The American Lawyer’s Special Report: The Road Ahead for Big Law lists eight big developments in Big Law from 2016 and explains what they might mean for 2017. Michael Mills, Chief Strategy Officer and Co-Founder of Neota Logic, shares his thoughts on #4 of the list: A focus on technology.
While this post shares the first four, we encourage you to read the full list here.
1. Growth Slows for Large Firms
The news: Financials for The Am Law 100 and The Global 100 indicate sluggish growth
The details: The good news is that Am Law 100 and Global 100 firms achieved a sixth consecutive year of aggregate top-line growth in 2015. The not quite so good news: The Am Law 100’s 2.7 percent increase in collective revenue represented the group’s lowest annual gain for more than two decades, excluding the recession in 2008 and 2009. The 3.3 percent increase in net income was also a significant slowdown compared with the 7.4 percent growth achieved in the previous year.
The Global 100 fared only slightly better, with total revenue increasing 3.1 percent, to $96.6 billion.
Wachtell, Lipton, Rosen & Katz stood out as the only Global 100 firm to increase its net income, revenue per lawyer (RPL) and profits per equity partner (PPP) by more than 20 percent each. Its PPP rose to $6.6 million—more than $2 million greater than any other firm in either survey.
The U.K.-based firms fared less well, although their figures were heavily skewed by a significant weakening of the British pound. Freshfields Bruckhaus Deringer posted a 6.6 percent increase in revenue and a 7.5 percent increase in PPP, for example, but when its results were converted to dollars for our survey, it suffered contractions across all key metrics.
Why this matters: The results illustrate the challenging underlying market conditions, with firms facing a combination of increased pressure from clients on fees, stagnation of overall demand for high-end legal services and turbulence in several core international jurisdictions.
As we saw during the recession, many firms responded by tightening their equity in an attempt to maintain average partner profits. Total equity partner numbers across The Am Law 100 fell 0.6 percent in 2015, to 20,337—the first annual decline in six years. Almost half of the 77 U.S. firms that posted increases in PPP in 2015 reduced their equity partner head count. Ten of those firms would otherwise have seen a reduction in PPP.
The data also highlights ongoing consolidation in the industry, both in the U.S. and globally. The Am Law 100 and Global 100 rankings continue to be increasingly top-heavy. In 2000, just one Global 100 firm had revenues exceeding $1 billion: Skadden, Arps, Slate, Meagher & Flom. Today, 35 firms have exceeded that milestone.
No single firm contributed to this trend last year more than Dentons. The firm completed no fewer than six combinations in the last fiscal year, including a tie-up with 4,000-lawyer Chinese giant Dacheng. The various deals increased Dentons’ revenue by over 65 percent, from $1.28 billion to $2.12 billion. It also almost tripled the firm’s head count, which now stands at more than 6,500 lawyers, making it comfortably the world’s largest law firm by that measure.
What it means for 2017 and beyond: If the Global 100 continues to grow at its current rate, the group’s total revenue will top $100 billion next year.
The continued recovery of the U.S. economy means that many American firms are relatively bullish about the year ahead. It’s unclear how Donald Trump’s shocking election victory might affect that. But thanks to Brexit, U.K. firms face an uncertain 2017. The EU referendum result has led to a slowdown in transactional activity and a significant decline in the value of U.K. currency, which is likely to have an even more dramatic effect on next year’s Global 100 survey. At press time in mid-November, the pound was trading at just $1.24. Applying that exchange rate to last year’s results would see British pair Berwin Leighton Paisner and Taylor Wessing drop out of the Global 100 entirely. —Chris Johnson
2. U.S. Politics and Big Law
The news: Regulatory law practices in Washington, D.C., have been booming, thanks in no small part to rulemaking during the Obama administration. A Trump administration could keep the intensity on some areas, such as antitrust regulatory law, while de-regulating in others.
The details: Washington, long a necessary outpost for many large law firms, has become central to many in the legal industry.
Last year, 14 Am Law 100 firms reported that their largest offices were in Washington. That includes several firms founded elsewhere, such as Akin Gump Strauss Hauer & Feld and Morgan, Lewis & Bockius.
Large firms including Reed Smith, Pillsbury Winthrop Shaw Pittman and Stroock & Stroock & Lavan chose new firmwide chairs or managing partners from Washington in recent years. The structural developments aren’t coincidental to what drives legal business in D.C.
Regulatory law and litigation involving federal agencies have pumped traditional Washington law firms, including Covington & Burling, Wilmer Cutler Pickering Hale and Dorr, Arent Fox and Venable, with profit and revenue per lawyer growth in recent years.
Cybersecurity, Foreign Corrupt Practices Act law, financial regulation and corporate monitorships were some of Big Law’s growth practices during the Obama administration. FCPA enforcement, which results in corporate defense lawyers fielding internal investigations and white-collar litigation responses, has been on the upswing since the George W. Bush administration.
The other areas of expansion owe themselves to the government response after the financial crisis, including the creation of the Consumer Financial Protection Bureau in 2011, and the advancement of technology.
Why this matters: A powerful federal government, even under a Republican president, will continue to demand that large law firms take their Washington offices seriously. Firms already here, especially those with large regulatory practices, could benefit the most. “You need to have a strong regulatory practice,” says Alice Valder Curran, Hogan Lovells’ head of the global government regulatory department. “Any sort of firm in the Washington legal market now is trying to establish and grow a regulatory practice.”
Curran is based in Washington and leads more than 400 lawyers in 14 practice areas. “The Obama administration has been noted for its expansion of executive power,” she says. The global financial crisis in 2009 and the United Kingdom’s Brexit vote this year are other watershed moments that spurred regulation, she added: “I do not see it going away.”
What it means for 2017 and beyond: Washington’s lawyers expect trade deals to be renegotiated, tax code to be rewritten, media mergers to be challenged, and health care to be overhauled when President Donald Trump comes to town. Much about the new administration’s policies is unpredictable. Yet even as the government unwinds laws and regulation, lawyers will have work to do. “Change does tend to lead to demand for legal services,” Timothy Hester, chairman of Covington & Burling, which is D.C.’s largest firm, said after the election. —Katelyn Polantz
3. Brexit Vote Lead to Uncertainty Abroad
The news: A shocking U.K. Brexit vote leads to questions about the future role of London as the European capital of Big Law.
The details: In June 2016, the U.K. held a referendum over whether the country should exit the European Union. After a divisive and close-run campaign, the polls predicted a narrow victory for remain. But in a stunning result, the British public voted by a 52 percent majority to leave the political bloc.
Why this matters: The unexpected outcome sent law firms into overdrive. Firms were inundated by queries from clients trying to make sense of the unprecedented event. Several set up special telephone hotlines, manned by lawyers around the clock, to handle the vast levels of client demand. Brexit email briefings were fired out at record rates.
After the initial frenzy, things have calmed down. A little too much, in fact. The widespread uncertainty caused by Brexit has dented market confidence and stifled investment. M&A activity has slowed significantly, while a number of U.K. initial public offerings have been shelved.
What it means for 2017 and beyond: Yet more uncertainty. Formal Brexit negotiations aren’t scheduled to start until March, and the process isn’t likely to be completed before 2019. That’s if it happens at all. London’s High Court ruled in November that the Brexit process must be subject to a parliamentary vote. U.K. politicians, the majority of whom wanted the country to remain within the EU, could now theoretically delay or even block the process. At press time in mid-November, a government appeal before the U.K. Supreme Court was pending.
Once exit negotiations do begin and the situation starts to become clearer, firms will be called upon to help clients navigate what will be one of the largest programs of regulatory and legislative reform ever seen. There will also be some choice government advisory roles up for grabs.
There are broader concerns that Brexit may lead to some banks, companies and even global law firms shifting business from London to other European cities such as Frankfurt and Paris—particularly following indications that the U.K. may seek to leave the European single market in a so-called hard Brexit. But like almost everything Brexit-related at the moment, the actual outcome remains to be seen. —Chris Johnson
4. A focus on technology
The news: Big Law’s use of technology has increasingly centered around keeping information safe and secure
The details: “Security and information governance are the two most time-consuming, worry-consuming and expense-creating activities in legal technology,” says Michael Mills, co-founder and chief strategy officer of Neota Logic Ltd., which makes software for legal matters and compliance. “Most firms until recently have had very open systems, except for M&A deals and internal investigations,” says Mills, the former CIO of Davis Polk & Wardwell. “More firms are following a practice called hiving—locking down information to those who need to know.”
When it comes to Big Law’s use of artificial intelligence, it appears that corporate lawyers, not litigators, are leading the way. “There seems to be quicker adoption of AI tools by corporate lawyers for things like contract review. Litigators have been slower to adopt it for discovery,” says Maura Grossman, who runs the e-discovery consulting practice Maura Grossman Law and who developed a machine learning e-discovery system when she was of counsel at Wachtell, Lipton, Rosen & Katz.
“Maybe it’s the difference in personality between corporate lawyers and litigators,” Grossman says. “Corporate lawyers want to get deals done expeditiously, while litigators see the minefields.”
Why this matters: “The hot activity in [Big Law’s use of AI] still is in contract analytics,” Mills says. Neota Logic recently announced that it is working with Clifford Chance to develop an automated process to analyze the impact of new regulations on financial institutions. But this area isn’t Big Law’s top tech priority. “Does it represent anything like what goes into security?” he asks. “Not a chance.”
In the past year, firms including Latham & Watkins and Baker & Hostetler have licensed an AI product for legal research in the bankruptcy arena developed by ROSS Intelligence that uses IBM’s Watson technology. ROSS founder Andrew Arruda has said that he’s aiming to extend this technology to many more practice areas.
What this means for 2017 and beyond: Grossman is cautiously optimistic about what AI can do for Big Law. “AI is the new big shiny object,” says Grossman. “But it probably won’t be as magical as some people hope. Instead it will augment what lawyers do.”
Law firms are showing renewed interest in using social networking tools such as Slack, HipChat and Microsoft’s new Teams product to communicate internally, moving away from email, according to Mills. He notes that most products that have caught on among lawyers have very simple user interfaces. “Lawyers have an extremely short payback period,” he says. “A new technology has to appear useful to them personally in about 20 minutes or they won’t use it.” —Susan Beck