Sir Nigel Knowles: Legal M&As an ‘imminent certainty’

We are entering 2014 on a wave of optimism, brought about by a raft of positive economic data in the US and UK which has buoyed markets and persuaded the Federal Reserve to begin tapering its asset purchasing programme. The outlook appears to be relatively bright for corporate deal activity too, with IPOs likely to continue the upward momentum of last year and M&A volumes expected to pick up significantly in 2014.

However, whilst economic recovery and sustainable growth are now regular features in commentary pieces and political rhetoric, the story for the legal services in 2014 is likely to be markedly different.

2013 was the year that a major shake-up of the legal services industry was delayed. This is not Cassandra-like hyperbole but a thesis based on the simple observation that the legal services sector as it currently stands is unsustainable.

Looking ahead to 2014 and beyond, it is difficult to see the status quo remaining. Commercial law is a $300bn global industry - no one firm has more than 1% of the market share and this has to change.  The sector is still remarkably fragmented; there are simply too many firms (and too many lawyers) in the market offering the same services without any clear differentiation. Consolidation is an imminent certainty and, furthermore, I expect to see consolidation on a scale not previously witnessed.

As already referenced, let not the recent plethora of positive economic data fool anyone either into thinking that the good times are back for legal businesses. Law firms that are still clinging to the hope that recovering economic conditions, increased corporate activity and better markets will come to their rescue are deluding themselves.

Reform is not predicated on economic downturn but on commercial imperatives and over the past decade there has been a fundamental shift in the dynamics of the industry. The financial crisis has only served to accelerate this trend and bring into sharper focus the systemic problems within the sector.

Analysing the changes that have taken place, one starts and ends with a shift in client expectations and requirements. Clients are more demanding buyers of legal services – this can be ascribed to a number of factors, including the consolidation of legal panels, a greater scrutiny on fees and the desire for global solutions (and corresponding global discounts).

This trend is not going to abate and will thus render many firms’ business models as obsolete. And let's not forget the rise and rise of alternative business structures (ABS) and their holistic approach to commodity work - this one-stop shop offering will drive business from the plates of other firms.

The firms that will emerge victorious in this brave new world will be either truly global or super niche. In the former case, firms that can offer a holistic suite of services across all regions will be in a strong position; however, there are many firms that purport to be operating globally but are in fact thin on the ground in many regions and as such will soon be sniffed out by discerning clients.

Firms will have to be creative in how they structure themselves and how they motivate and retain their key assets – the human capital generating fees. Successful law firms are run increasingly like any other major corporate and those wishing for a place at the top table will need to streamline their management structures and employ managing partners specialising in running business, rather than dispensing legal counsel.