Thanks to the highest number of U.S. mergers announced in a quarter in six years and the largest single-month gain in legal sector jobs in a year, 2013 began with a bang.
According to Altman Weil’s MergerLine, there were 21 U.S. law firm mergers announced in the first quarter—the highest number of mergers announced in a quarter since Q1 2009. Of those, 16 combinations were finalized in Q1. There also were seven firms that finalized mergers announced earlier, for a total of 23 mergers or acquisitions effective by March 31.
The majority of mergers—24 of the announced or finalized combinations—were targeted acquisitions of smaller, specialty firms with fewer than 25 lawyers. Only four combinations—Clark Hill with 82-lawyer Thorp Reed & Armstrong, Dickinson Wright with 60-lawyer Mariscal Weeks McIntyre & Friedlander, Novak Druce with 49-lawyer Connolly Bove and K&L Gates with 300-lawyer Middletons—involved merging with larger firms.
“Firms are picking up specialty practices, expanding in strong markets and adding offices in new cities,” said Ward Bower, a principal at Altman Weil. (You can read the full Q1 2013 report here.)
The high number of mergers seems to be good for job growth. According to the U.S. Department of Labor’s preliminary data, March saw a gain of 2,000 legal sector jobs—the largest gain seen in a year and the first addition of jobs since the beginning of 2013.
In fact, as compared to March of last year, there are 9,000 more people employed in the legal industry. Yet, as the ABA Journal points out, the total number of legal sector jobs—1,126,900 as of March 2013—has yet to rebound from the prerecession peak of 1.18 million.
An increasing number of top firms are moving senior leadership to the Asia-Pacific region. A recent Legal Week survey of 30 U.K. and U.S. law firms found that of the firms surveyed, 57 percent now have “at least one global practice head, department co-chair or deputy chair based in Asia.” And the majority of those positions were appointed in the last three years.
Why so many moves to Asia?
“It’s a reflection of the fact that we believe we can grow our business more quickly in Asia than we can in other parts of the world,” Mark Hyde, the global head of restructuring and insolvency at Clifford Chance (CC), was quoted as saying in the Legal Week article. Hyde recently relocated to Hong Kong as CC’s new Asia-Pacific finance head.
The firms with at least two global practice heads based in the Asia-Pacific are:
- Freshfields Bruckhaus Deringer
- Clifford Chance
- Herbert Smith Freehills
- Skadden Arps Slate Meagher & Flom
- Orrick Herrington & Sutcliffe
- Reed Smith
Firms with at least one global practice head in Asia include:
- Allen & Overy
- Norton Rose
- SJ Berwin
- Stephenson Harwood
- Berwin Leighton Paisner
- Baker & McKenzie
- Shearman & Sterling
Client satisfaction is a global issue, yet it looks like Eastern law firms are better at it than those in the West. A new report finds that general counsels (GCs) in Asian firms rated their external firms higher for billing practices and service delivery than GCs in Western firms did.
The Client Satisfaction Report (CSR) Asia, the first of its kind from Legal Week, is culled from Asia-specific data in the Legal Week Intelligence Client Satisfaction Survey 2012. Of 1,204 respondents, 214 offered data about Asia in six categories: cost/billing practice; service delivery; use of IT/knowledge management; personal/partner relationships; quality of legal advice; and quality of commercial advice.
The biggest difference in the East vs. West client satisfaction scores were in the area of cost/billing practices. On a 10-point scale measuring satisfaction, Asian GCs rated their firms at 7.37, higher than the global score of 7.22. Asian firms also came in higher for service delivery and responsiveness and use of IT and knowledge management.
At 8.9, overall satisfaction was highest for firms in mainland China. It was the highest-rated of the five jurisdictions examined closely in the report. The others are, by rank: India, Singapore, Hong Kong and Japan.
Data was also collected about preferred billing methods. The survey found that 45 percent of Asian companies preferred fixed fees, 31 percent like capped hourly rates and 10 percent prefer chargeable hours.
Read the full rundown and discussion of the results on Legal Week (sub. req).
It’s dour news for U.K. law firms. Not only has a recent report found that clients are “deeply unhappy,” but firms also downgraded their earnings forecast for the 2012-2013 financial year.
The Legal Services Board (LSB), which oversees the regulation of lawyers in England and Wales, found that only 12.6 percent of the 9,000 small businesses it surveyed agreed that “lawyers provide a cost-effective means to resolve a legal issue.” Chris Kenny, LSB’s chief executive, said in a Legal Futures story that alternative models such as “fixed-price subscriptions could be a ‘way of ensuring that there isn’t the deterrent effect of ‘dare I pick up the phone because the hourly rate clock will start spinning too quickly.’”
Access to legal advice is, Kenny said, essential to the success of small businesses. Yet “close to 30 percent of the general population don’t get their legal needs addressed for reasons of cost and approachability of the profession,” said Crispin Passmore, LSB strategy director.
In other news, the top 100 U.K. firms by revenue downgraded their income forecast for the next 12 months. The firms expect their annual income to grow by 3.3 percent—down from last year’s prediction of 5.7 percent growth—which is barely above inflation. It’s expected to be particularly tough for the top 10 firms, who forecast only 2.7 percent growth.
“The more gloomy forecast is despite a comparatively strong quarter, which saw the top 100 firms grow their revenues by an average of 3.5 percent in the third quarter of the financial year,” the Financial Times (sub. req.) story states. This was the first positive growth in more than four quarters and partly due to the increase in the number of fee-earners and the fees earned, which grew 1.8 percent and 1.9 percent, respectively, according to Deloitte, which compiled the data.
The number of non-equity partners has risen in Am Law 200 firms, or so indicates a report from Altman Weil. Since 1999, the number of non-equity partners increased almost 20 percentage points. Yet, the report says, “in many firms the non-equity tier is not functioning as it should.”
In 1999, 66 percent of Am Law 200 firms had a non-equity tier with only 17 percent of all partners classified as non-equity. By 2012, that number jumped to 85 percent with 39 percent of partners in the non-equity tier. The report states:
Managed well, a non-equity tier can be a proving ground for new laterals, a transitional stage for rising stars, or a long-term berth for technical experts. Instead, it often becomes a warehouse for lawyers who don’t generate their own work, block upcoming talent and don’t add economic or professional value commensurate with their compensation.
With the average number of non-equity partners increasing from 36 to 109 per firm, the impact on a firm’s bottom line has also increase. It is therefore important for two-tier firms to reexamine the success of the strategy.
The report suggests that firms do the following:
- Analyze short and long-term impacts on firm profitability
- Rethink non-equity compensation
- Establish tougher standards for entry and retention in the non-equity tier
- Regularize performance evaluations
- Systematically manage transitions out of the tier
To read the full report, click here.
Cost containment and compliance issues top the list of business challenges facing legal departments, according to a recent survey by Robert Half Legal.
The survey, which asked 175 lawyers with hiring authority at U.S. and Canadian firms of more than 1,000 employees about the top challenges, found that an equal percentage of respondents (26 percent for both) said “compliance or regulatory issues” and “controlling outside counsel costs” were the biggest issues facing their departments in 2013.
Participants were asked, “Which of the following, if any, will be your legal department’s single greatest business challenge in 2013?” Their responses:
|Compliance or regulatory issues
|Controlling outside counsel costs
|Litigation or e-discovery matters
|Employment issues (e.g., hiring, retention)
|TOTAL (does not equal 100 percent due to rounding)
“The ability to manage increased workloads related to compliance, regulation and litigation, while containing costs remains a key challenge for many corporate legal departments,” Charles Volkert, executive director of Robert Half Legal, was quoted as saying in a press release. “General counsel are carefully evaluating the projects they’re assigning to outside firms, as well as fee arrangements, in an effort to control spending.”
To read the full press release about the survey, click here.
Do you sometimes feel like corporations don’t appreciate the benefit you bring as a lawyer? A new study could help change that. “Lawyers and Fools: Lawyer-Directors in Public Corporations” examined performance data of U.S. corporations and found that companies with a lawyer on its board had an average 9.5 percent increase in firm value.
The study attributes this increase in firm value to the fact “that lawyer-directors are more likely to favor a board structure and takeover defenses that reduce shareholder value—balanced, however, by the benefits of lawyer-directors, such as the valuable advice they can provide.”
The analysis was performed by three professors—Lubomir P. Litov, University of Arizona Department of Finance; Simone M. Sepe, University of Arizona James Rogers College of Law; and Charles K. Whitehead, Cornell Law School—who examined data between 2000 and 2009, taking into account whether the company had a lawyer on their board. Other findings include:
- The number of lawyers on boards increased, from 24 percent of U.S. companies in 2000 to 43 percent in 2009.
- CEO compensation was higher for companies that had a lawyer-director, yet wage volatility was lower.
- Companies with a lawyer-director had less litigation risk, as reflected in 94 percent lower stock option backdating litigation.
- Companies without a lawyer on its board had “a 308 percent increase in the effect of accounting malpractice litigation on firm value.”
However, as a Financial Times (subscription required) article points out, since two of the three study leaders are law professors the findings may be a bit weighted in the favor of lawyers. As the article explains:
[T]hough the study tries to disentangle correlation from causation, it is not entirely clear whether it is really the presence of a lawyer that actually sparks this outperformance. After all, it is possible than a company which chooses to tap lawyers as board members could be better run than their peers in the first place. Conversely, lawyers probably will not join the boards of scandal-plagued companies, given the reputational risks.
Despite these possible shortcomings, the article states that “even if these results reflect correlation, not causation, they are interesting” and worth a read. You can download the full study here.
When it comes to attracting the best lateral hires, culture counts. Of the mid-size firms surveyed by TAGLaw and the Center for the Study of the Legal Profession at Georgetown University Law Center, 70 percent rated culture as one of the top two selling points in their recruitment process. The other was the overall quality of the firm.
The findings were provided by leaders at 68 firms with a median size of 40 attorneys. About half of respondents were located in North America, with the remaining split evenly among Europe and Latin America.
Culture was so important to firms, that preserving it was cited as the top reason not to seek mergers. Only 19 percent expect to grow through mergers. In fact, according to an ABA Journal story, 75 percent of the firms had been approached by a larger firm interested in a merger—but only 37 percent seriously considered the offer. “Faster growing firms—those reporting revenue gains of at least 10 percent since 2007—were the least interested in merging with a larger firm,” the story states.
When it comes to growth, 90 percent of firms plan to rely solely on organic growth and just 57 percent plan on expanding through lateral hires (though of the firms who have hired laterally, 92 percent said the new recruit lived up to expectations).
“The firms in our survey that are growing the fastest were the same ones that are most careful about their human capital,” Lisa Rohrer, director of executive education and a research fellow at the Center for the Study of the Legal Profession at Georgetown University Law Center, said in a press release. “Successful mid-sized firms greatly value their culture and weigh cultural concerns carefully when considering possible lateral hire and merger opportunities.”
Fewer firms are borrowing from banks, instead relying on increased capital contributions from partners. That’s the finding of both the American Lawyer and a survey Citi Private Bank’s Law Firm Group.
“Attitudes have shifted remarkably since a decade ago, when borrowing by firms was on the rise, and banks found a willing audience for sales pitches,” an American Lawyer article says. “After 2008, in particular, many firm leaders began to question the whole idea of bank debt.”
American Lawyer spoke with dozens of Am Law 200 firms about their partner paid-in capital programs. Of the 20 firms for which data could be confirmed, six increased or broadened capital requirements and seven—Dechert; Weil; K&L Gates; Day Pitney; Perkins Coie; Morgan, Lewis & Bockius; and Gibson, Dunn & Crutcher—said they do not borrow at all.
This echoes the findings of the Citi survey of 171 law firms, which discovered that average paid-in capital for equity partners at the 20 largest firms increased from $423,000 in 2007 to more than $500,000 in 2011. The survey further found that “after an increase in 2008, debt levels fell steadily between 2009 and 2011.”
For details on how the 20 firms in the American Lawyer story handle their capital, see “The Fine Print: How 20 Firms Deal With Partner Capital.” See the American Lawyer article for a full discussion of the issue, as well as several graphs illustrating the Citi data.
Get ready for more litigation activity in 2013. In fact, it’s already up—way up—according to Fulbright’s 9th Annual Litigation Trends Survey Report. That’s thanks to an increase in strict regulatory changes in both the United States and United Kingdom that hit a five-year high.
The report surveyed 392 senior corporate counsels about various aspects of litigation and related matters. There were 275 U.S. participants, 100 in the United Kingdom and 17 in other countries. According to the report, strict regulatory changes increased the number of companies retaining outside counsel for assistance in a regulatory investigation. In the United States, it increased from 55 percent in 2011 to 60 percent in 2012. In the United Kingdom, it skyrocketed from 27 percent to 72 percent.
“The regulatory thing is here to stay,” Otway Denny Jr., chairman of the global litigation department at Houston-based Fulbright & Joworski, says in an article on the Tex Parte Blog.
Yet overall U.S. litigation spending has remained relatively stable over the last three years, with respondents reporting a range of 50 percent to 53 percent of companies spending $1 million or more annually. In the United Kingdom, however, there is a definite increase in litigation spend: 38 percent in 2010, 46 percent in 2011 and 53 percent last year.
The survey also covered such issues at AFAs, in-house hiring trends and trends in electronic discovery, including how firms are using cloud computing and social media.
- AFA use is decreasing. Corporate Counsel reports that the percent of companies using AFAs dropped from 62 percent in 2011 to 52 percent in 2012. The shift is a general trend across companies of all sizes and in both the United States and the United Kingdom.
- U.S. in-house hiring flattened out in 2012, but U.K. hiring increased. Only 13 percent of U.S. respondents expect the number of in-house lawyers who manage litigation to increase in the coming year, which is the mostly the same as the past three years. However, U.K. companies increased hiring to 14% this year from 10% in 2010.
- About one-third of companies said they used cloud-computing services, according to Corporate Counsel. Of those respondents, a third preserved or collected data from the cloud in connection with actual or threatened disputes or investigations. And about one-fifth have preserved or collected data from an employee’s personal social media account.
To read the full report, click here (you’ll need to register for free before you can download the report). Fulbright & Joworski is also holding a webinar on March 5 to discuss the findings in the report. For more information, click here.