Boutique firms flourish in new legal landscape

FOR millions of years, dinosaurs ruled the world. They grew ever bigger, hoovering up increasingly massive amounts of the local ecosystem to keep them going. But then there was a cataclysm and the game changed. Resources became more scarce and eventually evolutionary push came to Darwinian shove and they lost out in the battle for survival to small vole-like creatures which were nimbler, nabbed the food from under their noses and drove the lumbering behemoths to extinction.

It’s a tale that large international law firms might well heed. In the past decade they grew ever bigger, expanded into many more jurisdictions and practice areas, winning talent and work. But this concentration on bulk means that they are losing ground in niche areas, and boutique firms are stepping in. They are – to slightly over-extend this metaphor – the proto-voles of the legal world.

In July a number of boutique law firms swam out of the primal soup. Dewey & LeBoeuf’s Frankfurt managing partner Hanno Berger and a colleague left the firm to set up a tax boutique. Baker & McKenzie has lost a number of antitrust lawyers who went to set up their own firm, taking clients such as Shell and Proctor & Gamble with them. And then there’s former SJ Berwin private equity partner Matthew Hudson, who has launched a firm called MJ Hudson with the backing of private equity money, and which will be working largely with hedge funds.

The reason this is happening is the diplodocus-like unwieldiness of the mega-firms. Stephanie Pautke, one of the lawyers who left Bakers said the reason for setting up the boutique was “the strategic considerations that the firm had for our group did not really fit into our strategy as a team.” As large law firms look to the big deals, the sorts of work that require long-term relationship-building start to look anomalous.

Pautke’s sentiment is echoed by Richard Turnor, a partner at Maurice Turnor Gardner, a private client boutique that spun off from Allen & Overy in May 2009. The way he puts it is that “as law firms get bigger and more focused on global businesses the centrifugal forces increase, and practice areas and offices that are non-essential, or which do not need the infrastructure and its associated costs, need to spin off in order to remain sustainable and competitive.”

For the lawyers themselves, the benefits are clear. Large law firms with lots of practice areas find it impossible to create a structure that is fair to all the partners because the ways they work are just so different. A process-driven area might have 30 associates to every parter, making it fundamentally different to a tax practice, where there might be a one-to-one ratio. The overheads in the former are much higher.

Creating a payment system that is fair to everybody is tricky, to say the least. When a firm is putting so much effort into the bureaucracy needed to administer the multiple practices, it starts looking attractive to let some go. In many cases the slewing off of a boutique is mutually agreed, and clients will continue to go to the parent firm for the legal services the boutique can’t provide.

So will the global law firms slowly die out, harried by their speedy little competitors until they fall face down into the mud, like haggard mastodons? Let’s not get carried away. If you are a global business then you probably want a global law firm as a one-stop shop for your legal work. Brand matters, too, for a big client.

But if you are small firm with a niche, then lawyers with specific knowledge of your area are appealing. Clients often prefer to deal with a boutique – because costs are lower, so are charges. Savvy clients such as hedge funds often prefer to work with boutiques. That makes sense. In some ways boutique law firms are the hedge funds of the legal work – small groups of specialists who want to escape from the straitjacket that is imposed on larger firms.

NEXT GENERATION

The most fascinating of the recent boutique launches is that of MJ Hudson, which is being funded by private equity money and will work with hedge funds. It will take advantage of the Alternative Business Structures allowed by the Legal Services Act, and instead of charging its clients a flat fee for its services, or an hourly rate, it will instead take a cut of their profits.

It will, it says, “share in its clients’ risks by charging a percentage of a successful fund or transaction”. In addition, the firm “can further align its fees with its clients’ returns, by investing equity in their funds and transactions”, “retaining earnings, paying dividends and attracting external capital from clients and others.” The firm says that the LSA will change the model of the law firm from a “cash flow” one to “an annuity-based and deeper relationship with clients”.

As the LSA comes on line, lawyers are sure to see the opportunities that the new liberal legal market offers them, and clients are sure to encourage them. A deeper partnership with your lawyer is surely a way of reducing risk. The legal gene-pool is about to get stirred up.