Trends in the legal profession globally

Trends in the Legal Profession Globally John Colvin

May 1996

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Contents – Market Issues

• Market trends - globalisation• Trans Atlantic mergers• Threat of accounting firms• Growth areas• Future of mid-sized firms• Growth in tender process

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Contents – Commercial Issues

• Financial drivers in a law firm• Various models• Partner compensation models• Organisation structures• Measurement systems

4

Implications for Law Firms

• Globalisation• Threat of accounting firms• Technological threats and opportunities• Growth areas• Growth in tender process• Commercial issues• Partner compensation

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Market Trends – Globalisation

• The legal profession has been globalising at a steady pace over the past five years. • The focus of international expansion has been Asia, and in particular the legal work

surrounding:• equity and debt raisings in the US/UK capital markets, • the major infrastructure projects in most Asian countries, • and the privatisation of utilities throughout the region.

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Market Trends - Globalisation

• There are two models of international expansion being implemented by the NY/London firms:• small representative offices practicing US/UK law, supported by associations with major local

firms• significant local offices staffed by local lawyers, plus a critical mass of UK/US lawyers on

secondment, practicing either UK/US law, or in some cases both areas of law.

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Globalisation Models

US/UK Law Small Branch Office Table 1 US/UK Law Plus Local Office Plus Local Associations Not Globalised

Los Angeles Gibson, Dunn & Crutcher Pilsbury Madison & Sutro

Latham & Watkins

O'Melveny & Myers

Sheppard Mullin, Richter & Hampton

Cooley & Godward

New York Skadden, Arps Sullivan & Cromwell

White & Case Davis Polk & Wardwell

Morgan Lewis & Bockius

Rogers & Wells

London Clifford Chance Allen & Overy Dibb Lupton Broomhead

Linklater & Paines Lavell White Durrant Masons

Freshfields Ashurst Morris Crisp

Herbert Smith Denton Hall

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Trans – Atlantic Mergers

There has been much press speculation over the past few years about a major US and UK firm merging. The most common rumour surrounds Davis Polk and Freshfields, with both denying the idea strenuously.The reason why this speculation exists centres around:• the gradual globalisation of the legal profession• the eventual power of the accountancy firms who already have powerful global networks• the globalisation of most of the world's industry, and the consequent growing need for

international legal capability; and• the economic need to pool the investment funds required to build a global network.

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Trans – Atlantic Mergers

• Most people think that a major merger is inevitable, and virtually everyone believes that the major players have merger contingency plans.

• However, it is expected that this process will start with a second tier firm in New York merging with a second tier firm in London before the turn of the century.

• This will start an explosion of mergers over a five-year period.

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Threat of Accounting Firms

• Arthur Anderson and KPMG are already major forces in the European legal market. • These two plus Price Waterhouse and Coopers and Lybrand are expected to launch a major drive

into the UK legal market in the next few years. • They are also expected to do the same in the US, when legislation is passed which will allow

accountants to enter this market.• Everyone we spoke to felt that the accountants will first of all capture the corporate middle

market over the next ten years or so. From there they will attack the top end of the market.

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In Australia

• The accountants are already well advanced in building their legal practices beyond the tax area.• In this process, the accountants will do great damage to the mid-sized regional players, many of

whom will collapse or get merged in with the accountancy firms, or bigger law firms. • They will do damage also to the middle market businesses of the major law firms.

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Growth Areas

• Project finance focusing on infrastructure projects in Asia for the major New York and London firms

• The industry sectors of telco carriers, multi-media and content providers mainly in Los Angeles and London

• IP litigation almost totally in US• IP/patent work mainly in Los Angeles

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Growth Areas – Los Angeles

Table 2 IP/ IP/Patent IT/Out- High Tech MultiMedia/ Project M&A Infrastruct.Patents Litigation Sourcing Companies Telecoms/ Finance Power,

Media Water Asia

Los Angeles

Pillsbury, Madison & Sutro 3 3 3 3

Latham & Watkins 3 3

O'Melveny & Myers 3 3 3 3 3

Gibson, Dunn & Crutcher 3 3 3 3

Sheppard, Mullin, Richter & Hampton 3 3

Cooley & Godward 3

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Growth Areas – New York

Table 2 IP/ IP/Patent IT/ Out- High Tech MultiMedia/ Project M&A InfrastructurePatents Litigation Sourcing Companies Telecoms/ Finance Power,

Media Water Asia

New York

Sullivan & Cromwell 3 3

Davis, Polk & Wardwell 3

Skadden, Arps, Slate, Meagher & Flom 3 3

Morgan Lewis & Bockius 3 3 3

White & Case 3

Rogers & Wells 3 3 3

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Growth Areas – London

IP/ IP/Patent IT/ Out- High Tech MultiMedia/ Project M&A InfrastructureTable 2 Patents Litigation SourcIng Companies Telecoms/ Finance Power,

Media Water Asia

London

Clifford Chance 3 3 3 3

Linklaters & Paines 3 3

Freshfields 3 3 3

Allen & Overy 3 3

Lovell White Durrant 3 3 3

Herbert Smith 3 3 3 3 3

Denton Hall 3 3 3

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Future of Mid-Sized Firms

• The future of mid-sized firms is difficult• There is no doubt that there will be a steady consolidation over the next five to ten years at the

top end of the legal profession • This is the history of all global service industries, whether the service area is accounting,

consulting, actuarial or advertising. The big will get bigger

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Future of Mid-Sized Firms

• The accountancy firms will take over the corporate middle market during the next few years, and technology will replace a lot of the commodity work that is left.

• The only place left for medium-sized firms is a very specialised niche position or positions.

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Growth by Lateral Recruitment

• Nowhere in the world has there been a successful merger of two major national firms. Virtually all the firms that have grown steadily and continuously over the past 20 years have done so through lateral recruitment.

• The firms which most spring to mind are:• Skadden Arps, Slate, Meagher & Flom – now the world's biggest law firm, and also one of

the most remunerative• Latham & Watkins – now California's biggest law firm• Rogers & Wells

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Growth in Tender Process

• Virtually everybody commented that over the past five years there has been a steady increase in the number of beauty parades required for specific project work (e.g. major litigations).

• Indeed, most major project work is now subject to the tender process across the world. This situation applies to even the best of the firms.

• As a consequence, most firms are grappling with trying to improve the sales skills of the Partners.

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Growth in Tender Process

• In addition to this, relationship work is increasingly being put to tender as well. • Major corporates are starting to apply the same processes to law firms as has been common

place for some time for accountants, bankers, consultants and so on.• It is now clear that the legal profession is fast becoming as competitive as any other professional

services area. • Globalisation is now fueling this competition with the top American firms holding a significant

advantage over the rest of the world with much superior management and business systems.

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Financial Performance Drivers in a Law Firm

• Leverage• Utilisation• Charge out rate• Overhead rateAnother way of saying this is:• Leverage• Margin

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• Leverage = Lawyers (excl Partners)/Partners• Utilisation = Billed hours/1800• 1800 = (260 week days-20 AL-10 PH-5 SL)*8• Charge out rate = ave blended charge out rate for all professional staff• Overhead rate = all expenses, except legal staff salaries, as a % of revenue

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• A convenient way of expressing all of these variables in one index is:Profitability Index = Leverage x Margin

• Another way of looking at these drivers is:Internal factors : Utilisation, overhead rateExternal factors : Leverage, charge out rate

Profitability Index versus Average Partner Compensation

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Table 3 Profitability Index versus Average Partner Compensation

Piper Alderman

BDWPilsbury

Latham O`MelvenyGibson Dunn

Sheppard Mullin

Cooley Godward

Sull & Cro

Davis PSkadden

Morgan Lewis

White & CaseRoger & Wells

Clifford Ch

LinklatersFreshfieldsAllen & Overy

Lovell White Herbert Smith

Ashurst

Dibb Lupton

Denton Hall

Masons

0

200

400

600

800

1000

1200

0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60Profitability Index = Leverage x Margin

Ave

rage

Com

pens

atio

n pe

r E

quity

Par

tner

$00

0

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Different Models of Leverage & Margin Exist

Table 4 Different models of Leverage & Margin exist

Piper Alderman

BDWPilsbury Latham

O`MelvenyGibson Dunn

Sheppard Mullin

Cooley GodwardSull & Cro

Davis PSkadden

Morgan Lewis


Clifford Ch

LinklatersFreshfields Allen & Overy

Lovell White

Herbert Smith

Ashurst

Dibb Lupton

Denton Hall

Masons

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

20% 25% 30% 35% 40% 45% 50%Margin %

Lev

erag

e

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Relationship between Compensation per Partner and Leverage

Table 5 Relationship between Compensation per Partner & Leverage

Piper Alderman

MasonsDenton Hall

Dibb Lupton

Ashurst

Herbert Smith Lovell White

Allen & Overy

FreshfieldsLinklaters

Clifford ChRoger+Wells White & Case

Morgan Lewis

SkaddenDavis P

Sull & Cro

Cooley GodwardSheppard Mullin

Gibson Dunn

O`MelvenyLatham

Pilsbury

BDW

0

200

400

600

800

1000

1200

0.50 1.50 2.50 3.50 4.50 5.50Leverage

Ave

rage

Com

pens

atio

n pe

r E

quity

Par

tner

$00

0

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Relationship between Revenue per Partner and Leverage

Table 6 Relationship between Revenue per Partner & Leverage

BDWPilsbury

Latham O`MelvenyGibson Dunn

Sheppard Mullin Cooley Godward

Sull & CroDavis P Skadden

Morgan Lewis

White & Case

Roger & Wells

Clifford ChLinklaters

Freshfields

Allen & Overy

Lovell White

Herbert Smith

Ashurst

Dibb LuptonDenton Hall

Masons

Piper Alderman

0

500

1000

1500

2000

2500

3000

0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00Leverage

Rev

enue

per

Equ

ity P

artn

er

$000

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Relationship Between Average Compensation and Margin

Table 7 Relationship between Average Compensation & Margin

BDWPilsbury

LathamO`Melveny

Gibson Dunn

Sheppard MullinCooley Godward

Sull & Cro

Davis PSkadden

Morgan Lewis


Clifford Ch

Linklaters

Freshfields

Allen & Overy


Ashurst

Dibb Lupton

Denton HallMasons

Piper Alderman

0

200

400

600

800

1000

1200

20% 25% 30% 35% 40% 45% 50%Margin %

Ave

rage

Com

pens

atio

n pe

r E

quity

Par

tner

$00

0

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Relationship Between Compensation and Utilisation

Table 8 Relationship between Compensation & Utilisation

BDW Pilsbury

LathamO`Melveny

Gibson Dunn

Sheppard Mullin

Cooley Godward

Sull & Cro

Davis PSkadden

Morgan Lewis


Clifford ChLinklatersFreshfields

Allen & Overy

Lovell White Herbert SmithAshurst

Dibb LuptonDenton Hall

Masons

Piper Alderman

0

200

400

600

800

1000

1200

50% 60% 70% 80% 90% 100% 110% 120%Utilisation %

Ave

rage

Com

pens

atio

n pe

r E

quity

Par

tner

$00

0

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Utilisation

When you adjust utilisation for leverage for the top London and New York firms, you get the following picture:

New York

Sullivan & Cromwell 111% x 3.5 = 3.90

Davis Polk 108% x 3.81 = 4.10

Skadden Arps 108% x 4.40 = 4.75

London

Clifford Chance 67% x 4.50 = 3.02

Linklaters 65% x 4.18 = 2.72

Freshfields 58% x 4.01 = 2.32

Allen & Overy 69% x 3.84 = 2.65

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Utilisation

• So it is clear from this analysis, that the New York firms are much more productive in converting available capacity into billable hours.

• In fact, the Americans are roughly 60% more efficient in converting lawyer hours into billable hours than their English equivalents.

• This more than compensates for the higher charge out rates of the English firms, and is the major reason why compensation in the best New York firms far exceeds most of the English firms.

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Relationship between Revenue per Partner and Utilisation

Table 9 Relationship between Revenue per Partner & Utilisation

BDW Pilsbury Latham O`MelvenyGibson Dunn

Sheppard MullinCooley Godward

Sull & Cro

Davis PSkadden

Morgan Lewis


Clifford Ch

LinklatersFreshfields Allen & Overy


Ashurst

Dibb Lupton

Denton Hall

Masons

Piper Alderman

0

500

1000

1500

2000

2500

3000

50% 60% 70% 80% 90% 100% 110% 120%Utilisation %

Rev

enue

per

Equ

ity P

artn

er

$000

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Relationship Between Margin and Overheads

Table 10 Relationship between Margin & Overheads

BDWPilsbury

Latham O`Melveny

Gibson Dunn

Sheppard Mullin

Cooley Godward

Sull & Cro

Davis P

Skadden

Morgan Lewis


Clifford Ch

LinklatersFreshfields

Allen & Overy


Ashurst

Dibb Lupton

Denton Hall

Masons

Piper Alderman

20%

25%

30%

35%

40%

45%

50%

25% 30% 35% 40% 45% 50% 55% 60%Overheads / Revenue %

Mar

gin

%

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Categories of Firm Partner Compensation

Traditional Lock-Step Modified/Managed Lock-Step Meritocracy

Los Angeles Pillsbury Madison & SutroLatham & WatkinsO'Melveny & MyersGibson, Dunn & CrutcherSheppard, Mullin, Richter & HamptonCooley & Godward

New York Davis Polk & Wardwell Sullivan & CromwellSkadden, Arps, Slate, Meaghar & FlomMorgan Lewis & BockiusWhite & CaseRogers & Wells

London Clifford Chance Allen & Overy Dibb Lupton BroomheadLinklaters & Paines Ashurst Morris Crisp Denton HallFreshfields MasonsLovell White DurrantHerbert Smith

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Details of Compensation Systems

There are various meritocracy models with the main features being:• Points system with a 3-4 times multiple from top to bottom• Often nearly automatic progression for the first four to five years• This is followed by progression based on performance• People can freeze or regress in these systems• In addition, there is a bonus scheme to reward excellent performance in the year just gone• Usually there is a Compensation Committee which is separate from the Executive Committee,

which administers unit progression and bonus allocation• Many of these systems are administered in secret

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Lawyer Compensation

The average compensation per lawyer in the various cities we visited is:Average Compensation Compensation Adjusted per Lawyer ($000) for COL ($000)

Los Angeles

Tier 1 firms 105 83

Tier 2 firms 75 60

New York

Tier 1 firms 145 101

Tier 2 firms 105 73

London

Tier 1 firms 110 86

Tier 2 firms 90 70

Tier 3 firms 80 63

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Organisation Structures

• The most common organisation structures are:• the traditional practice groups• supported by specialist industry groups

• Virtually all the major firms had:• lead partners to manage the key clients and key relationships• partners managing the work on a day-to-day basis

• Our current thinking of evolving to national practice groups, supported by specialist industry groups, with partners managing our key clients is consistent with this

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Measurement Systems

• Most of the firms we saw had fairly basic systems to measure partner and lawyer performance

• However, two firms (Latham & Watkins and Rogers & Wells) which have significantly re-engineered themselves over the past five to ten years, credit their measurement systems as being an important ingredient to their improved performance

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Implications – Globalisation

Findings• The legal profession has been globalising at a steady pace over the past five years.• At the centre of this are the major New York and London firms.• This pace is expected to quicken in the future.• The focus is in infrastructure projects in Asia.

Implications • How do you defend your local market against major UK/US firms building strong networks in the

region, and attacking your market from this base?• Do you need to consider some sort of merger or strategic alliance in the future?

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Implications – Threat of Accounting Firms

Findings• The accounting firms will capture a large part of the corporate middle market over the next

decade.• From there they will attack the top end market.• 20 years from now they will be major players in the legal profession world-wide.

Implications • How do you defend your business which currently is in the corporate middle market or lower?• How do you grow your share of the business in the top companies in Adelaide?

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Implications – Technology Threats/ Opportunities

Findings• There is a very large latent market for law firms that can use technology to support commodity

product areas at low cost and high service.

Implications• Is this a market you wish to pursue?

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Implications – Growth Areas

FindingsGrowth areas around the world are:• Project finance focusing in on infrastructure projects in Asia• Telcos, multi-media and content providers• IP litigation• IP/patent work

Implications• Are these growth areas relevant to your business?• If so, do you need to do anything additional to capture a bigger share of these developments?

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Implications – Growth in Tender Process

FindingsThere is increased competition for both:• Project work• Relationship business

Implications• Do you need to improve your client and bid management capabilities?

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Implications – Partner Compensation

Findings• The traditional lock-step system has been replaced everywhere except the major London firms

by either a meritocracy or modified/managed lock-step system.

Implications• Does this matter for you?

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Implications – Organisation Structures

Findings• The most common structure is the traditional practice groups supported by specialist industry

groups, with lead partners responsible for major clients.

Implications • Is your thinking consistent with this model?

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Implications – Measurement Systems

Findings• Most firms have basic systems for measuring partner and lawyer performance. Many firms rely

significantly on the subjective judgements of performance by a group of senior partners.• Two firms (Latham & Watkins and Rogers & Wells) attribute part of their growth in performance

over recent years to the implementation of a more sophisticated measurement system.Implications• Look carefully at what you can learn from these two firms.

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Contact Details

John ColvinPrincipalE: [email protected]: +61 409 183 174S: +61 2 8823 3485Level 36, Governor Phillip Tower1 Farrer Place, Sydney NSW 2000, Australia

Sian O’ShaughnessyResearch AnalystE: [email protected]: +61 2 8823 3485 Level 36, Governor Phillip Tower1 Farrer Place, Sydney NSW 2000, Australia

Sandra HeinigSenior AssociateE: [email protected]: +61 416 731 897S: +61 2 8823 3485D: +61 2 8823 3487Level 36, Governor Phillip Tower1 Farrer Place, Sydney NSW 2000, Australia

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Trends in the legal profession globally