I predict...
What future trends are worrying managing partners in the US? A survey of 100 managing partners highlighted a range of concerns, such as regulatory changes, the rise of outsourcing and the generation gap. Patrick McKenna reports
January 24, 2007 at 10:03 PM
7 minute read
One hundred managing partners – of firms ranging from 100 lawyers to more than 3,000 – were recently asked: what forces already at work within the legal profession have the greatest potential to transform (positively or negatively) your firm's future in the next three years?
Patenting of business processes
One managing partner made the point that "a highly-fragmented patent regime, combined with differing interpretations across international boundaries and a relatively new initiative to patent business processes could introduce potential threats in years to come".
According to this individual, more than 8,000 applications for business methods are now filed each year. For example, tax strategies are now being patented through the US Patent Office. Tax practitioners could face new liability dangers as a result of the actions of tax shelter promoters who patent their tax reduction strategies. If tax professionals are aware that tax planning methods they implement with clients are patented, attorneys and accountants may therefore incur patent infringement liability.
For now, tax and estate planning is the most likely area that risks patent infringement litigation. However, real estate and corporate M&A could also be at risk. The firm leader who raised the issue asked rhetorically: "As attorneys, should we now begin applying for patents on strategies that we have discovered in solving particularly thorny problems for clients?"
The international stage
US capital market lawyers are worried about one particular international trend. A couple of law firm leaders expressed their concern over "the recent drain of initial public offerings flowing from New York to London", claiming that while New York had 59% of global initial public offerings raising more than $1bn (£510m) in 2001, it now has just 6.5%.
Some law firms may be quietly wondering if London could eventually displace New York as the world's main financial centre – in lucrative, high-margin practices anyway. While New York remains the centre of the hedge fund and private equity worlds, London is increasingly the key centre for innovation in important parts of the derivatives and structured finance world.
As London grows in stature, this could divert more financial business from continental Europe to the UK, handing major European practices – and those US firms with strong London and European offices – an enviable competitive position.
Outsourcing
Perhaps fuelled by media reports,
a number of managing partners cited their concern over "a growing number of Fortune 1000 companies looking
to secure legal services from low-cost providers in India, China, South Korea or other such locations".
While this trend is not new, firm leaders now suggest more of their clients are investigating and experimenting with this option.
One respondent says: "In April, lawyers in India were carrying out the due diligence work for an acquisition financed by a major UK bank." Apparently, this M&A work was handled by lawyers qualified to UK law practice standards and paid only $12,200-$21,000 (£6,200-£10,600) a year.
Increasing competition
As the buying habits of sophisticated clients evolve, so too has the information available to them from which to measure and assess different law firms. League tables and other rankings have grown in importance.
"The convergence process is pushing clients' best work to fewer and fewer firms, most of which seem to be chosen based on the particular firm's standing with respect to how many deals they handled in a particular area over the past year," says one managing partner. "It is becoming critically important to get our firm on to key deal lists."
Another firm leader comments: "Getting on the shortlist is not easy. Even if you have the expertise, you may not get on the list unless you also have size and depth. That is our biggest challenge."
Some suggest this trend is likely to drive further consolidation in the years ahead. The leader of one Chicago firm notes: "The trend that concerns me more than anything else is what I see as the business strategy being carried out by most of the mid to large-sized law firms in the US. The strategy seems to be based on two premises: that a firm can enter the top ranks of law firms only by attracting high-end business from multinational clients; and that a firm can only attract such business if it is of mega-size and present in numerous markets.
"While this might be a viable strategy if pursued by a handful of law firms, if virtually all the mid- to large-sized firms pursue it, it will become self-defeating."
As firms grow and clients reduce the number of outside firms they employ, some see a breakdown in the lawyer-client relationship. Clients – increasingly large companies – are treating outside professionals as vendors.
"The advent of the corporate procurement department into the picture, in an active way, to negotiate billings rates absolutely counters the lip service given by general counsel to wanting to 'partner' with their outside law firms," says another managing partner.
Many also talk about the competition for talent. One firm chairman reports: "Law firms are facing increasing competition to get the best work. To get the best work, they need the best talent. The competition for the best talent is fiercer than ever. The number of top students is static and the demand is growing every year., so this is a really tough business right now. It is not that hard to stand still but it is very challenging to grow partner profits every year – at least, if the firm is being honest in what it reports."
Generational differences
Research conducted for the Future Law Office project identifies four generations in the existing workforce for the first time ever: traditionalists, baby boomers, generation X and generation Y.
"The next generation of lawyers finds much about our profession that they do not like," laments one managing partner. "Massive firms, with summer programmes in excess of 200 lawyers and multiple offices consisting of unconnected people, become impersonal and are viewed as providing increasingly unsatisfying career tracks."
Another counters that the problem was more a case of young lawyers being uninspired and unmotivated.
"Things are not they were in the 'old days'," he claims. "Young lawyers do not seem to have the same work ethic and are not always interested in the partner career track. Yet firms are caught up in the salary spiral, increasing the costs of hiring and training the junior lawyers.
"I am not at all sure what the answer to this is. It may be that the law firm of the future will have many fewer partners than we see today, with many more contract lawyers, working for a good but not exorbitant salary, where quality is uneven and partners oversee dozens of staff. Could this be the coming of the 'big accounting firm' model?"
The chairman of a US national firm sums up: "The comment of the founder and retired chairman of Intel Corporation, Andy Grove, comes to mind these days: 'If you are not paranoid, you just do not understand the situation.' It is hard to think of an issue facing law firms that is not in a sense more 'burning' than it was last year or the year before."
Patrick McKenna is a partner at Edge International
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