28 November 2023
There have been a number of developments this year which, taken together, signal a highly significant change in the Big Law landscape.
In his book, 1971 Never a Dull Moment, David Hepworth advances the view that 1971 represented “the best year in the history of recording” and a turning point in classic rock music. It was the year that gave us, amongst other treasures, Led Zeppelin IV, Who’s Next and Tapestry. After that everything was, well, downhill.
I saw Mr Hepworth present his theory with compelling enthusiasm at an event in 2016 and ever since I have been drawn to the notion of the “pivotal moment”:
So, attracted as I am to the notion of the pivot, I do think that 2023 will, in due course, come to be viewed as a pivotal year in the world of Big Law.
There have been a number of developments this year which, taken together, seem to me to signal a highly significant change in the landscape.
The themes I would draw out are:
For many years Allen & Overy, Clifford Chance, Freshfields and Linklaters (the “Big 4”) have been making efforts to build a meaningful presence in the USA. The USA is the home of the US dollar and by far the biggest market for legal services in the world. The view has come to be, rightly or wrongly, that you cannot sit at the top table of Global Elite law firms unless you have serious US heft.
It has not been a straightforward endeavour, with merger partners hard to find and “build our own” strategies struggling to gain momentum.
But this year has seen A&O’s merger with Shearman & Sterling approved by both sets of partners and Freshfields continue to commit serious resource to building their US practice.
Shearman will bring to A&O 500 lawyers in the US (and more elsewhere) and a US law firm brand of resonance, albeit one that has faded over recent years. Freshfields meanwhile has acquired some impressive senior talent, has grown its US revenue by 29% in its last financial year and ranked eighth in the top M&A advisers in the Americas in the first 9 months of 2023. Tellingly, the firm’s managing partner is based in the USA.
I have hitherto been a sceptic as to whether the Big 4 could ever really cut it in the USA. I have perceived two big issues:
The A&O Shearman deal and the Freshfields push, of course, don’t immediately alleviate those concerns. It is very early days. There is still material execution risk in the A&O deal as there will be fallout from the integration and, critically, the merged firm will need to demonstrate that it can both keep top talent and attract stars from other firms. And Freshfields must keep up its US/US deal-doing momentum without losing top talent elsewhere in the world.
But these developments do signal the willingness of Big 4 firms to take the fight to the US firms. Which is exciting and quite a change of pace.
It does, of course, put pressure on Clifford Chance and Linklaters - particularly Linklaters as they have the smallest US presence of the Big 4 firms. I wonder what they might do?
And Slaughter and May? - I hear you say. Well, although the move of Paul Weiss into English law may not be what they would have wished for, I believe (biased as I am) that the independent model of an English law leader working alongside top US firms (including those with some UK capacity) on Transatlantic deals will continue to serve them well.
It is old fashioned to say this but I do regret the growth of star culture in the law. Clients benefit from the support of an external legal team of understated quality, collegiality and consistency. The rise of the star lawyer, and the associated transfer market, doesn’t seem to me to sit easily with that. But we are where we are…
This summer’s transfixing tit-for-tat battle for talent between Kirkland and Paul Weiss was, moreover, the apotheosis of transfer market intensity. There was an intake of breath when Paul Weiss’s London managing partner, Alvaro Membrillera, moved with a team to Kirkland in August. But then there was a stunning touché when, just weeks later, fabled debt guy, Neel Sachdev, led a group of partners from Kirkland to Paul Weiss.
Almost the stuff of a TV mini-series!
Brad Karp, the Chairman at Paul Weiss, is quoted as saying that his firm’s focus has turned to “the increasing importance of star talent, with clients increasingly hiring star lawyers rather than law firms.” This of course fits with the recruitment of Sachdev et al - there is speculation that top earners in that group could earn as much $20m per annum.
And these Ronaldo-style deals are not just the domain of Paul Weiss. As observed in an article in Financial News in July “a handful of top partners at the leading law firms in London are now paid more than $15m per year, according to people familiar with the sector”. Whilst this will be mainly the US firms, Freshfields are (see above) paying $10 million or more to their US stars.
This ratcheting up of “paying huge money for stars” has surely been a major driver in other firms being increasingly willing to introduce a salaried/fixed share partner tier. Thus we read that Cravath, the very essence of an all-equity lock-step firm (albeit with a recently introduced bonus pot), has introduced a salaried partner layer and that Paul Weiss are also apparently contemplating it.
The firms’ thinking here must be that this will (i) help them to keep younger talent for longer by offering a partner business card earlier and to those who may not graduate to equity and (ii) increase the equity profit pool in a way that enables them to pay more to their senior equity stars. The archetype for this salaried/equity model is Kirkland with some 900 salaried partners and 500 equity partners - and average profit per equity partner last year of $7.5 million.
So, for me, 2023 is the year in which a “stars above firms” approach really took root, with the structural wash that elite firms are increasingly willing to abandon an all equity model.
The goings on at Open AI over the last week or so have been bemusing at best but, we must assume, do not detract from the transformational importance of Chat GPT and other generative AI (“GenAI”) products.
GenAI is of course highly significant to, and the subject of much discussion in, the world of legal services. A Goldman Sachs analysis earlier this year suggested that 44% of legal tasks in the USA could be automated by Gen AI.
Several new products focused on legal services have been launched. Harvey, a tool for contract analysis, due diligence and regulatory compliance built on ChatGPT, is probably the best known. It is being used by, for example, Allen & Overy and Macfarlanes.
The recently published PwC Law Firms’ Survey 2023 (the “PwC Survey”) finds that 69% of Top 100 firms believe that GenAI will have a positive impact on revenues but also notes the various risks:
PwC go on to observe that:
“Despite wide acknowledgement of the risks and opportunities of GenAI, 38% of Top 100 firms have not done anything with respect to this new technology. Further, only 9% of Top 100 firms are actively developing technology alongside GenAI providers.”
These percentages are surprisingly muted. Whilst many law firm leaders will say that the products will develop and it is best to allow other to make the mistakes, I do think that that is dangerous. GenAI is a game changer and top firms should surely be actively assessing the market and working alongside tool providers to fashion solutions that fit their practice requirements.
All of which said, the most difficult issue with GenAI for me is what it does to the apprenticeship model (the third risk above).
The real value-add of quality law firms is the generation of ideas (how can we structure the otherwise impossible deal?) and the exercise of judgement (is this litigation risk one which the Board can responsibly take?). But the senior lawyers who provide that added value built their knowledge, learnt their trade and refined their skills by doing the research, grinding through data rooms and preparing the first drafts.
So firms will need to find a way of sharing the work which is normally done by trainees and younger associates between them and the AI tools in a way that is both efficient and acceptable to clients - because clients may baulk at paying young associate, Ben Folds, for doing work that Harvey could do. That process will be an important journey.
Ten years ago China was a major strategic focus for large international law firms who were busily ramping up their presence. US and European clients were expanding there and Chinese firms were investing aggressively and listing their stock overseas. Alibaba listed on the NYSE in 2014 and raised $25 billion, giving it a market value then of $231 billion.
But pressure in China on foreign businesses, together with broader economic and geopolitical challenges, have changed everything.
In July this year Dentons announced that it was ending its combination with Dacheng, a huge firm which was Dentons’ entire presence in the PRC, as a result of “recent Chinese government mandates on Chinese law firms, including those relating to cybersecurity and data protection” which imposed new requirements on collecting certain data and transferring it out of China. In September, moreover, Linklaters confirmed that it was reducing its cohort of lawyers in Greater China by 30 lawyers in light of China’s prolonged economic downturn.
And, in a recent article, Andrew Goudsward points out that of the 73 largest US law firms with offices in China, 32 shrank their lawyer presence over the last decade.
This striking change in temperature extends of course to Hong Kong. The FT in August quoted a senior corporate lawyer in Hong Kong as saying: “Hong Kong has transitioned very quickly from being an international to a China-focused financial centre”. Given this, multi-national clients will inevitably be more hesitant about using Hong Kong law for their long-term contracts and about agreeing to Hong Kong as a venue for arbitration.
This is a huge shift from the 80s, 90s and 00s when Hong Kong was a swash-buckling go-go international financial centre.
So there are two points of pivot here:
Cyber attacks on law firms are, of course, nothing new. DLA, for example, suffered a well-publicised attack in 2017 and there have been numerous incidents since. Law firms gather sensitive information and are attractive targets.
The subject received particular focus earlier this month however when it was revealed, and reported in the FT, that Allen & Overy had suffered an attack. LockBit, the Russian hacking organisation, claimed responsibility and said that they would publish the data they gathered on 28 November unless a ransom was paid.
A&O said that their emails and document management systems were not affected but this must still be a significant concern for the firm.
Cyber events of course risk the leaking of sensitive client data and may also expose firms to lawsuits. Orrick, Bryan Cave and other firms have faced class actions is the USA alleging that they did not take reasonable measures to protect client data.
The PwC survey revealed that, of the Top 100 firms, 80% experienced incidents unintentionally caused by staff, 71% reported that they had been subject to phishing attacks and 69% (up from 47% in 2022) experienced data loss or leakage of confidential information. Human cyber risk is clearly a major issue and firms’ spend on security systems and advice needs to be complemented by training and due diligence in hiring with a view to mitigating the risk of employees, intentionally or unintentionally, triggering a cyber incident.
The PwC survey confirms that commercial law firms are increasingly concerned about the risk and the A&O incident is a visible reminder of the significance of the threat. The growing frequency of incidents may also stimulate clients to ask whether they should be giving sensitive data to firms. Whilst it may be hard to avoid if firms are to do their job, clients may increasingly ask whether there are alternatives.
I hope that you will agree that, in light of the above factors, we will come to see 2023 as a turning point for Big Law. It sure feels like it.
It is also, of course, the year in which the Rolling Stones released Hackney Diamonds, their first studio album since 2005. Reviewers have been very positive but do wonder whether it might be their last. If I can presume to extend the pivot to the bookend, I can’t help but remember that 1971 gave us the seminal Sticky Fingers!
Christopher Saul
Deanna Oppenheimer, Chair, Hargreaves Landsdown and Intercontinental Hotels Group
Richard Solomons, Chairman, Rentokil Initial
Christopher Saul Associates
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Christopher Saul Associates is an advisory firm providing independent trusted advice to senior executives and key stakeholders within publicly quoted and privately owned businesses and professional service firms.