Press Articles & Comment

Technology law: staying alert to change

(Richard Kemp, Partner, Kemp Little LLP, appearing in Legal Business IP & IT Report 2005)

What characterises the technology sector we advise? How is legal advice resourced internally and externally? And what are the factors that contribute to the success of law firms and practices active in the technology sector - now and in the future?

Three characteristics of the technology sector - change, evolution and innovation - drive the dominant trends in UK technology law in private practice. These factors shape the demand for and supply of legal services, both internal and external. Nevertheless, important points central to everything technology touches are often overlooked.

It's worth recalling four points. First, Moore 's Law (the empirical rule that computer power doubles every 18 months) means that the ripples that started with the first commercial microprocessor in 1971 are still closer to where the pebble hit the water than the banks of the river: microprocessor-based sectors mature, morph and extend, all at the same time. If there is a constant, it is a dynamic of constant change.

Second, cyclicality. Technology businesses - from the railway to the PC - always have been and always will be cyclical, characterised by boom, bust and consolidation.

Third, technology transforms business and moves to the heart of the organisation: outsourcing companies which used to look after the desktop now perform processes so critical to the beating heart of banks that financial services regulators want to regulate them too.

Fourth, the impact of change; often overestimate short term and underestimated long term. Digital convergence (of computers, communications and content) discussed at conferences in 1998 is now happening, on an epic scale.

These powerful cyclical and structural forces continue to propel technology lawyers' work towards the centre of the organisations we work with. With that in mind:

Technology supply sectors

Technology supply sectors - software, services, computers, Internet, communications, etc - mature, change and extend. The markets are incredibly dynamic, and the same forces that bring about trends towards consolidation and globalisation also constantly innovate, generating new forms of competition, new start-ups, and new forms of local players too.

Consolidation

In enterprise software, anti-trust clearance of the Oracle/Peoplesoft merger heralds consolidation. The UK outsourcing services sector is now maturing and dominated by a handful of global businesses. The HP/Compaq merger demonstrates continuing competitive pressure in the computer sector. The Internet has 'disappeared down a thousand foxholes' - become at once all-pervasive and less visible - and powerful, durable online companies like IAC, eBay, Amazon.com, Yahoo and Google have emerged. In telecoms, excess capacity makes it harder to make money if you didn't start life as a PTT. In broadcasting, Carlton and Granada have merged and Capital Radio and GWR are merging. The list would not be complete without mentioning the companies that have disappeared - Digital (absorbed into Compaq before its merger with HP) and Wang, for example.

Globalisation

These businesses are increasingly global. 20 years ago, we established UK PC and software subsidiaries by the shelfload. 10 years ago, they were larger businesses operating as country fiefdoms. Today, those remaining are managed as one EMEA region, in turn managed from corporate HQ.

Innovating

Yet at the same time you can't lose sight of smaller tech companies - traditionally big users of technology law firm services. The implacable consequences of Moore 's Law constantly fuel new applications and new, more efficient ways of doing things. Consider three examples at the moment: the disruptive or 'creatively destructive' impact of WiFi (wireless network technology) and IP (Internet Protocol) in bringing about vastly cheaper voice and data telecoms; ever increasing miniaturisation; and new services businesses in India. There may be no once in a generation pulse like the Internet boom, but the ripples from Intel's first microprocessor in 1971 continue to expand, increasing the surface area of an organisation's activity that computer power touches.

Technology acquisition

On the buy side, technology acquirers put sustained effort into increasing efficiency and cutting expenses in order to achieve profit growth in a ferociously competitive climate where growing sales is harder. In the private sector, enterprise customers have built procurement machines to get lower prices from fewer suppliers in return for higher volumes. A similar pattern is emerging in the UK public sector, where the radical approach to IT procurement of the NHS National Programme roll-out in 2003/4 is being adopted by other Government departments. Cost pressures on big IT users (public and private) increasingly lead to outsourcing of IT and processes as a way of increasing efficiencies.

In-house legal department

The in-house legal group has matured along with the industry. What characterises the legal group today? Technology businesses have long attracted in-house top class lawyers and increasingly offer a rewarding career patch in terms of professional and management development. The legal department continues to grow in quality and reach to service corporate needs. Major IT users increasingly have dedicated in-house IT law capability.

Tight budgeting and the regular reviewing of recruitment decisions (one extra head or more external legal spend?) are now part of corporate counsel's daily workload. Such pressures lead to a reengineering of the in-house legal function. Many law groups 'manage and outsource' technology legal work, but with cost pressures growing more companies 'manage and do', outsourcing less frequently. Work that was once routinely sent outside - software licensing, say - is now seen as non-specialist and done in-house. It is also ripe for 'de-lawyering' as a process. This in turn may mean greater use of document assembly for standard forms; greater authority for non-legal staff to make contract changes; greater investment in contract management processes; and greater integration of the in-house legal resource to manage the whole process. Improving technology applications support and enable this transformation - Moore 's Law again.

What do corporate counsel want from their law firms?

Against this background, corporate counsel want outside counsel to deliver practical, well-judged solutions, with the accent on quality and value. Quality means a genuine understanding of both the client's business and the dynamics that house counsel respond to; and a service that is creative, technically sound, responsive and above all commercial. Value means a more accountable approach to fees with a focus on proportionality and transparency. Fixed fee work is on the increase. Supply- and buy-side clients increasingly use a range of law firms - 'horses for courses' - with growing use of competitions and panels to secure best value. Secondments from private practice law firms have become a settled feature of this landscape, with the advantages to the client of cost and specific expertise about the client's business.

Private practice - scoping and sizing our market

What about the supply side of the market? First, let's try and scope and size our market to get a better handle on what we're talking about, taking as a start point 'the supply of mainstream technology law services by solicitors in private practice in the UK'. By 'technology' is meant information and communications technology, excluding life sciences; 'mainstream' includes operational and transactional corporate, commercial, IP and litigation work but would exclude property, banking and employment work.

Legal 500 lists 48 London law firms recommended for IT this year. If each practice had 8 full-time equivalent lawyers, that would give a London market of 400 specialists, say 500 including communications lawyers. A look through the Legal 500 suggests a similar figure outside London . Taking average annual revenue per lawyer for those 1000 at around £200,000 would give a UK private practice technology law services market of about £200m. (Putting that into context, 1000 lawyers is just over 1% of the 72,500 solicitors in private practice in the UK .) These figures are guesswork only - the legal fees on a big UK technology corporate deal will affect the figures materially. Other relevant factors are supply elasticity - between the IP, commercial and corporate groups for example; the boundaries between where technology work stops and other disciplines (corporate and other TMT for example) begin; and specialist firms doing international projects from a UK base.

Important questions arise if you follow through the analysis. First, what were last year's numbers and what will they be next? Secondly, what are the equivalent figures for in-house - now, last year, next year? Thirdly, what is the correlation between lawyering technology in private practice and in-house and what are the trends? Fourthly, consider the impact of the NHS National Programme - the largest piece of joined up UK IT legal work ever. The whole project could have taken up to 200 external lawyers for around 6 months, or 20% of capacity. How does this impact the market?

Private practice - market structure and dynamics

Although law firm mergers are increasingly common, an enduring feature of the UK law firm market is its fragmentation, in comparison with other professional services markets - accountancy for example. This pattern is reflected in the technology law private practice market: Legal 500 recommends 48 firms for IT in London alone. The current analysis on the make-up of our market in Legal 500 is that you have three prominent categories of firms - IP powerhouses, City players taking technology seriously and specialist practice (like us). Magic circle practices are currently de-emphasising technology work. Surprisingly, only 7 out of the 48 are US firms, which suggests that IT generally isn't high on their list of priorities at the moment either.

Technology law is classic 'mid market' work - specialist and high value at the leading edge, shading to general commercial work at the trailing edge. The market is characterised by strong competition between firms. Competition reflects sustained supply (this is a market with low barriers to entry but higher barriers to staying); increasing cost pressures from clients; and increasing client market knowledge. Strong competition raises quality, lowers prices and intensifies sales activity. This in turn fuels innovation - in new partnering arrangements between corporate counsel and the law firms they use; in technology (extranets for WIP information, knowledge sharing, systems for managing customer relationships); and pricing mechanisms (help lines, fixed work packages, secondments, gain sharing).

Private practice - achievements for success: now

Key generic characteristics of today's successful technology practices include (as in every other area of practice) deep sector experience, committed commercial client service and understanding of the client organisation. More specifically however, technology - as an industry founded on constant change, innovation and dynamism - expects that same change from the legal profession that supports it.

Skilling Up for tomorrow

A particularly important factor is the ability to skill the practice up for tomorrow's specialist services. You can't rest on your laurels . When I started out, we charged the client for faxing statutes. Now they're all freely available. Software licences that were sent outside a few years ago are now mainstream and done in-house. As more information becomes freely available and more tasks become mainstream, we must constantly move up the down escalator of information commoditisation to keep our edge.

That means being intellectually adventurous: it's always been the case that you don't have to go far in our practice world to get to the leading edge. Much of the work here is at the intersection of previously separate practice areas - currently, for example, where outsourcing meets financial services regulation; where competition law meets IP rights; where telecoms (transmission regulation) meets broadcasting (content regulation); where the internet meets financial services in e-money; and where the law of copyright, database right, confidence and contract meet in addressing the digital world. But today's leading edge becomes tomorrow's trailing edge, so we must constantly look ahead.

Another opportunity for technology lawyers is to follow where our clients' technology work leads. As IT transforms business, so technology law takes us towards its heart and increases the range of our work. We're observing this particularly in banking, insurance and travel - but the same is true across the board: as technology transforms business, technology lawyers have an opportunity to develop commercial and regulatory skills and specialisms in those sectors.

In addition to meeting the intellectual challenge of new law and new sectors, we need to be able to scale up to the larger outsourcing and other set piece IT projects, as well as servicing the trailing edge work that becomes mainstream commercial work over time, all the while maintaining the leading edge skills.

It's for these reasons that we at our firm put contract, IP, competition and IT regulatory under one roof in a single broad technology law focused commercial practice. There's a huge amount to keep up with so learning to learn becomes the core skill. With a team of excellent lawyers, you can resource projects (large and small, specialist and mainstream) leanly, cost effectively and at a superior quality of service.

... and in five or ten years' time

What will our market look like in five or ten years' time? Well, my crystal ball is as good as anybody else's but the points mentioned at the start - cyclicality, Moore's Law, the transformational power of IT and the impact of change long term - will see strong competition keeping technology lawyers light on their feet. We'll see increasing structural change and consolidation in the market - the middle market that today looks crowded will thin out a little - and new ways of working between corporate and outside counsel based on increasing use of technology and reducing costs. Those firms - specialist, national and mid size City - that can adapt to the challenges of change will thrive. As well as constantly improving our training, recruitment and marketing, this means keeping attentive and focussed - to the markets our clients operate in, to the law firm market itself and to learning new skills today for tomorrow's leading edge legal problems.

(Richard Kemp - Legal Business IP&IT Report 2005)