Shared hub in Manchester, UK 2015 In February 2015, Freshfields announced it is undergoing a consultation to move a number of its legal and support from London to Manchester. The company's staff would be moved in phases, from 2015 to Initially, only backoffice staff would be moved; other departments would follow later. In all, six non-partner-facing departments, including billing, IT, marketing and design, and some paralegals, would be affected by the move. The long-term goal of this move is to create a consultancy option as well as a low-cost legal hub to help the company compete with the Big Four accountancy firms that have moved into the legal market by obtaining a licence for an alternative business structure. Rents are low in Manchester, so the move will enable the firm to reduce its real estate costs. The centre will help the firm support client-facing lawyers in an efficient way. Move to Manchester hub: An initial plan to shift 1,000 jobs is said to have been cut back by onefifth, following internal discussions between the head of the new venture and former head of disputes resolution, Paul Lomas, and colleagues. The plan will be implemented in stages, with the first phase expected to happen in 1H2015. Contract lawyers Freshfields Continuum 2012 This initiative seeks to commercially leverage Freshfields' alumni network. The firm drafts in ex-freshfields lawyers on an ad hoc basis to provide part or full-time support on specific projects. 12 This helps the firm handle fluctuating workloads at cheaper working rates. NA 12 'LexisNexis, accessed on 26 February Evalueserve. All Rights Reserved 12

13 Bribery Watch provides a summary and comparison of anti-bribery and corruption laws and enforcement activities across 100 countries. Online legal Bribery Watch, EPBnet, Fsnet, Guardian Angel 2012 EPBnet is a secure extranet for topical employment and pension law issues. Fsnet is a secure extranet that provides useful resources to financial clients. The enhance Freshfields client service offerings. NA Guardian Angel is an online toolkit designed to help organisations' in-house commercial and legal teams Evalueserve. All Rights Reserved 13

14 d. Linklaters According to Peter Hickman, chief finance and operations officer at Linklaters, the firm is committed to using innovation and leading technology to serve clients. In line with its strategy, it appointed Matt Peers as director of Information Systems & Strategy (ISS) in May Low-cost hub Back offices in Colchester, UK, and Warsaw, Poland 2011 Linklaters pursues a model based on two captive shared centres in Colchester and Warsaw. Warsaw: It decided to bring 60 business and financial staff back in-house in Warsaw after choosing not to renew its contract with outsourcing provider Infosys, which previously provided all staff at the business shared office. The Warsaw centre provides financial processes, global invoices and travel invoices support as well as client and contact data management and data processing functions. Colchester: The Colchester base is likely to handle more HR and marketing work in the future, given its proximity to client contacts in London. The centres were set up to provide a more flexible cost model and increase efficiency. 14 Expansion of Warsaw centre: On 17 February 2015, the firm relocated 10 backoffice staff from its London and Colchester offices to a low-cost business centre in Warsaw. The firm already has 70 positions in Warsaw, with all of the staff moving to Linklaters, after a brief period at Infosys. Document review Legal Services Centre (LSC) in Colchester, UK 2011 The firm started a new initiative, called the Legal Services Centre (LSC), in its Colchester office, with paralegals provided by Integreon. The LSC provides document review, due diligence and other transactional support to major clients. It will also be able to procure contract lawyers both for the firm and its clients in New York, London and Europe, on specific deals and projects. Brian Henerson, global head of legal sourcing, said, 'The motivation for the move is not only to cut costs, but also to free up time for younger lawyers and to create more flexibility within the teams. The new arrangements allow us to offer clients a NA 13 'LexisNexis, accessed on 26 February 'LexisNexis, accessed on 26 February Evalueserve. All Rights Reserved 14

15 tailored and costefficient service.' Online legal Online subscription - The firm's online include data protection and a dispute management toolkit. The enhance Linklaters client service offerings. NA Evalueserve. All Rights Reserved 15

16 e. Slaughter and May Slaughter and May is seen as the most traditional of the Magic Circle law firms. Although it has been looking at outsourcing for the past few years, it lags behind its Magic Circle counterparts in adopting new service delivery models. In 2012, the firm adopted Recommind s Decisiv Search as its knowledge management search solution to establish a search facility across the firm s know-how, intranet content and library sources. 15 The move helped to improve employee efficiency. Document review Outsourcing legal work to Carillion Advice Services (CAS) 2013 Slaughter and May has begun offering the of Carillion's new low-cost legal arm to its own clients, including a recent transaction for key client Vodafone. The firm offered Vodafone the option of using Newcastle-based CAS in an undisclosed deal, which included a customer contract exercise. In the past, Slaughter and May has used CAS to carry out some of the more straightforward work it used to do. The firm looks set to offer the arrangement more widely to other clients. The enhance Slaughter and May s client service offerings. NA Commenting on the Slaughter and May Carillion arrangement, Roland Turnill, the Vodafone relationship partner at the firm, said, 'It is of real value to us and our clients to have access to the CAS service in the right circumstances and for the right sort of work.' 15 'Slaughter and May Deploys Recommind s Decisiv Search, 16 October 2012, recommend.com Evalueserve. All Rights Reserved 16

17 4 Conclusion According to the FT Innovative Lawyers 2014 report, the top 20 law firms in the UK are using a combination of outsourcing centres, paralegal support centres, contract lawyers, process mapping, project management and technology for legal and support work. Legal matters are being broken down into smaller components and resourced in more cost-efficient ways. Large law firms are focused on rebundling and repackaging for clients under the firms' own brands. Delivery models Allen & Overy Clifford Chance Linklaters Freshfields Bruckhaus Deringer Low-cost hub Document review Online legal Contract lawyers Hybrid legal solutions Slaughter and May Among the Magic Circle law firms, A&O is the most innovative law firm, as is evident from the types of alternative delivery models it has adopted. It is followed by Freshfields, Clifford Chance, Linklaters and Slaughter and May. Other firms, such as Eversheds, Berwin Leighton Paisner and Pinsent Masons, are also considering integrating new business models or have started implementing such models. Eversheds, for instance, introduced business process engineering in 2003, and launched its consulting arm for clients in Evalueserve. All Rights Reserved 17

18 Disclaimer The information contained in this report has been obtained from sources believed to be reliable. Efforts have been made to validate the information from multiple sources, but the accuracy cannot be guaranteed. The author and InsightBee disclaim all warranties as to the accuracy, completeness or adequacy of such information. InsightBee shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof Evalueserve. All Rights Reserved 18