strategy

A conversation with Lucy Fato, General Counsel at McGraw Hill Financial

Last week Bloomberg’s new Big Law Business website published a two-part extract [It’s All About Relationships and ‘Gut Checks’ Are Better than AFAs] from a recent interview Bloomberg had with Lucy Fato, General Counsel of McGraw Hill Financial (among others, parent company of Standard & Poor’s).

Transcripts from the interview make for interesting reading. While not agreeing with all Ms Fato has to say, her take on the following issues run close to how a number of in-house counsel feel here in Australia:

On the role of in-house counsel:

But my view is that the role of in house counsel is, in many ways, to be the face of the company in these situations. Outside counsel can never really have perfect information about what a board or a CEO is thinking. They can never really step into the shoes of in-house counsel.

That’s how in-house lawyers really add value. They can connect all the dots. I think, historically, general counsel deferred more to outside counsel than what you see today. It’s a process that has evolved.

On the role secondments can play in developing personal relationships with in-house counsel:

Secondments are a great way for a firm to build a relationships. The associate is actually here, in our building, getting to know our people, getting to learn our business, and when they go back to the firm, they bring all of that knowledge with them. It’s especially effective when a firm is new to the company.

On the developments going on in in-house departments:

“In-house departments have become much smarter about how we manage our departments and how we manage our legal expenses. In-house departments are becoming bigger, more global, and many companies, including ours, spend a lot of money on outside counsel. Getting a handle on that is extremely important.”

On the role data plays on the modern relationship between in-house and external legal:

I’m very big on data and having a lot of information to work with…

E-billing gives you enormous visibility into how law firms make money.

On alternative fee arrangements:

Getting better control over who we’re spending money with, how they are staffing deals, how much time is being spent on matters — taking a hard look at those types of questions is more effective over the longer term than trying to do alternative fee arrangements.

On hourly rates:

But I will say it’s gotten a little out of control. It’s eye popping even for me, and I’ve been doing this a long time, when I see an hourly rate that’s over $1,000 an hour. I look at that and think, “Really?”

Ms Fato makes a number of other good observations and comments, both about the evolving role of in-house counsel and the relationship between in-house departments and their external legal advisers, but I wanted to finish this post with probably my favourite:

Firms have to be mindful that their client is not just the lawyer. It’s also the business person.

Absolutely.

The two types of efficiencies law firm associates need to become familiar with…

Really interesting article [‘What Associates Should Know About In-House Rates and Efficiencies‘] by Gina F. Rubel was published overnight (7 April 2015) on The Legal Intelligencer website – discussing the two types of efficiencies that law firm associates should become familiar with – contains a gem of a quote from an in-house general counsel that I wanted to share/pass on.

First, to put some context around the quote below by Gino Benedetti, as Rubel states:

“There are two types of efficiencies with which lawyers need to be familiar. The first is general efficiency, which is the state or quality of being efficient and the actions designed to achieve optimal results. The second is economic efficiency, which requires optimal production and distribution of a firm’s resources.”

And while both are extremely important to in-house counsel, the following quote in the article by Gino Benedetti, General Counsel of SEPTA, should give some indication to private practice law firm associates which of the two bears more commercial importance to their in-house clients:

“Associates should understand that every case does not require a full-court press,” said Gino Benedetti, general counsel of SEPTA. “Associates add value when they think creatively by identifying the core issue in dispute and focus their case work on things that impact that issue. Often, associates work on an aspect of the case that does not have any meaningful impact on the ultimate outcome. So, associates should appreciate that their time may be less expensive, but that does not justify inefficiency. Associates should communicate often with the partner or the client directly so that the client’s objective is understood and the work is driven by that objective.”

If you haven’t already, I’d like to suggest you go over and read the entire article. It’s full of sage advice from several in-house GCs.

In the meantime, if you are a private practice law firm associate, the next time your supervising partner asks you to undertake a task on behalf of your client why not ask yourself which type of the two types of efficiency you are going to bring to the task…?

Pinsent Masons joins the #Auslaw party!

Some 15 months (December 2013) after Pinsent Masons initially appointed Maddocks ex-chief executive David Rennick to lead the firm’s review of growth opportunities in Australia, and three months after the vote to appoint John Cleland as new global managing partner that appears to have confirmed the firm’s stated international growth strategy , Pinsent Masons has, today, announced that it will launch a 5 partner led local Australian practice in May of this year with offices in Sydney and Melbourne that will initially focus on infrastructure related work.

Given the firm’s overall strength in infrastructure related work in Asia – partner-in-charge of Asia Ian Laing has significant PPP and PFI experience – a strategic focus in this area would appear to be sensible.

That said, Pinsent Masons decision to open here (with an as yet undeclared number of lawyers and support staff) does nothing to deter from the fact that the legal market in Australia is a very competitive and crowded one, a trend that is likely only going to increase with the growing interest of international brands – so the very best of luck to this firm going forward and welcome to the Auslaw party!

The rising demand for flexible legal resourcing

Lawyers On Demand (LOD) (the so-called ‘alternative legal services provider’ backed by UK-based firm Berwin Leighton Paisner (BLP)) have released data – akin to an annual report – that indicates there is a growing need for ‘flexible resourcing’ within the UK legal market.

Among the more interesting data to be released is that:

LOD’s turnover has increased by more than 500% (to circa £9m) in the past four years.
LOD’s ‘On Call’ service (launched in June 2013) has completed more than 70 assignments in its first 18 months.
more than 150 On Call lawyers have now completed LOD assigned assignments for more than 15 different law firms.
LOD is offering clients retainer arrangement of between £2,000 to £50,000 per month, depending on their current resourcing needs.
surging demand for On Call lawyers to work on specific transactions has led to the launch of On Call ‘transaction teams’.

Notably, LOD said the On Call teams:

“allowed private practice clients to scale up quickly and cost effectively, protecting their profitability on transactions and responding to client demand.”

So, what has all this to do with the Australian legal market you may ask?

Well, as it happens a number of ‘flexible legal resourcing’ providers have had ‘soft’ launches in the local market of late, including:

Crowd & Co – whose tag-line is “Saving you time for what really matters”, and
Lexvoco – with a tag-line of “Law on call”.

Both of which are in addition to the recent launch of Orbit by Corrs Chambers Westgarth, and both of which look to offer what appear to be very similar services to LOD’s On Call.

Add to this the recent (2 February 2015) decision by Allen & Overy to expand its ‘Peerpoint’ service to the Hong Kong market, and I think we can safely say that there is clearly a rising demand for flexible legal resourcing – globally, regionally, as well as locally here in Australia – and that all that now remains is for someone to come up with the appropriate acronym.

Q2 2014/15 CommBank Legal Market Pulse report

The CommBank Legal Market Pulse report for Quarter 2 2014/15, conducted by Beaton Research + Consulting, has been published. Providing useful insights into the latest trends and developments impacting on the Australian legal industry, this report has rapidly cemented itself as a staple among serious legal business developers in Australia.

Interesting outtakes from the latest report include:

unsurprisingly, given the continuing political uncertainty and falling commodity prices, many law firm leader believe there may well be a downturn in the broader economy over the next 12 months.
one in three firms are looking to expand geographically by opening new offices, with an emphasis on Perth, Brisbane and Canberra being the locations of choice. This is an interesting development as it had been the stated strategy of many firms in Australia for a long time not to expand outside of their geographic stronghold base. For example, for a long time HDY were only ever going to be a Sydney firm serving national clients. Now they have an office in Brisbane. Likewise for G&T (new offices in Melbourne and Perth). What I would be interested to find out though is how much of this expansion is self-driven and how much of it is been driven by major clients looking to rationalise the number of law firms they use? If that question was asked, I suspect we may find that this trend is more client-driven than firm-driven.
Asia at 89%, UK/EU at 67% and Brisbane at 52% are seen as being the geographic areas with the highest revenue growth expectations. Sorry but I find this nothing short of astonishing. Have any of these respondent law firms looked at how crowded the Brisbane and Asian legal markets are? And wasn’t it only a few months ago that PwC were reporting that return on equity for Asian law practices was the lowest globally (at somewhere in the 20% range). [that said, Clifford Chance did recently announce a desire to increase revenue in Asia by 25%]
expected changes in realised rates is a 1% (+) increase. Pathetic! Might I suggest the firms concerned consider not increasing their rates by 5-10% this year and instead concentrate on trying to get more than 80c in the $ in realised billing rates.
negotiating price with clients, at 81%, is seen as the biggest business challenge facing law firms. Here, I would hazard a guess that negotiating the price we want from our clients is probably the real business challenge as it would seem that price negotiations in law firms is a one way conversation at the moment.
the practice area with the highest revenue growth expectations is Government (at 55%). With the announced forthcoming closure of the Australian Government Solicitor potentially putting up for grabs around $111.3 million in revenue for private practice law firms, perceived growth in this sector shouldn’t be too surprising. What does remain to be seen is how much of this pie firms other than Clayton Utz (at 11% for 2013-14) can get their hands on.
54% of law firms surveyed believe revenue from “non-legal services” will increase over the next 2 years. While I was unable to find a definition of “non-legal services”, the relatively low (at 54%) number of law firm leaders who saw growth in revenue in this area does surprise me. This is especially so if services such as the recently launched Orbit by Corrs Chambers Westgarth is seeing as constituting “non legal services” (in that it is not core legal advisory work).
and finally, 70% of law firms see “recruiting partners and staff from competitors in the new location” as being the most likely method of geographic expansion, while only 30% saw this geographic expansion occurring as a result of a “merger with an existing firm” – so be on the lookout for 2015 being a very business year for lateral hires!

If you haven’t already done so, can I suggest you download a copy of the report. It really is an interest read.

Network ASEAN: Are you plugged in?

I read with interest a commentary post yesterday (although the post itself was made on 7 February) by Reid Kirchenbauer (on the www.investasian.com website) that outlines some of the economic developments that had occurred in the forty years since The Association of Southeast Nations (ASEAN) and Australia had developed diplomatic relations – ‘Understanding Australia-ASEAN Trade’.

Some of the more notable aspects of Reid’s post include:

Southeast Asia (SEA) is currently Australia’s second largest trading partner after China
Bilateral trade between SEA and Australia was valued at US$67.9 billion in 2013

And yet, somewhat troubling, notwithstanding the multi-billion dollar level of trade between ASEAN and Australia, and even though a free trade agreement (FTA) exists between ASEAN-Australia-New Zealand (the AANZFTA signed in 2010), a 2013 survey by the Australian Trade Commission (ATC) found that the majority of companies in Australia were not aware of the ASEAN Economic Community.

I say “somewhat troubling”, but the reality is that the ATC 2013 survey mirrors a recent Acitas survey, whose major findings were that:

45 per cent of multinationals require legal advice in South East Asia;
34 per cent of Australian multinationals’ legal spend now goes outside their home jurisdiction; and
60 per cent of Australian in-house counsel surveyed said they needed legal advice in South East Asia

but that these needs were largely going unmet – “Law firms are failing to support clients in South East Asia” an article by Felicity Nelson posted to the Lawyers Weekly website on the 19 December 2014.

If we leave aside for the moment the comprehensive recent report by The Lawyer Magazine on Southeast Asia Legal Elite (the Executive Summary of which can be read here), it seems indisputable to me that ASEAN represents a massive opportunity for Australian law firms in 2015 and that, sadly, a large part of this opportunity is going to be unmet.

Turning back to Reid’s post though, what realistic opportunities exist for Australian law firms in all this?

Well,

no doubt assisted by the Thailand-Australia FTA (TAFTA), coming into effect in 2010, Thai foreign direct investment (FDI) into Australia has increased by over 20 times since 2007;
with the Australia-Malaysia FTA (MAFTA) coming into effect in 2013, Australia is ranked the third biggest investment destination for Malaysian investors and two-way investment between the nations has doubled since 2010 and now accounts for more than $20 billion; and
in addition to being the oldest FTA between an ASEAN nation and Australia (signed in 2003), according to the most recently published data Singapore is currently the largest foreign investor in Australian real estate, making up 28% of all foreign property investments in Australia.

and that’s just inbound work from ASEAN into Australia, let alone any of outbound work the 60 per cent of surveyed Australian in-house counsel said they needed help with in SEA.

All of which leads me to ask:

is your law firm plugged into a formal or informal network in ASEAN?
if so, do you know what level of inbound referral work you are getting from your ASEAN network partners?
and, do you know what level of outbound referral work you are sending out to the partners in your ASEAN network?

Are the legal press letting the importance of revenue get in the way of a good story?

An interesting news item appeared on the Global Legal Post website overnight (Australian time). Citing a recently published (January 2015) Legal Services Market Research Report by IBIS World, the Global Legal Post item, which is titled “Australian firms on the hunt for increased revenues” states that:

Pressure on revenues is forcing Australian firms to look overseas in a bid to increase turnover.

First of all, if I’m allowed to say, this is irony in action!

Given the number of international (mostly British) law firms that have entered the Australian legal market in the past five or so years as a result of perceived or real limitations on growth in their own domestic markets, to now be informed that one of the consequence of this action is that Australian firms now need to look overseas to grow their own revenue is, well, ironic.

More importantly – aside from being wrong as the IBIS Report clearly states that the market in Australia is growing (if admittedly at a snail’s pace) – is that it misses a crucial point; namely, increasing turnover for turnover’s sake is nothing short of a wasted effort!

But don’t take my word for it, as the prominent industry strategist and pricing expert Richard Burcher rightly points out in his comment to the link I posted to this on LinkedIn last night:

Surely it is bottom line growth that matters? And the assumption that this can only be achieved through top line growth is profoundly flawed. The application of a more sophisticated firm-wide approach to pricing can yield a demonstrable increase in revenue by on average 5% to 8%. For most firms that produces a profitability increase of 15% to 25% with the same clients and the same work. No wonder more than 50% of post merger firms report that it failed to deliver to the bottom line.

Precisely Richard.

Unfortunately, however, this is not the only example of this type of legal press reporting/thinking.

Only the same day (Monday) The Australasian Lawyer reported – citing (wrongly in my opinion) another UK website – that the Australian arm of DLA had been “fingered for [the] law firm’s drop in revenue” as if huge levels of shame needs to be attached to this [revenue drop] given that it

follow[ed] a transition period where underperforming partners in the region [Asia] departed.

Well I happen to know a number of the partners who left DLA last year and one thing I can say with absolutely certainty is that they were anything but underperforming. More accurately, what they were was in practices that were no longer strategically aligned to where DLA sees the future of its business (something I think is made clearer in the UK version of this news). And, in a partnership sense, there is nothing wrong with having conversations like that. Indeed, they are to be encouraged.

So as with the discussion around revenue and profit, the discussions around revenue and strategy, while related are two different issues.

And all of this before we even get into the very real discussion of whether or not one law firm’s growth has to come at the cost of another law firm.

Shouldn’t a law firm talk to its clients before agreeing to merge with another firm?

The results of an interesting survey (looking at UK law firm merger activity) of 102 of the UK’s top 200 law firms by legal communications specialists Byfield Consultancy and partnership law experts at Fox Williams is being reported in the UK press overnight.

The headlines that appear to be grabbing the most attention from the survey results are that:

“Almost half of all non-merged UK firms would consider a tie-up over the next two years”

and that:

“As many as 95 per cent of managing partners expect their firms to merge within the next decade”.

Interesting as these numbers are, what grabbed my attention was the surprising – to me at least – fact that only 43 per cent of all merged firms revealed that they “investigated feedback from clients” prior to merging with the other law firm.

When you then take on board that “81 per cent of merged firms cited growth as a reason for joining forces” with their merger partner, doesn’t it seem a little odd that less than half would then discuss whether or not there was any real growth prospect in the merger with their clients and their merger partner’s clients (including any joint clients) prior to merging?

Little wonder, maybe, then that only:

“43 per cent of firms that have merged since 2010 believe that the move was a success”.

Indonesia – the next frontier?

To those wondering what the next marketing and business development frontier in the Asia-Pacific will be for law firms now that China and India have started to go off the boil, I can say “the hunt is over” – Indonesia will be the ‘hot’ new buzzword of 2015.

An article published in Singapore’s Straits Times today [26 January 2015] – “Foreign law firms eye Indonesia market – Global players drawn in by opportunities as Jakarta pursues investment deals” by Wahyudi Soeriaatmadja in Jakarta, sets out a number of compelling reasons (as well as limitations) as to why more global law firms are looking to try an get active in this rapidly expanding and increasingly attractive market.

Of note:

Indonesia is South-East Asia’s largest economy
The country has an extremely ambitious 5-year infrastructure (roads and railways) development plan
The government of newly elected President Joko Widodo is looking to boost gross domestic product (GDP) growth by 7 per cent over the term of its government

Add to this list that Indonesia has one of the fastest growing middle classes in the world, and setting aside some of the practical limitations in place on foreigners practising in Indonesia, given the close proximity of Australia to Indonesia it is somewhat surprising that Australian firms don’t appear to be having the same tactical strategic business development approach to this market (as outlined in the article) that firms in places such as Malaysia do.

Of course, this very likely will change during the course of the year as ‘Indonesia‘ becomes the buzzword of 2015.

What is the ultimate dead-end job?

On reading the title, how many of you thought:- law?

The title of this post is actually taken from an article in today’s South China Morning Post by Peter Guy – ‘Banking – the ultimate dead-end job‘

The article is a great read and while I would ask you to read Peter’s article in full; if I can, I’d ask you to take in some of the following comments he makes:

Even as a traditional service industry, investment banking used to beckon candidates with a sense of excitement, like you were entering an elite and exclusive club.

Growing interference and lower pay are driving the smartest and most innovative people away from the once-superior banking industry

Today’s deadening layer of bureaucracy is discouraging many new hires from spending more than two or three years in a bank before leaving the industry entirely or seeking positions in hedge funds.

Older, more senior bankers whose careers straddle pre- and post-financial crisis have few career choices and must subjugate themselves to the compliance-led and rules-driven banking culture until retirement.

Alternatively,

who wants to work and lead a dumbed-down organisation?