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Innovation can be a double-edged sword for lawyers. Legal innovation is the hallmark of the most prestigious US firms – they pride and sell themselves on their intellectual horsepower.
It is the source of their differentiation from the rivals that jostle for the accolade of having the most brilliant lawyers and coming up with the best solutions.
But while clients appreciate such legal strokes of genius, lawyers are not always recognised for the commercial value they create, or rewarded in appropriate financial terms.
Instead, the economic structure of the legal sector is still largely predicated on a time-input basis rather than one that places a value on output. In other words, lawyers are still paid for the hours they work rather than the value they create for their clients.
Eric Greenberg, a corporate partner at Paul Hastings, says that legal innovation enhances reputation and generates business, but does not result in higher fees.
Mr Greenberg argues that, because of the hourly rate, law firms are like movie theatres that make the bulk of their money selling high-turnover popcorn.
The innovative legal structures that create opportunity for the client may be the work of a few hours for a seasoned lawyer. But as lawyers, unlike bankers, are paid on their hourly input whatever the commercial value of the opportunity for their client, it is the more laborious, time-intensive tasks where big firms earn their big fees.
“The traditional model treats every hour equally in terms of fees. The result is that the innovative, opportunity-generating hour must be coupled with other fee-generating hours and this can make legal innovation a loss-leader,” says Mr Greenberg.
But high-quality innovation is taking place nonetheless. This FT report, which for the first time extends its remit from the US to the whole of North America, ranks 87 examples of legal innovation in the corporate, finance and litigation categories. And although many of the firms’ submissions show lawyers working at full horsepower, they had only a one in three chance of getting their work profiled in the report this year.
The submissions ranked for legal expertise in the FT report have to prove that the lawyers are, to use a common industry metaphor, far more than carpenters. They have to show they have played the role of architects.
One example ranked in the Litigation ranking table comes from Tara Lee and Serge Nawej at DLA Piper. The team spent a large portion of the year knocking on doors in Kinshasa to create their case for the government of the Democratic Republic of Congo against vulture funds that buy distressed securities.
They were eventually successful in helping the Congolese government find a process to defend itself against unfair claims. The courage and determination shown by the team went far beyond the usual brief.
Although they may not be earning what their legal innovations are truly worth, the top firms in the FT 40 are the most profitable in the global marketplace. The top three – Kirkland & Ellis; Skadden, Arps, Slate, Meagher & Flom; and Latham & Watkins – have revenues above $2bn and are among the top five US law firms in terms of global profitability for 2014.
Kirkland’s top ranking in the FT 40 ranking reflects a balanced performance across the categories of this report. Not only did it secure standout entries for legal expertise innovation in finance and litigation, and commended entries in the corporate category, it also managed to win an entry in the business of law category for its approach to handling its data and “big intelligence” for clients in private mergers and acquisitions work.
Gaining rankings in the business of law category is an achievement for the most profitable firms with the highest turnover.
Historically, such firms have relied on their legal expertise innovations to win the top clients and work. They have been less interested in business or process innovations, believing them to be the preserve of law firms selling more commoditised legal services.
But the research for the 2014 FT report shows that intellectual horsepower is not always enough. The pressure is on for the most profitable firms. Growth in the economy is bringing work back, though not to the levels seen before 2008, most say. Clients are choosing to do more legal work in-house before instructing external lawyers.
As a result, many big law firms are rethinking their approach to client relationships and are expanding the definition of what constitutes legal expertise. They are looking to their own data and accumulated intelligence to reframe their advice, share knowledge and analyse the markets in which they operate.
Kirkland’s private M&A database is instructive in the way it captures and analyses the firm’s collective knowledge and experience. It could become a game changer for legal innovation.