Innovation Trends #3 : Network and Structures

Innovation Series – Re-cap

Welcome to the third part of this series on Innovation Trends in Law Firms relating to Law Firm Networks and Structures. In the first part, we introduced the background and discussed the first of the Top 10 words – Technology. The second part deals with Law Firm Management. The third word relating to innovation has once again been selected based on frequency of mentions in the Business of Law section of the FT innovative Lawyers Asia-Pacific report. We will uncover two related themes this week – Law Firm Networks and Structures.

Law Firms in a Global Economy

Traditionally, all countries have tightly regulated the practice of law in their respective countries. This has resulted in exclusion of non-lawyers or lawyers from other countries from participating in local law firms. However, two interesting trends have emerged globally that have provided an impetus to change.

Firstly, the global economy is now significantly more inter-connected than ever before. The UNCTAD (United Nations Conference on Trade and Development) states that international trade in goods and services has increased from $4 trillion in 1990 to about $24 trillion in 2014. With Brexit and the tapering of international trade growth in the recent past, the acceleration of this trend may certainly reduce. However,  complex global value chains have already been established during this period and this has irreversible bearings for services.

Secondly, technology and information led developments have disrupted several sectors. The legal services sector may not have been at the forefront of these changes. However, it does have some place on the innovation diffusion curve and will catch up.

An inward looking people driven (and billable hours led) world is metamorphosing into a connected world driven by technology and information.

Innovation Trends in Law Firm Network and Structures

The innovation trends in law firm network and structures are manifested in myriad ways.

• Establishing Global Structures

Law firms have traditionally joined international law firm networks to access global markets. One of the largest networks, Lex Mundi was set up in 1989. However, this did not create a permanent exclusive global entity and was only a network of independent firms.

International firms started adopting Swiss Vereins as the dominant vehicle for creation of international law firms. This trend probably started with Baker & McKenzie in 2004. Most international law firms have now formed Swiss Vereins to create a common international brand and unified management structure, while maintaining independence of regional operations and finances.

The traditional model of establishing global structures worked quite well across the developed economies, especially those in North America and Europe. However, the Asian economies started gaining importance over the last couple of decades. These countries not only have regulated markets but also natural entry barriers due to their unique cultural and linguistic challenges.

Law firms have progressed beyond “best friends” relationships and started creating partnerships and joint ventures with local firms in Asia to overcome these challenges.

• Access to Capital

Technology led disruptions can severely distort the economic balance of law firms. Operating costs can reduce dramatically with the efficient use of technology. However, investing in appropriate technological solutions also requires access to capital. This has partially led to the trend of law firms starting to raise capital and going public.

Slater & Gordon in Australia was the first law firm to  be publicly listed in 2007. However, this has become a milestone and not the commencement of a trend.

After the Legal Services Act, there are 520 Alternative Business Structures (ABS) licensed by the SRA in the UK as of 30th June 2016. In 2015, Gateley became the first UK law firm to go public.

Law firms are trying innovative structures, since going public does not appear to be the optimal choice. For instance, the FT report mentions Zico Holdings, that has spun off it’s parent company that provides support services to its network firms.

In Conclusion

The debate over whether law firms are a profession or a business may have abated over the years. However, there continue to be vocal participants on both sides of the debate.

The pragmatists will argue that irrespective of the internal debate, law firms are inherently connected to the external ecosystem. The ecosystem has been severely disrupted over the last few years by the trade balance as well as technological advances and the information revolution.

Law firms need to respond by creating appropriate structures. Most countries have not relaxed regulatory restrictions at all and many have started on this journey.

This is a perfect backdrop for innovative law firms to explore a wide variety of options for striking the right balance and gaining access to markets, skills, technologies and even for aligning with local cultures.