Current and Future Issues City Firms Face

This question, or versions of it, are notoriously popular on vacation scheme and training contract applications. A full answer requires an in depth understanding of the internal networks of the City and an analysis of the role of lawyers in relation to other City players. In essence, this question tests student’s possession of the elusive “commercial awareness” – an essential quality to access the City firms.

To provide a full answer, we must first set the scene of the current legal market, acknowledging the concurrent changes to the legal industry and existing commercial firms. Each of these external factors effects, or causes, the key issues facing City firms and allude to business model solutions, making them essential considerations. So which contextual factors need to be considered?

1. The Legal Services Act 2007

The monopoly lawyers once held over legal services is no more. The Act has brought new players into the market, thereby expanding it and offering more choice to clients, leading to increased competition and offering the client bargaining power. However, many legal analysts have predicted that the pressure of the effects of the Act will be felt more so at the lower end of the market, therefore affecting high street and smaller firms. The top end of the market, namely City firms, are unlikely to be as affected as their expert advice and status continues to draw in major clients.

2. The LPO (Legal Process Outsourcing) Model

The legal market has undergone a substantial shift in its delivery of legal services by transferring the more “bread and butter” legal work to external vendors located overseas or domestically. This minimises costs to the firm, increases flexibility, and allows the firm to expand its in-house capabilities.

3. The Socio-economic Climate

Even City firms could not escape some of the repercussions of the 2008 financial crisis. In June of 2013, the Solicitors Regulatory Authority (SRA) announced that it was closely monitoring the finances of 30 top 200 firms at risk of failure. At the other end of the market, we have seen smaller firms merge to survive. In a difficult financial climate with uncertainty of future growth, competition for clients becomes fierce as clients themselves are placed under internal pressure to reduce their legal budgets. However, the economic downturn has had some positive repercussions. For example, while banking sectors may struggle due to a squeeze on credit, bankruptcy and insolvency lawyers will have plenty of work.

4. The Increase of Qualified Lawyers in Emerging Economies

When firms and clients alike are focused on cost-cutting, securing and retaining the best talent becomes even more essential. With many City firms boasting international reach, securing qualified lawyers in these locations, with a knowledge of the local area and industries, is a strategic move.

5. Social Networking and Technology

The accelerating technological age has revolutionised City firms. It has changed how students job hunt and network with firms, while offering firms a new way of recruiting, marketing their brand, and interacting with clients.

So, drawing on this legal context, what key issues are facing City firms?

1. An increase in client demands

Clients are expecting more from firms for less cost. Meeting the demands of global clients is imperative to City firms to ensure they do not lose the client to their competition.

2. Client retention

With clients possessing the bargaining power, they can shop around similar firms for the best deals. For City firms to correspond with their aim to grow their market share, they must compete for more work with their existing clients for the best price.

3. Globalisation

With the existence of global City firms, the traditional boundaries of business and legal practice have been erased. While this is not a new issue, it is gaining momentum due to factors such as internet growth, automation of legal processes and emerging technological tools. The legal industry is being reshaped and City firms must ensure that they are leading the way. The client will see the firm growing in other industries and markets and wonder how the firm could enhance their business in these new contexts. This implies that globalisation may give City firms an edge by consolidating breadth of practice and industry expertise, and also gives rise to the opportunity to cross-sell.

4. Market Consolidation

Many firms from all tiers have merged in recent years, causing market consolidation. However, while mid-tier firms are merging to survive, City firms are merging to expand their global reach and access new economies.

5. Other issues to consider:

Maintaining a work/life balance, attracting talent, managing internal networks, being responsible (“Green Law”), budget distribution dilemmas (such as whether to invest in more up to date IT, training, new offices etc).
So which issue is most important, and why?

Clearly, clients becoming most conscious due to the recession and expecting more services for less money is the key issue. Clients are integral to City firms as they connote status as well as providing revenue. Meeting the client’s demands and understanding the internal pressure the clients are facing could, in itself, lead to increased client retention and obtaining more work from existing clients. Given this is a goal of City firms, investing in understanding and adapting to client’s needs seems a worthy investment.

Having addressed the key issue, we will now look at potential solutions. City firms want to adapt to maintain client relations, but how could they go about this practically?

1. Invest in merging lawyers with commercial advisors

Clients don’t care about legal jargon – they want tailored, commercial advice. By making lawyers also business experts, the needs of the clients will be matched and lawyers will develop greater insight to the client’s industries, guaranteeing expert, considered advice in the future.

2. Offer a competitive value

Some estimates states that up to 70% of a lawyer’s work is “bread and butter” – this routine legal work could be outsourced to reduce costs and free up lawyers to consider more strategic legal issues. This cost benefit could then be passed on to the client to offer a competitive price.

3. Invest in IT and new technology

Change how the firm produces, serves, files, stores, and archives legal documents to grant client’s easy access to the files they need to upgrade to modern times.

4. Consider Re-structuring

Preserving the existing law firm financial model may not be the most effective or efficient way of billing in the current climate.

5. Assess the “Gene Pool” of the firm

Ensure the firm is filed with motivated, skilful lawyers and invest in training and development. Ultimately, the members of the firm will be the ones developing it into the future, will ultimately benefit the client and improve internal relations.
So which solution is “best” – the most practical and effective?

The answer, somewhat cheekily, is all of them! Innovation is key to remaining competitive. City firms must adapt to the speed of business to meet client’s needs. Key points of innovation include:

1. Outsourcing. Allen & Overy and Herbert Smith Freehills have opened their own disclosure/due diligence process centres in Belfast to tackle the more routine work. Alternatively, firms could outsource work internationally to places like India or the Phillipines.

2. Technology. Casey Flaherty, the General Counsel at Kia Motors America, has said “Lawyers see themselves as Tom Cruise but most of their work is drudgery…and they suck at using computers”. To create a modern, cosmopolitan firm, investment in technology is crucial.

3. Alternative Billing Models. Conditional fee arrangements are increasingly popular, with Addleshaw Goddard utilising the method in Russian oligarch litigation under the condition that they will receive 50% of the fees is they lose and 150% if they win. These types of arrangement inspire trust as the firm shares the risk with the client. While the current hourly-rate model is the most popular, it lacks the transparency of a conditional fee arrangement or a fixed fee arrangement, and has been accused of “rewarding inefficiency”. While a fixed fee project could take longer or use more resources than expected and so be less beneficial financially to the firm, the benefits of transparency and trust ought to outweigh this as it is likely to lead to increased client retention.

Put very simply, innovation will ease client’s demands of more for less which is ultimately the key challenge facing City firms.