Change Is On the Way. Law Firms Are Getting Ready

Faced with inflation, a looming recession and increased global regulation, law firms are looking at a lot of uncertainty. Even those still enjoying high demand for their services and basking in the increased profits and revenue they’ve experienced in the past year, know that change is likely on its way. So they are getting ready, taking steps they hope will insulate them from whatever is to come.

There are many ways to prepare for the big changes ahead but perhaps the most dramatic step a law firm has recently made took place last week in Australia. There, the fast-growing firm Wotten + Kearney, which specializes in insurance law, announced it is selling a 30% stake in the firm to a private equity company.

The law firm, which has 57 partners and more than 300 lawyers, wants to raise money to expand geographically—both in Australia and in Asia. It also wants to attract top talent, capture new market opportunities and invest in legal tech. It could have raised money by listing on a stock exchange—a move taken by other firms, both in the U.K. and in Australia. Or it could have pursued traditional financing. But instead, Wotten + Kearney did what many startups and companies do: it looked to private equity.  

David Kearney, Wotten + Kearney’s chief executive partner, acknowledged that the firm could have pursued the usual path, as debt funding is cheap now. But it won’t remain so, he told International’s Christopher Niesche. Anyway— and perhaps more to the point—“it’s not only about money,” Kearney said. 

A private equity investment brings in outside expertise, the law firm leader explained. Two of the private equity partners are joining Wotten + Kearney’s board as non-executive directors. The law firm’s partnership has plenty of insurance expertise, but the private equity partners are experts in accelerated growth. They have worked for management consulting firms, in the banking and finance sector, and in legal tech, giving the firm “more punch in terms of how to run an effective, profitable business.”

What is notable about law firms is that they are businesses often run by people who know a great deal about the law but aren’t nearly as sophisticated about running a business—especially in uncertain times. Some know this and have from time to time hired management consulting firms to examine their business. However, most don’t like to admit they could use outside help. Kearney, in contrast, is embracing the opportunities that outside expertise may bring. 

Private equity firms still have a lot of “dry powder” they’re looking to invest. Will more of them consider putting money into law firms in those jurisdictions where outside investors in law firms are allowed? And will more law firms be willing to turn to private equity? We shall see.

Meanwhile, no matter what the economy may do down the road, firms have turned their attention to areas where they see ample growth opportunities. Withers, which is known for its private client practice, has turned to California for growth. About 60 of the firm’s 151 U.S. lawyers in the U.S. are based in California, prompting the firm to expand its physical footprint in the state, with new office spaces in Los Angeles, San Francisco and San Diego. Freshfields has also found success in Silicon Valley and has a fancy and up-to-date new office to show for it. (You can see a slide show of the new office here.)

Ireland is another place where law firms see growth opportunities. Since the beginning of the year, Addleshaw Goddard and Bird & Bird have joined the likes of Taylor Wessing, Hogan Lovells, and Linklaters in Dublin, International’s Jack Womack writes. This is partly because Ireland is in the EU, while the U.K. is not, prompting firms to put lawyers in a place where they can still practice in EU member states. But Ireland itself also has seen an influx of multinationals demanding legal services. All this has resulted in a change in the dynamic of the legal industry in Dublin. This “maturing” legal landscape is witnessing a fierce war for talent.

Law firms know that opportunities also create challenges. Regulatory changes, for example, mean that firms desperately need people skilled in such fields as privacy, antitrust and the environment to help clients navigate a world increasingly fraught with uncertainty. 

In Europe, where environmental laws and regulations can quickly lead to litigation and fines, firms need more lawyers who understand the myriad ways in which clients can be affected. While many lawyers say they want to practice environmental law, Anne Bagamery writes that it’s not so simple. Law firms in Europe expect job candidates to come in the door already possessing the specialized training and experience needed to contend with the increasingly complex and technical laws that govern the environment.  And she explains what it takes.

With an economic outlook that seems less bright, law firms also need to look at their fee structure, which may have to change as clients tighten their belts in anticipation of a recession. Already, many companies around the world are increasing their budgets for in-house legal departments as they move to keep more legal work in-house. In fact, corporate legal departments are no longer setting aside the biggest chunks of their budgets to pay law firms and outside counsel, according to new findings from the Association of Corporate Counsel and Major, Lindsey & Africa. Their latest legal benchmarking report revealed that more than half of legal department spending—54%—is staying in-house—up from 49% a year ago. 

Then, of course, there is the challenge created by geopolitics, war, and growing threats to the rule of law across the globe. The war in Ukraine prompted the West to impose sanctions against Russian state-owned entities and Russian citizens—mostly oligarchs, government officials, and associates of Russian President Vladimir Putin. But Russia has retaliated with its own list of people who are now banned from traveling to Russia. Unsurprisingly, many of those on the list are government officials in the U.S. and the U.K. But what is surprising is that it also includes U.S. lawyers in private practice—from firms such as Akin Gump Strauss Hauer & Feld; Arnold & Porter Kaye Scholer; Katten Muchin Rosenman; King & Spalding; Morgan, Lewis & Bockius; Skadden, Arps, Slate, Meagher & Flom; Shearman & Sterling; Squire Patton Boggs; Stroock & Stroock & Lavan; Wachtell, Lipton, Rosen & Katz; Vinson & Elkins; Williams & Connolly; Willkie Farr & Gallagher; Wilmer Cutler Pickering Hale and Dorr. You can read more about the list here.

It’s not just war that prompts concern about maintaining the rule of law, however. Last week. two legal groups in two different countries—the New York City Bar Association’s Cyrus R. Vance Center for International Justice and the Mexican Bar Foundation—agreed to work together to protect the rule of law by forming a joint committee that will focus on strengthening judicial and democratic institutions in both countries. In Mexico, lawyers are worried about the independence of the judiciary under President Andrés Manuel López Obrador, who has labeled Mexican lawyers who defend international companies “traitors” and has accused Mexico’s judicial branch of being at the service of private interests. The group will also examine democratic institutions in the U.S., noting that a breakdown in governability is also occurring north of the U.S.-Mexico border.

Firms also are facing the challenge of employee wellbeing as they emerge from the COVID-19 pandemic. In the U.K., about 70 companies are currently taking part in a trial program in which their employees can work a four-day week with no effect on their pay. This prompted International’s Hannah Walker to ask whether a four-day week could actually work in Big Law. Would it create more efficiency? How would it impact total billable hours? And at a time when even law firm leaders have made bold moves—like the De Brauw managing partner who stepped down saying he needed “a break,” or the Fried Frank Harris Shriver & Jacobson London managing partner who said recently he is taking a six-month sabbaticalwould a four-day week help alleviate burnout? Read Hannah’s story here

Sometimes, looking at what law firms are doing—where they are expanding offices and hiring lateral partners—is an indicator of where they see challenges and opportunities. Last week we saw a lot of these moves, but two such moves struck me most: Holland & Knight added a tax partner in Bogotá, Colombia—a country that is anticipating significant economic transformation, having only just yesterday elected its first-ever leftist President. And Japan’s Nishimura & Asahi hired an experienced White & Case energy and project finance partner in Tokyo as the firm aims to expand its energy practice at a time when Japan, a country heavily dependent on energy imports, has been struggling to phase out Russian oil. 

It’s a good sign when the legal industry makes changes as it looks at the challenges that lie ahead. But for all its efforts, the legal profession still has some blind spots—areas in which it is stuck and resistant to change. This is especially true in its treatment of women.

Last week, an Australian legal industry regulator said it would not pursue disciplinary action against Timothy Leschke, a lawyer at Allens who was accused in 2015 of sexually harassing junior associate Fiona Thatcher. Thatcher reported the various incidents to the firm, and despite accepting her version of the events, Allens required her to continue working with Leschke. This prompted Thatcher to leave the firm. Leschke was later promoted. 

So when the Legal Services Commission said last week it would not pursue a case against Leschke, it added insult to injury. The LSC’s decision should have rattled the legal profession in Australia, where sexual harassment has come into sharp focus in the past two years. It did not.

Thatcher gave lawyers a wake-up call.

“Sexual harassers in our industry can sleep easier knowing that even if they are unlucky enough to be called out on their damaging, predatory and toxic behavior, their firms and even the LSC will protect them,” she said. 

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