By David Holme
Was 2018 a year full of surprises in the legal services sector, or were we all still reeling and dealing with the fall-out from the momentous decisions of 2016/17? At the beginning of this year, we made some predictions about the year ahead. So how did we do?
In some respects, this year has been 12 months of watching and waiting in the broadest sense. The US presidency turmoil rumbled on with a new cadence of government-led scandals; in Europe, the uncertainty around Brexit kept everyone on their toes; and the global economy waited with bated breath to see if the bull market would finally come to an end.
What we got right: the Big Four
One of the most significant indicators in our market (and a move we correctly predicted last year), was that the Big Four continued their charge into the legal services sector without an ounce of humility; and why shouldn’t they? Ron Friedman asks, with tongue firmly in cheek, whether all lawyers will work for the Big Four by 2026. Rather unlikely, but the Big Four have been pretty smart about the sectors and markets they want to exploit, by targeting the high margin commercial end of the market as well as expanding the consulting offering, much like the currently maligned audit + consulting + tax model.
American Lawyer reported recently that the Big Four had already started to dominate, taking four out of the top five spots in the second annual ranking of the brand strength of alternative legal service providers (ALSPs). E&Y made a splash, buying Riverview Law, bringing its total number of law practitioners to 2,200 within member firms across 81 jurisdictions. But I have a feeling this might end in tears, as did the Conduit Law divorce which showed that the clash of cultures is real.
Deloitte may have been slower to react than the other Apex predators, but 2018 saw some big moves from the firm. The Deloitte/Berry, Appleman & Leiden (BAL) deal was far more interesting than Riverview, which had kind of reached the end of the road as an independent and had just about reached stall speed. BAL disaggregating practice areas and selling them to Deloitte was a larger, more interesting deal and more inventive.
Deloitte also acquired an alternative business structure license and expanded its legal team in the UK. Midway through this year it also launched Deloitte Legal International, which is a fully licensed foreign law practice operating out of Singapore. This brings the number of legal professionals in the Deloitte Legal network to more than 2,000 spread across 80 countries.
PwC and KPMG had already announced plans to acquire law firms and expand their legal services back in 2016/17 and, as I predicted, this march continued throughout 2018 with new senior legal appointments made to bolster their services and reputations. But although the Apex predators are on the march, we see some fallout from those entrepreneurial type businesses who find partnerships bureaucracy difficult to stomach.
2018 technology – or the big disappointment
Despite the constant hype and media coverage, as we alluded to, technology didn’t light up the legal sector in 2018 – and why would it? Let’s be honest, we’re not in an early-adopter kind of market. Some niche legal tech providers continue to hold station for a little while longer with narrow offerings like eDiscovery solutions, but they should be careful. Any movement of the big tech giants can overturn them in a second. They have deep pockets and market penetration. Microsoft, for example, can easily take over the ediscovery Space if it decides to do so.
Of course, there were a few utterly meaningless articles about large firms adopting technology. This always feels a bit like you are leaving your wife for a much younger model; initially flattering but the rest of the family (ie the partners) don’t much like it and wish you had bought a Mustang instead.
Legal technology, a few zombies and some surprises
In terms of the legal technology market itself, I don’t think it quite came of age this year. For the most part, it’s still at the angel and startup funding stage with few really professional investors becoming excited. For example, NextLaw Labs has no investment pedigree and hasn’t managed a single exit, so what is the point?
Last year we talked a lot about the legal market structure and the rise of the zombie firms – those who are stuck in mid-market mediocrity, who merge with other mediocre firms to create larger mediocre firms. As I predicted, these zombies continued to rise in 2018. Whether they’ll still be the walking dead by the end of 2019 is uncertain. I think we have now passed the peak of inflated expectations in the ‘Hype Cycle’.
What we didn’t foresee was the consolidation in the Alternative Legal Service Providers (ALSP) sector. The CVC/UnitedLex deal was certainly eye-catching; a $500m cash injection from an investment company for a legal outsourcing provider caused more than a few market ruffles. Noted as one of the largest transactions to date with any legal services provider, UnitedLex said the deal means they will invest in technology and acquisitions. There will be more, much more to come from here, I think. Watch this space.
The alternative providers are here to stay
The CVC/UnitedLex deal demonstrates that the ALSP segment is now mature beyond a point where the advisory suppliers (law firms) can squeeze them out of the market. The market likes them too much for their simplicity, efficiency and uncomplicated client service. ALSPs are 10-15 years on in their development now and as we’ve seen, private equity is willing to pay 12-20 x EBITDA for the right company in this space. These multiples reflect the maturity of the players and the optimism for real tangible growth. Who would pay that multiple for a law firm? No one, unless they had experienced a sharp blow to the head!
So, how did our predictions do overall? I’d give us a B – we’ll try harder this year. Watch out for my 2019 predictions in the coming weeks.
Driven by an urge to reshape the legal industry, Exigent’s CEO and co-founder David Holme has been injecting innovative thinking into the way legal services are provided for the last 15 years. David founded Exigent in 2003, focusing on workflow efficiencies first and then continuing to move the needle of alternative service providers from the low-cost camp to smart, data-enabled business partners.
David provides the strategic direction and plays a key role in developing partnerships globally for Exigent, an inherently cross-cultural, progressive and borderless business.