The stories behind the legal sector news

Downturn at bay

It seems that, within the legal sector at least, reports of a downturn have been somewhat exaggerated. According to the Office for National Statistics , the UK’s legal sector has thus far managed to ward off the wider economic malaise affecting the services sector as a whole – indeed, the industry recorded ￡3.5bn in turnover in December 2022, which is an 8.6% increase on December 2021.

So how is the legal sector able to buck the trend and record growth at a time when the UK services sector as a whole has seen a 7.5% month-on-month drop in turnover between November and December 2022? One possible answer is provided by Julie Norris, regulatory partner, legal services at Kingsley Napley, who is quoted in a piece in the Law Gazette : ‘This is probably due to demand in areas like litigation, insolvency and employment, given the economic context.’ In other words, even in straitened times – and perhaps especially then – people still need the services of lawyers.?

However, it’s not all doom and gloom for the wider services sector. The Professional Services Sector Trends Tracker – set up by the Managing Partners’ Forum, an industry body, in 2011 – shows a steep rise in confidence amongst professional service leaders that things are set to improve. Whereas the ‘confidence index’ was at a mere 45% last October, it has risen to 71% this month as industry leaders grow more optimistic about future activity levels, new workflow and headcount growth.

The thing is - we’re getting mixed signals and it’s harder than ever to read the tea leaves.

In the past economic cycles that I have experienced in the legal sector, a few things have characterised them:

1. Lawyers remain upbeat until the last possible moment on the assumption that confidence breeds confidence. Layoffs are normally well after banks and accountants have made people redundant;
2. When layoffs begin in the legal sector, then they tend to spread quickly to other firms; and
3. Linklaters tends to act most ruthlessly and does something clever or dramatic or both to sustain profitability and ensure that it emerges from any downturn stronger; and
4. Savvy firms pick up good talent that has been needlessly let go.

We’ve already seen US firms laying off US lawyers at the first sign of tech sector trouble. And we’ve seen the odd restructure in financial services and the broader professional services sector too. But those changes have been analysed elsewhere as having shareholder-driven rationales, not driven by the economic headwinds. They also come on the back of massive major growth in headcount for those sectors over the past two years.

My opinion is that the law firms that have the guts to make the right decisions, not just the popular ones will be the ones who emerge stronger over coming months, whether or not there’s a downturn.

Beware the bean counters…

Do the Big Four accountancy firms have ambitions to play in the top league of the legal sector? You could be forgiven for thinking so, given how much poaching there has been of late: within the last six months alone, Deloitte has tempted four partners away from Shoosmiths and headhunted former Freshfields tech expert Isabel Parker for its legal management consulting business; KPMG has snagged Linklater’s senior corporate partner Stuart Bedford; PwC has hired five senior lawyers to grow its real estate legal team; and EY has bagged Virginia Allen, Dentons’ former head of employment.

So should the legal world be concerned by this hiring spree? Well, based purely on revenue generated from legal services, there doesn’t seem to be much to fear as things currently stand. According to exclusive research on The Lawyer’s City Signal channel , none of the Big Four would rank within the top 50 of The Lawyer UK100 – PwC made an estimated ￡90m in revenue in 2022, with the other three firms neck and neck at around ￡60m. In terms of market share, the Big Four thus don’t seem to pose much of a threat at present to the legal industry’s big dogs.

But here’s the rub: PwC et al have very deep pockets. And the flurry of new hires in recent months seems to indicate that UK growth is firmly on their agenda. Given that the legal sector is already competing fiercely for human resources, things are really going to heat up with the Big Four throwing their hat in the ring. These accountancy behemoths may not be able immediately to outgrow the UK’s biggest law firms, but they sure as shooting can outspend them in a bid to poach their top talent.

That said, as part of our research for a client recently, the deal flow between accountants and lawyers remains a delicate balance. Instructions flow both ways and accountants are wise enough not to rock the boat too much for fear of sending major deal work to a rival.

The case for MDPs/Big Four in Law has evolved through a few models over the 20+ years I have been in the sector and yet here we are today, with a continued natural tension between that two that seems to work for both industries and their clients.

… because they’re the canary in the coal mine

Speaking of the Big Four: last Friday, Ernst & Young resigned as auditor of MJ Hudson over “lost trust and confidence in the company’s management”, less than 18 months after being appointed to the role. This is a very sure sign that things are far from well at the City-listed asset-management consulting company – and indeed, E&Y’s move almost immediately prompted MJ Hudson’s founder, Matthew Hudson, to defenestrate himself by resigning as CEO.

In a damning resignation letter, E&Y wrote: “We are ceasing to hold office because we have lost trust and confidence in the company's management and those charged with governance, and in their ability, along with your finance team, to provide us with accurate and reliable information for audit.” Ouch!

This week’s developments are just the latest in a catalogue of woes to befall MJ Hudson in the past couple of months: in December, the firm’s shares were suspended from trading when it was made "aware of…issues, including in relation to the reporting of historical trading of the business in relation to [fiscal year] 2022, the full impact of which is unclear." A little mealy-mouthed and more than a little concerning for investors!

Given that the company is seeking to sell off some or all of its business units, this is the kind of publicity that press officers’ (and shareholders’) nightmares are made of – nobody at the firm will want to see a fire sale, least of all Michael Hudson himself, who holds a 24.8% stake in the company.

Say hi to Harvey

Remember our recent article on the future of AI in the legal sector? Well, on Wednesday this week, Allen & Overy used its LinkedIn page to announce the arrival of Harvey , “a ground-breaking generative AI platform that is designed to tackle legal problems”. In the post, senior partner Wim Dejonghe describes Harvey as “a game-changer that will enable us to deliver unprecedented value, efficiency and innovation to our clients”.?

Dejonghe’s resounding confidence is not least based on the fact that Harvey has been tested by over 2,000 A&O lawyers across the firm’s global offices and proved a resounding success. Indeed, A&O seems to be the first law firm in the world to have enterprise-level access to Harvey and, so the firm believes, any generative AI based on OpenAI’s latest models.

So what does Harvey do? According to A&O, this clever piece of tech uses natural language processing, machine learning and data analytics to provide support in many bread-and-butter areas of the firm’s work, including contract analysis, litigation work and regulatory analysis.?

In other words, Harvey is much like any other major technological innovation in human history, bringing greater efficiency to the way people work and thereby freeing them up to focus on the areas where humans still run rings around the robots. To quote Dewey from Malcolm in the Middle , “the future is now, old man”.

Your thoughts on secondments

Did you ever do a secondment? We’d love to hear from you.

Next week, we will be writing a feature on secondments and would welcome your input. If you have been on secondment and are able to talk to us about it, we would be hugely grateful if you could take five minutes out of your day and complete our short survey here .

Dates for your diary

• 21 February – Secrets to Success London – with Ashurst, CMS, Goodwin Procter and ULaw – Legal Cheek is in London for the latest in its new 2023 series of in-person Secrets to Success events to help students boost their commercial awareness ahead of vacation schemes and training contract interviews. An event for students and graduates, to be held at the University of Law, London Moorgate.
• 22 February – Cyber Security and Cyber Risk Management for Law Firms – UKLTA will host this event in Central London. Join David Baskerville (Baskerville Drummond) as he welcomes guest speakers Kerrie Machin (Mitigo Cybersecurity) and Lauren Watson (Legl) for presentations, panel discussions and an opportunity to discuss cyber security risk management best practice for law firms.
• 24 February – Lawyering in the anti-trafficking space – This event will focus on the role of lawyers who represent victims and survivors of trafficking and modern slavery. It will provide a forum to hear insights from both research and legal practice about the reality of lawyering in this sector. To be held at the University of Liverpool

I hope you've enjoyed reading this week's edition.

Thanks,

Si Marshall

[email protected]