Innovation needs spending on R&D as well on partners

There is a puzzle at the heart of the North American legal market. The US is home to many of the world’s most innovative businesses, but when it comes to the most successful law firms, many are surprisingly conservative.

Unlike their European counterparts, they have been slow to update the way they deliver and charge for legal services.

US law firms have little incentive to change. Profits per partner at the 15 most profitable law firms range from $3m to $5.8m a year, according to the Am Law 100, an index of firms by revenues and profits. The reluctance to change — or even tinker with — a model that does not appear to be broken means some of the most profitable US law firms do not reach the top places of the FT25 for North America, which shows the aggregate scores for innovations ranked in this report (see table).

Of the 15 most profitable firms in the Am Law 100, only two make the top 10 in the FT25 list: Kirkland & Ellis, and Weil, Gotshal & Manges.

The absence of more profitable law firms as innovators was once explained by Richard Susskind, a technology adviser and author of The End of Lawyers?: Rethinking the nature of legal services. “It is hard to tell a room full of millionaires that they might have their business model wrong.”

Nevertheless, elite US law firms should avoid complacency. “Business as usual” cannot continue: automation of many day-to-day processes is accelerating; a crisis in recruitment of skilled and clever people is emerging — the number of high scoring graduates choosing law school has fallen by more than 50 per cent since 2010; and many changes are under way on the client side.

The latter development is increasingly significant. This report, for instance, looks at how much general counsel are innovating, including some big purchasers of legal services, such as GE, IBM and Citi.

Corporate law departments, which could be said to have already disrupted the legal profession through their growth in status and power, are altering how they evaluate their external counsel and purchase legal services.

Moreover, nearly half (43 per cent) of the world’s biggest companies, according to the Association of Corporate Counsel, appoint their own legal operations directors. These experts, many of whom are not lawyers, have combined to create networks such as the Corporate Legal Operations Consortium (Cloc), where they share best practice and information about legal vendors.

Despite such developments, when it comes to work of existential importance, many of the most profitable US law firms still work in the way they have for the past decade. Only 9 per cent of the clients interviewed in connection with 127 submissions of work in the legal expertise category for this report said technology had been used by their law firms in a way that improved the way that the work was done.

We have a futurist in our organisation, which would have been considered daft a year ago, but not now

As this report seeks to capture, however, some North American firms are thinking differently about their businesses. Out of the top 10 slots in the FT25, five are filled by firms with revenues that also put them into the top 10 in the AmLaw 100 (Latham & Watkins, Kirkland & Ellis, Baker McKenzie, DLA Piper and Hogan Lovells). These fast-growing firms take a long-term strategic view on technology, research and skills.

Traditionally, the business strategies of transaction-focused US law firms, largely New York-based, are focused on partner profits. The glue that binds these law firms together is partner remuneration, which — as the profession’s most popular measure of success and retention — has to rise every year. The leaders of these firms, more often than not, feel they must pay out the profits of the firm annually to the partners rather than invest in research and development.

Paul Rawlinson, chairman of Baker McKenzie, however, has made innovation integral to the firm’s strategy. “You need that quality time spent in what most companies call R&D. We now have a futurist, Sanjay Khanna, in our organisation, which would have been considered daft a year ago, but not now.”

Latham & Watkins, which regularly appears in the top 10 of the FT25, has long focused on the future generations that will work at the firm. This helped it to expand out of its Los Angeles base 40 years ago to become an international firm and the largest in the US by revenues according to the Am Law 100. Taking a long-term view about the people in the firm “puts us closer to a corporate”, says William Voge, the Latham & Watkins chairman. “We look after the next generation and do not manage solely for profits for partner,” he says. “The money we invest now into AI experiments today is to further strengthen the platform tomorrow, so that our partners five to 10 years from now have the tools to stay ahead of change.”

Another West Coast-based law firm is ranked top for the second year in a row: Orrick, Herrington & Sutcliffe.

Mitchell Zuklie, Orrick’s chairman, has convinced his firm of the need to respond to technological and social changes. Not only has it set up Orrick Analytics, a team of data analysts that works in the gap between traditional law firms and legal process outsourcers, but it is also in the vanguard of firms considering the potential impact of blockchain technology on the practice and business of law. It is a founder member of the Global Legal Blockchain Consortium, which aims to be the blockchain for the legal profession.

The firm’s willingness to change reflects its ties to Silicon Valley. Mr Zuklie says: “I am around great innovators in the Valley and it is an advantage. But overall it is more industry than geography, it helps that I am a technology lawyer.”

Explore the North American Innovative Lawyers 2017 tables

• FT 25 Most Innovative Law Firms and Legal Service Providers
• Accessing New Markets and Capital • In-house
• Collaboration
• Data, Knowledge and Intelligence • In-house
• Driving Value
• Enabling Business Growth • In-house
• FT 25 Most Innovative In-house Legal Teams
• Litigation and Disputes • In-house
• Managing and Developing Talent • In-house
• Managing Complexity and Scale • In-house
• New Business and Service Delivery Models • In-house
• New Products and Services • In-house
• Rule of Law and Access to Justice • In-house
• Strategy and Changing Behaviours • In-house
• Technology • In-house