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In House Warrior: Paul Smith and Pre-Pandemic Challenges In the Legal Industry

Paul Smith, former chairman of the law firm, Eversheds Sutherland, speaks with Richard Levick in this transcribed installment of the In House Warrior Podcast.

Speaker 1: Welcome to the Corporate Counsel Business Journal's daily podcast, In House Warrior with host Richard Levick, chairman of LEVICK, a global crisis and litigation communications firm.

Richard Levick: Welcome to In House Warrior for the daily podcast for the Corporate Counsel Business Journal. I'm Richard Levick and with me today is Paul Smith, the former Chairman of the law firm, Eversheds Sutherland, and author of The Real Deal: Law Firm Leadership That Works, recently published by Thomson Reuters. Paul, you and I go back a long way, long before we even were required to lie about our ages. I know that you wrote this book before the pandemic. Why don't you talk about some of the pre-pandemic challenges for the legal industry? Let's start there.

Paul Smith: Yeah. What came out of the research was that more firms are far more fragile than people believed. If you look at the market, you would think that the industry, the law firms were very profitable, but they were masking that by reducing the number of partners sharing in the profits. And so you're having many large firms now, just a few partners taking all the risk. And so whilst the overall profitability looks good, the actual productivity was sliding. It's a shocking fact that as we came into the COVID-19 situation in the UK, 20% of the top 100 law firms have less than a million pounds in the bank, so they are very exposed.

Levick: Less than a million pounds seems a remarkably small number, particularly when you're talking about the size of law firms today, and the last downturn, when we go back a decade, and then we go back a few decades before that, the last time the legal industry had to face these kinds of challenges, that seems much more like 1990 dollars than it does 2020 dollars.

Smith: Yeah and I think that's because most law firms operate on the same principle, but at the end of the year, you take all the cash out of the business. It's just the way that law firms operate. They close the gates at the end of the financial year, divide up the profit between the partners and start again and so they don't have the cash reserves that other businesses have.

Levick: When you look at 20% of the top 100 law firms in the UK, do you see the same kinds of challenges for U.S. firms?

Smith: Yeah. I'm seeing these challenges all across the world because this is happening to everyone. And if you monitor the legal press every day across the world, you're seeing this week that many firms are cutting staff, furloughing staff, stopping the payments of partner profits, reducing the amount of monthly drawings that partners can take out. Pretty drastic steps, but I was there in 2008 and you have to batten down the hatches and keep the cash flowing because like any business, if the cash stops flowing, then you go bust very quickly and 2008 saw the demise largely as a result of the financial crisis of Dewey & LeBoeuf from the U.S., [inaudible 00:03:18] in Canada, Halliwells in the UK, because the cash runs out and so it was this desperate scramble, literally in every jurisdiction, to keep the cash coming in.

And if they don't do that, it's going to be very difficult and there are some very difficult conversations taking place with law firm lenders. Some firms, even sophisticated firms, just reliant on the bank overdraft that can be withdrawn at any time. Some firms don't have sophisticated treasury functions with revolving credit facilities and the like and in the UK, we found a number of firms that have floated on the stock market. They're having some really difficult conversations, not just with partners who took a bit big hit in returning for shares, but also with their investors on publicly listed exchanges. So these are scary times. This is far worse than 2008. We really are at a tipping point with regard to the future.

Levick: And I know Paul, you go back to the days of Eversheds and helping it become a global firm. What are some of the recommendations you have for law firm leaders, both in terms of internal, how they manage through this crisis, and also their relationships with general counsels?

Smith: Communication, communication was the message that I received loud and clear when I was Chairman of Eversheds Sutherland, is that you got to communicate with your staff, you've got to be open with people, but equally you got to keep the trust of clients. And I think what I'm seeing now as we moved to a digital age and I think pre-COVID firms knew they had to invest in technology, but weren't quite sure what. They knew that there would be more remote working, but not really a great appetite for it. And now all these things have happened and firms are going to have to engage with clients in a whole different way and I know from my time dealing with in-house lawyers. A lot of junior in-house lawyers expect to buy legal services like they buy stuff off Amazon. They expect to be treated as customers.

It's, "I want some advice, add to basket, take it from my credit card," which sounds overly simplistic, but I think increasingly as we now rapidly move to a digital age, we'll have to start treating clients as customers. We will have to use data to understand our clients in a way that we've never done before and I think this will all accelerate what you might describe as the customer experience from a law firm, because firms are going to have to engage with clients in a far more digital way than they have done in the past. And I'm seeing a lot of platforms emerging where in-house counsel and law firms can deal with each other on an institutional basis. I think part of the problem with law firms is that their experience with in-house counsel is of a particular partner or a particular team or a particular office. And I think the digital transformation will, if the firms who get it embrace it, will be able to deal with clients in a far more sophisticated way with them having a relationship with the institution that is the firm and not a bunch of individuals.

Levick: You know, Paul, we only have a minute left, but I think in closing, let's take a look at from the buyer's side, what general counsels should be asking and how they should be managing the relationship with law firms.

Smith: I think they want reassurance that the firm is stable and that the cash won't run out, which is something that leaders need to communicate, that there is a plan, that there is a reserve, that there is a way that the firm can function until it has time to reinvent itself. The good news is that in-house counsel generally are very loyal to their firms and departments they work with, which of course is great, but you have to communicate. You have to be very transparent about what's happening.

Levick: Paul, thank you so much. Paul Smith, former Chairman of Eversheds Sutherland and book author of a new book out this past winter, The Real Deal: Law Firm Leadership That Works. Thank you so much for joining us. I'm Richard Levick, and this is In House Warrior for the Corporate Counsel Business Journal.

Speaker 1: You've been listening to the Corporate Counsel Business Journal's In House Warrior with host Richard Levick.

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