Benchmarking City Law Firms Final Report

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Prepared For:Legal Services Boardth7 Floor, Victoria HouseSouthampton RowLondon WC1B 4DABenchmarking the supply oflegal services by city lawfirmsPrepared by:Kyla Malcolm, Tim Wilsdon and Charlie XieCharles River Associates99 BishopsgateLondon EC2M 3XDDate:August 2011

Benchmarking the supply of legal services by city law firmsAugust 2011Charles River AssociatesDISCLAIMERThe views expressed herein are the views and opinions of the authors and do not reflector represent the views of Charles River Associates or any of the organisations with whichthe authors are affiliated. Any opinion expressed herein shall not amount to any form ofguarantee that the authors or Charles River Associates has determined or predictedfuture events or circumstances and no such reliance may be inferred or implied. Theauthors and Charles River Associates accept no duty of care or liability of any kindwhatsoever to any party, and no responsibility for damages, if any, suffered by any partyas a result of decisions made, or not made, or actions taken, or not taken, based on thisstudy. Detailed information about Charles River Associates, a registered trade name ofCRA International, Inc. is available at www.crai.com.Material from this report may be freely reproduced, subject to full acknowledgement ofsource.Page i

Benchmarking the supply of legal services by city law firmsAugust 2011Charles River AssociatesTABLE OF CONTENTSFOREWORD . 1EXECUTIVE SUMMARY . 21.2.3.4.5.INTRODUCTION . 51.1.METHODOLOGY . 51.2.CITY LAW FIRMS . 61.3.SELECTION OF INTERVIEWEES . 91.4.STRUCTURE OF THE REPORT. 11FIRMS AND FIRM STRUCTURE . 122.1.OVERVIEW OF CITY LAW FIRMS AND OTHER UK 200 FIRMS. 122.2.TYPES OF STAFF . 142.3.TRENDS REGARDING STAFFING AND FIRM SIZE . 192.4.LEGAL STRUCTURE . 222.5.ABSS . 242.6.CONCLUSIONS ON FIRMS AND FIRM STRUCTURE . 27TYPE OF LEGAL SERVICES. 293.1.FRAMEWORK FROM THE METHODOLOGY STUDY . 293.2.TYPE OF LEGAL SERVICES PROVIDED BY CITY LAW FIRMS . 293.3.VARIATION IN TYPES OF LAW OFFERED BY FIRMS . 363.4.CONCLUSIONS ON TYPES OF WORK . 40CLIENT . 424.1.FRAMEWORK BY METHODOLOGY . 424.2.TYPE OF CLIENTS . 424.3.CLIENT ACQUISITION . 484.4.CONCLUSIONS ON TYPE OF CLIENTS . 53REGULATION . 555.1.INTERACTION WITH THE REGULATOR . 555.2.SPECIFIC AREAS OF REGULATION . 565.3.COST OF REGULATION . 585.4.CONCLUSIONS ON REGULATION . 59Page ii

Benchmarking the supply of legal services by city law firmsAugust 2011Charles River Associates6.MARKET OUTCOMES . 616.1.METHODOLOGY STUDY . 616.2.VOLUME . 616.3.QUALITY . 626.4.COSTS AND PROFITABILITY. 636.5.PRICING . 656.6.OTHER ELEMENTS AFFECTING VALUE. 696.7.CONCLUSIONS ON MARKET OUTCOMES . 70Page iii

Benchmarking the supply of legal services by city law firmsAugust 2011Charles River AssociatesFOREWORDWe are pleased to welcome this publication as the first of our studies looking at specificaspects of supply of legal services in England and Wales. We are publishing this reportalongside our market framework study by OXERA, which outlined the overall approachwe will take to segmenting the legal services market for further analysis and review.The OXERA report developed a framework based on segmenting parts of the supply oflegal services that exhibit similar features. Segments defined by the services offered andclients served, rather than traditional supplier-focused measures such as the number ofpartners or turnover. A particular challenge for the LSB in piloting this framework was tounderstand how to develop a sample for the study. For this first pilot, the decision wastaken to use the common term „city (of London) firm‟ as a proxy for firms offering advice tolarge corporate clients.We chose large corporate law firms for the pilot study since, while small in number(around 2% of firms), they represent a significant proportion of the legal services market,whether measured by turnover or by employment (more than 40% of solicitors).Understanding the operation of this part of the market is of huge importance to thestructure of regulation of the legal services market, whether deciding the application ofoutcomes focused regulation or the scope of reserved activities.The findings presented in this report provide an insightful analysis of this part of the legalservices market. As a proxy for a particular type of segment, the sample approach(applied flexibly) has provided a relatively homogenous group of firms in the scope of theirservices. However, there is huge variety in the detail, with individual firms competingagainst a different set of competitors in different types of law; specialist firms able tocompete against the very largest firms; and diversity in the international reach of firms.The report will help us understand better the risks presented by one part of the legalservices market to the regulatory objectives set out in the Legal Services Act 2007. Theresults support the view of a relatively strong correlation between the shorthand „cityfirms‟ and a market segment focused on the legal needs of large corporates. The clientsof this segment have a greater capacity to use knowledge and buying power to makeinformed purchasing decisions and therefore the firms are likely to pose relatively few ofthe traditional regulatory risks. Any regulatory concerns are more likely to focus on thebroader public interest concerns outlined by the Regulatory Objectives set out in the Act.That said, regulators will also need to be mindful of the effect of their actions oncompetitiveness – both of the larger firms discussed here and of the corporate clientswhich they serve.We are grateful to all of the individuals from firms who participated in this study andprovided CRA with their time and expertise. We hope that the resulting report will be readwidely and seen to provide a benchmark in understanding of one area of the legalservices market.Chris Kenny, Chief Executive, Legal Services BoardPage 1

Benchmarking the supply of legal services by city law firmsAugust 2011Charles River AssociatesEXECUTIVE SUMMARYCharles River Associates (CRA) was commissioned by the Legal Services Board (LSB) toundertake a pilot study for benchmarking the supply of legal services by “city” law firms.City firmsThere are a number of key characteristics of city law firms that differentiate these firmsfrom other law firms in the legal services market as a whole, although these issues do nothave “hard-line” boundaries:Location – Firms are located in and around the City of London although theboundary moves over time and would currently include areas of Canary Wharf,Holborn and Southwark where many clients would also be located;Type of firm - Firms are among the top 50 or 100 largest law firms in the country (top1%) and commonly have high average profits per lawyer or partner;Type of work – Firms commonly provide corporate work with corporate finance andM&A transactional work particularly strong areas, along with work that would relatespecifically to financial services issues; andType of client – Firms typically have large corporate clients with financial institutionsespecially well represented and international clients playing an important role.Variation between city firmsAlthough city firms are distinguishable from the majority of other law firms, theirreputations, and closest competitors, vary between firms and between practice areaswithin firms. Legal directories are available which convey this information to clients (andregulators).In general, the firms with the best reputations are more likely to undertake morecomplicated, and higher value, work. The very largest corporate clients (in the FTSE 100)more commonly use the bigger firms with the best reputations while smaller (but stilllarge) corporate clients would be more likely to use smaller (but still large) city firms. Incertain technical areas of work, however, smaller specialist city firms are able to competeagainst the very largest city firms.Headline hourly fee rates also vary, with partners of the firms with the best reputations(including US head-quartered firms) able to charge rates above other city firms and whichare multiples of those charged by firms outside the city.Staff and structure of the firmFee earners in city firms are primarily qualified solicitors and they are more specialisedthan at other firms as seen by declaring fewer areas of expertise per practising lawyer.The recession has increased pressure from clients to seek cheaper methods of workthrough outsourcing or on/off-shoring of more standardised areas of work although thePage 2

Benchmarking the supply of legal services by city law firmsAugust 2011Charles River Associatesuse of paralegals to conduct due diligence and document review can bring similarbenefits.Increased numbers of staff within litigation departments are obtaining advocacyqualifications and although currently used mainly for early stages of cases with externalbarristers appointed for the rest, it is expected that the amount of advocacy done in-housewill increase over time. Many city firms have a small number of fee earners who areexperts in other disciplines (accountants, economists, town planners, trademarkattorneys) although the individuals have generally been trained elsewhere and would notbe partners.Firms will be able to operate Alternative Business Structures (ABSs) from October 2011,but interviewees, especially large firms, did not generally see ABSs as attractive becausethey are reluctant to cede control of the firm for external funding which they do notcurrently need. However, it is possible that firms (potentially including mid-tier city firms)who wish to rapidly expand through acquisition may have capital needs and thereforepursue an ABS.Large city firms also did not see the advantage of ABSs in order to offer a wider range ofservices since they see themselves as specialist firms and can already bring otherexperts in-house anyway. In addition, ABSs bring complications for international law firmsoperating in jurisdictions where such structures would not be permitted, although thesefirms generally already have complicated institutional structures internationally anywayhence these complications would not be insurmountable.Type of workCity firms will often describe services at a much finer level of categorisation than otherfirms as well as commonly marketing the sectors in which they work highlighting theimportance of understanding the business environment in which their clients operate.Corporate finance, M&A and advice specific to the financial services sector are prevalentareas of work for city firms. Corporate transactions often represent a core issue whichleads to other areas of work being provided alongside it, such as employment, property,tax and pensions. Other areas of work may be common to many law firms, such aslitigation and commercial property, but the underlying issue will be much more complexand high value at city firms. Similarly, legal directories rank firms not simply for M&Atransactions but differentiate between firms on the basis of the underlying value of thesetransactions.Pricing arrangements vary according to the specifics of the case and frequently involve acomplicated mix of hourly rates, blended rates, fixed and capped fees. Hourly ratesremain typical for litigation whereas success and abort fees are common for corporatetransactions.Regulatory differences such as whether activities are reserved are not consideredrelevant or currently recorded and to do so would be costly. Neither is work categorisedaccording to the activity such as research, advocacy, litigation and advice.Page 3

Benchmarking the supply of legal services by city law firmsAugust 2011Charles River AssociatesType of clientMost clients of city law firms are corporates such as large financial institutions andnational or multinational corporations. They are highly sophisticated purchasers,commonly have in-house lawyers and are repeat, if not continual, purchasers of legalservices.City law firms would commonly advise central government and quasi-governmentorganisations on corporate issues, and even where advice is specific to the role ofgovernment (infrastructure projects, state aid, regulatory investigations etc) this wouldusually have a corporate equivalent.Many corporate and government clients will use panel arrangements to pre-select firmsand as a way to reduce prices in return for larger volumes of work. Panels also commonlyrequire the provision of training as well as the secondment of staff to the client.Many of the largest city firms have spun off their private client departments althoughsome city firms retain private client practices alongside very well regarded commercialpractices. These clients would be among the more sophisticated purchasers of individualadvice and would tend to receive advice on complex tax, wills and trust arrangements,and landed estates.Interaction with regulatorsCity law firms had little interaction with The Law Society (TLS) or the Solicitors RegulationAuthority (SRA) in the past. This has altered recently in the light of the SRA seeking tohave staff explicitly responsible for large corporate firms, the use of relationship managersbeginning and the development of outcomes focused regulation. Despite the fact that cityfirms have sophisticated clients, interviewees were nonetheless generally in favour ofbeing regulated and the role the SRA could play in encouraging best practice in respect ofregulation and risk.The cost of risk management and compliance had increased over time, although this hasnot been driven by TLS/SRA requirements but rather from the increased complexity oflarge (and international) law firms and greater focus on compliance related issues in thebusiness world generally.Improvements to consumer redressThe development of the Office of Legal Complaints (OLC) is not anticipated to affect citylaw firms as the majority of their clients (corporates) are not eligible to use the OLCanyway. Few complaints are received from individuals, but since even these clients areconsidered to be relatively sophisticated this also limits the expected impact of the newprocedures among city firms.Page 4

Benchmarking the supply of legal services by city law firmsAugust 2011Charles River Associates1.INTRODUCTIONCharles River Associates (CRA) was commissioned by the Legal Services Board (LSB) toundertake a pilot study for benchmarking the supply of legal services by “city” law firms.There are a number of different aims of the research including to:Help the LSB benchmark and understand in greater detail various aspects of city lawfirms in order that future work can help to identify the impact of the following reformsin this segment:oEnsuring regulation is independent of professional bodies and vestedinterests;oThe introduction of Alternative Business Structures (ABSs); andoImprovements to consumer redress when things go wrong.Provide information regarding the characteristics that are common between city lawfirms, as well as examining areas where there is variation between city law firms; andUse the opportunity of a pilot study to provide feedback for the methodology studysuch that lessons from this study can help with future examination of the legalservices market.1.1.MethodologyThere are a number of different components to the work that have been conductedincluding:Engagement with methodology study – prior to the pilot study, the LSB commissionedOxera to develop a methodology for benchmarking the supply of legal services. 1Discussions have been held with Oxera to ensure that lessons from the methodologystudy can be applied to this pilot benchmarking study as well as later discussionsensuring that lessons from the pilot study are taken into account in the methodologystudy. There are a wide range of issues that it would be possible to consider in abenchmarking exercise of this kind, and discussions with the LSB led to prioritisingthe issues to be covered in this study to topics including focusing on firms, types oflegal services, types of clients, regulatory costs and pricing;Desk research – there is limited existing research on the supply of legal services,although we have sought to ensure that existing information is taken into accountincluding information from the Smedley Review of corporate legal work, evidencefrom the UK 200 survey of the largest UK firms, and data provided by the LSB; and1Oxera, Benchmarking the legal services sector, June 2011.Page 5

Benchmarking the supply of legal services by city law firmsAugust 20

That said, regulators will also need to be mindful of the effect of their actions on competitiveness – both of the larger firms discussed here and of the corporate clients which they serve. We are grateful to all of the individuals from firms who participated in this study and provided CRA with their time and expertise.

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