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Robert Millard Towards a ‘BigLaw’ model for African law firms SPA Ajibade & Co. Annual Business Luncheon Lagos, Nigeria, 17 November 2016

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Robert Millard

Towards a ‘BigLaw’ model for African law firms

SPA Ajibade & Co.Annual Business Luncheon

Lagos, Nigeria, 17 November 2016

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It is wonderful to be back in Lagos for the first time in nearly a decade and I am deeply grateful and honoured to be addressing as eminent a group as we have assembled here today.

The topic is what the concept of ‘BigLaw’ might and should mean in Africa. This is an important question. The scale and sophistication of law firms in a given market are a function of the complexity of the work that clients need done and hence the level of specialisation required to service their needs. Everything, of course, is driven by clients. Clients do not exist in a vacuum, though. Their needs are driven by both internal and external factors. The latter include the nature of the industry sectors in which they operate, the complexity of the law in the jurisdictions in which they operate and the scale of their enterprises – particularly if they straddle multiple jurisdictions and have to comply with the requirements of multiple legal systems.

Africa is evolving quickly. It is, they say, the new frontier. Perhaps the last frontier - on the planet at any rate. But the frontier for whom? Having strong, competent African law firms is going to become increasingly important to ensure that the interests of Africa’s peoples are protected as that frontier is exploited. Of course we live in a globalised world and legal services are as subject to that reality as any other area of the economy. But the practice of law is a very local phenomenon. It is closely intertwined with the identity of a nation and its culture and the safeguarding of its national interest. As African economies grow and diversify, so too Africa’s law firms will need to ‘up their game.’

Enormous obstacles remain that need to be overcome in order for economies in Africa to advance .... but they are being overcome. Trade within Africa, itself a function of the quality of infrastructure connecting the countries, is far weaker than it should be. The continent has a massive energy deficit. Corruption remains rife in many places. Societal inequality is at dangerous levels and social unrest bubbles just below the surface, occasionally erupting into violence. Yet this is the continent that leapfrogged over landline telephones straight into the mobile age by translating that technology into the financial services sector. Perhaps we will see other needs being more efficiently met in Africa with the innovative use of the most modern inventions, for instance local electricity generation such as Elon Musk has just launched in the United States. In education. In healthcare. In agriculture.

Law firms will always play a vital role in unlocking Africa’s future. The ‘BigLaw’ model is something that evolved during the course of the twentieth century, though, in other parts of the world. In thinking about its relevance to today’s world and to Africa in the 21st century, it would be useful to quickly revisit the pressures that created it and the key bullet points of its development. In my library, I have a book by one Erwin Smigel, titled “The Wall Street Lawyer.” It was written in 1963. Mr Smigel notes with some wonder that at that time the largest New York firms had as many as 50 to 120 lawyers in them and occupied two to three whole floors of a New York skyscraper. That was just fifty years ago. Since then, the legal profession has been mostly in rude health in North America and in Europe, especially. In the United States, except for a few brief periods, the legal sector has grown consistently faster than the nation’s Gross Domestic Product (GDP) - see figure 4.

Of course the legal profession in the United States is far more protectionist than in most countries. In the 1930s, under the leadership of the American Bar Association (ABA) the legal profession managed to secure the idea that unlike for instance doctors or dentists or architects, its rights to self-regulate are beyond the legislature and in fact constitutionally protected. Aghast at banks and claims adjusters and accountants and consumer organisations who were collaborating with lawyers to dispense legal advice to clients, the ABA hit on a remarkably clever way of preventing that. Lawyers were simply prohibited from sharing fees with anybody else who was not legally qualified. Unlike the prohibition on alcohol from roughly the same era, that prohibition has stood the test of time. For the past eight years, if you required legal advice in the USA then you were obliged to purchase that advice from an attorney. It is most unlikely that such a measure would be approved today, were it not already in place. An unanticipated consequence though has been that vast sectors 1

What should ‘BigLaw’ mean in Africa?

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Detroit 1990 Silicon Valley 2014

Market capitalisation

Revenues

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$36 billion

$250 billion

1.2 million

$208,333

$1.09 trillion

$247 billion

137,000

$1,802,920

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X 8.6

Dealingwithstrategicuncertainty:Assessingchangestoyourcompetitiveenvironment

The3largestcompanies:Detroit1990versusSiliconValley2014

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Detroit 1990 Silicon Valley 2014

Market capitalisation

Revenues

Employees

Revenue per employee

$36 billion

$250 billion

1.2 million

$208,333

$1.09 trillion

$247 billion

137,000

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X 8.6

Dealingwithstrategicuncertainty:Assessingchangestoyourcompetitiveenvironment

The3largestcompanies:Detroit1990versusSiliconValley2014

07

Figure 1. Mankind has experienced three industrial revolutions to date and appears to be in the early stages of a fourth, characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.

Figure 2. To understand the impact of the third industrial revolution, consider the three largest companies in Detroit in 1990, versus the three largest companies in Silicon Valley today. They have roughly similar revenues but vastly different market capitalisations and the latter have far fewer employees to generate that value. The fourth industrial revolution may have a similar impact on the need for human workforces. (Schwab, 2016.)

Dealingwithstrategicuncertainty:Assessingchangestoyourcompetitiveenvironment

The4threvolutionwilllikelybeasdisruptiveasthefirstthreewere

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We need to design our law firms to thrive in the world that is emerging, not that

which is or was before ....

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Renaissance

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Legal services in the 4th Industrial RevolutionRenaissance means just getting back to the 1989-2015 GDP growth trend

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Source: U.S. Bureau for Economic Analysis; MPSFG analysis

Figure 4. For most of the period since the 1960s, the U.S. legal services sector grew faster than Gross Domestic Product (GDP.) It contracted sharply following the onset of the global financial crisis in 2009 and has since flatlined.

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Legal services in the 4th Industrial RevolutionThe volume and complexity of law has been increasing exponentially

Population: 1 = 1bn people

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Number of pages in major items of U.S. financial services legislation

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Source: Philip Wood, 2016. The fall of priests and the rise of lawyers.

Source: (1) Compliance Week, 22 July 2013

• Will the law all be in written form? Other possibilities?

• Agile regulation? • ‘Ignorantia juris non excusat’ for

machines?

Figure 3. The volume of law is growing exponentially and so too its complexity. Philip Wood, in his book ‘The Fall of the Priests and the Rise of the Lawyers” identifies an inflection point in Victorian times (corresponding to the advent of the automated printing press) after which the amount of law promulgated worldwide doubled and doubled again within the course of 150 years. This exponentiality may accelerate even faster over the coming decade and beyond.

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What if the future actually looks like this?

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Source: IMFNote that the IMF did not produce forecasts for Egypt – the data after 2014 is 5-year moving average

2,9502,834

2,347

2,148

Angola

SouthAfrica

Nigeria

EgyptAlgeriaMorocco

Growth will be more broad-based over the coming decade

Source: IMF, MPSFG analysisNote: The IMF does not currently publish forecasts for Egypt so the projection shown here after 2014 is the 5-year moving average

Figure 5. Despite Africa’s vast size, the cumulative GDP of all its economies in 2016 was only roughly the size of Italy’s. By 2020, according to IMF projections, it may be the equivalent of France’s or the United Kingdom’s in 2016. Growth in African economies over the coming decade will need to be broader based and less directly dependent on energy and other natural resource exports. This will create new demand for legislation and hence legal services.

of American society have been rendered unable to access justice. They simply cannot afford the legal fees. Online services like LegalZoom and RocketLawyer are stepping into the gap to provide basic legal documents for a fraction of the cost of what a lawyer would need to charge to compile them and these services are to be applauded. They are enhancing the ease of doing business, reducing business risk for small businesses and so creating more demand for more sophisticated legal services at the top end. Which of course is good for ‘BigLaw’ too.

In 1991, two academics from the University of Wisconsin, Marc Galanter and Thomas Palay, described the ‘BigLaw’ phenomenon comprehensively in a book titled ‘Tournament of Lawyers.’ They described a world of partners who owned the firm supported by salaried associates, the swing from litigation to transactional law and a formal support system with modern technologies being deployed. For the first time, partnership agreements became necessary to govern the contractual relationships between the owners of the firm. Lawyers began to work in real teams. Smigel quoted a contemporary law firm leader in the 1960s as follows:

“If a large law firm has a big anti-trust case with a lot of detail factual work, a number of men are required. We have one team of twelve persons working on a case like that and the men are doing mostly factual studies – not law. They are indexing and cataloguing. It is obvious that you can’t keep the president of the Harvard Law Review on that kind of case and keep him around for long. So you have to hire people who are not that bright.”

With the exceptions perhaps of the last sentence and the fact that today it would almost certainly not only be “men,” this quote describes a situation that we would find completely unsurprising today. In the early stages of ‘BigLaw’ though, the concept of leverage and of actually having a partnership agreement was completely revolutionary.

During the first ten years of the twentieth century, largely on the back of the property boom but also ongoing globalisation and technological advancements especially with the internet, law firms

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Numbero

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Nigeria

Figure 6. Breakdown of five major Kenyan law firms by practice area (counting lawyers who are specifically identified on each firm’s website as being associated with a particular practice group or groups. Excludes those, for instance junior associates, when they are not allocated to a particular group.)

Figure 7. Breakdown of four major Nigerian law firms by practice area (counting lawyers who are specifically identified on each firm’s website as being associated with a particular practice group or groups. Excludes those, for instance junior associates, when they are not allocated to a particular group.)

grew revenues at 4 – 6% more than the rate of inflation every year – almost entirely by increasing rates. Client demand exceeded supply. Since the global financial crisis, growth has stagnated in the portion of the legal services sector serviced by law firms. Which is not to say that demand for legal services has stagnated. In house teams have grown significantly over the past seven years. So too legal process outsourcing firms. At the same time, we have seen a succession of mergers that have pushed the size of the largest law firms in the world to numbers that our commentator in 1963 New York would have found quite incomprehensible. ‘BigLaw’ is today very different to even in 2009.

Technology has always been an important driver of both demand for legal services and law firm size. We can track how major advances in technology have spawned quantum leaps in regulatory 5

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South Africa

Figure 8. Breakdown of four major South African law firms by practice area (counting lawyers who are specifically identified on each firm’s website as being associated with a particular practice group or groups. Excludes those, for instance junior associates, when they are not allocated to a particular group.)

and other forms of legal complexity. Philip Wood, in his book ‘The Fall of the Priests and the Rise of the Lawyers’ shows how in Victorian times, the invention of mass printing led to an exponential proliferation of new legislation. Mankind has experienced three industrial revolutions in the past and is now experiencing a fourth. The First Industrial Revolution used water and steam power to mechanize production. The Second used electric power to create mass production. The Third used electronics and information technology to automate production. Now a Fourth Industrial Revolution is building on the Third, the digital revolution that has been occurring since the middle of the last century. It is characterized by a fusion of technologies that is blurring the lines between the physical, digital and biological spheres.

Through each of these revolutions, businesses have become exponentially larger, more complex and able to generate more profit with fewer people. In turn, legal issues involved in business have become more complex, substantial in scale, more important to the profitability of the business. Each time, lawyers had to up their game to be able to adequately advise their clients. Big business requires big law. Business that is driven by cyber-physical systems, big data, the internet of things and artificial intelligence will require legal advisors who are similarly technologically enabled.

Philip Wood identified the inflection point in the exponential growth in the sheer volume of legislation worldwide to be about 1830. Perhaps history will show that to have been a mere blip on the curve and the real inflection point to be right about now. The Glass Steagall Act of 1936, which separated retail from wholesale banking in the United States, was just 36 pages long (see figure 3.) According to David Polk’s Dodd Frank Resource Centre, 271 rulemaking deadlines have expired from promulgation of that Act in 2010 up to July this year. The last estimate that I have seen of the number of pages of law that have been produced is three years old now, but today it would be somewhere north of 15,000 pages. We already see litigation where discovery is being performed on

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databases which if printed out would comprise millions if not billions of pages and if that discovery were to be performed by the team of twelve that Smigel described in the 1960s, it would take literally centuries to complete. This is the reality with which African ‘BigLaw’ will contend.

As emerging economies diversify and grow, we are seeing countries adopt wholesale the legislation already developed in other parts of the world. This process has a long way to run. The collective GDP of all the African economies in 2016 is slightly less than that of Italy. If the projections of the IMF are accurate then by 2020 they will be roughly equivalent in scale to France or the United Kingdom. Clearly, there is likely to be considerably more legislation promulgated in African countries, in coming years. While some will converge across nations (like legislation under OHADA) a considerable amount will vary and even conflict across other national boundaries.

We all know how geographically vast Africa is. How much of the world’s natural resources are to be found on the continent. How youthful its population is and how vast its future workforce. The United Nations recently revisited its projections and now believes that Africa’s population could, on a medium projection, rival Asia’s by the end of the current century. If they are right then the ‘triple bottom line’ economic, ecological and social sustainability challenges in Africa will be profound.

Life has already become very complex. Think of last time you downloaded a piece of software and just clicked “agree” instead of reading through terms and conditions. In different ways and to varying degrees, “clicking agree” rather than confronting complexity has become the norm in today’s world. The alternative is to pay more to manage the risk than it is [usually] worth. Gillian Hadfield in her book ‘Rules for a Flat World’ (2016) points out that according to the American Intellectual Property Law Association, in 2012 the median cost for litigating a patent suit with a value of < $1 million was $600,000 – for each side. In well over 80% of tenant eviction, consumer credit, divorce and child support cases in North America and, I strongly suspect, in Europe and in Nigeria too, at least one party in a dispute goes unrepresented. In developing ‘BigLaw’ solutions in African law firms, solutions also need to be found for those who have need of legal advice of a kind where it simply does not make economic sense for a lawyer in a law firm to dispense it. Otherwise, the rule of law remains the preserve of the rich and subject to challenge by the disenfranchised.

What will ‘BigLaw’ mean five years to ten from now? Will it be different in an African context to what it means in North America or Europe, or Latin America or South East Asia? What can African law firms do in order to optimise their own competitiveness in what is becoming a more crowded market, although nothing quite as crowded as the hypercompetitive American or UK markets? In Africa we have a largely clean slate with which to develop a ‘BigLaw’ model that can be competitive in today’s global legal services market, advance the rule of law and make a disproportionately large contribution to the realisation of Africa’s potential for Africa’s people. The essential characteristics that I think the large successful African law firm of the future will have are as follows:

1. A strong disputes practice and a suite of corporate and commercial practices

The breakdown of partners by practice in a range of large Kenyan, Nigerian and South African law firms are shown in figures 6, 7 and 8. Note that almost all of them have a strong disputes resolution practice. Clearly, the ability to advise clients when things go wrong is almost as important as on transactions that go right. In Nigerian firms, the number of partners whose practice crosses between transactional and disputes work is also far higher than in either South Africa or Kenya. This will likely reduce as Nigerian firms mature further.

2. A primarily local law focus

Much has been made of the amount of fees earned by foreign law firms advising clients on matters in Africa. With the large cross-border deals, especially involving investors and/or funding from outside of Africa, English law or less frequently French or other civil code law will apply. As law firms in many jurisdictions (not just in Africa) have found, the large international law firms with 7

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a critical mass of English qualified lawyers have a clear competitive advantage in this area. Hiring a few English qualified lawyers is unlikely to tip the scales enough. Trying to compel international investors to instruct local rather than international law firms simply has the effect of chasing away all those investors who will not invest unless advised by their own trusted legal advisors.

3. Strong practice groups

As mentioned at the outset, the scale and sophistication of law firms in a given market is a function of the complexity of the work that clients need to be done, so the level of specialisation required to service their needs. For the overwhelming majority of law firms, this means specialisation along practice lines, then along industry sector lines. Figure 9 shows the degree to which partners in a firm claim multiple practices. In the South African firms, which are the largest and have business models that are closest to the European and North American law firms, the average number of practices claimed by individual partners is roughly half that in Kenya and Nigeria. Deep specialisation means that partners will no longer be able to spread across multiple practice groups.

4. Amarketpositionthatiscompetitivewiththe‘Big4’advisoryfirms

Figure 11 shows how the ‘Big 4’ global advisory firms are growing and their ambitions for further growth – almost all of it outside of audit. While legal services comprise a relatively small part of the anticipated growth, all four regard emerging markets as an attractive opportunity for this part of their advisory business. The successful large African law firms of the future will constantly calibrate their service offering, in close consultation and perhaps even collaboration with their clients, to focus on areas where the ‘Big 4’ are less well positioned and specialist law firms more competitive. Deep specialisation is likely to be a key ingredient of success. So, too, focusing on those areas that intersect less directly with financial advisory work. Attracting and retaining better legal talent than the ‘Big 4’ can attract will also be key to success in years to come.

5. Closerelationshipswithoneormoreinternationallawfirms

As economies expand and diversify and legal needs become more complex, so the business case for international law firms to enter the market improve. By definition, by the time a business case exists for a big, multi-practice indigenous law firm, a business case will also exist for a local office of any of several global law firms. The verein structures that have been adopted by many of the emergent global giants (see figure 10) make it quick and easy for firms or groups of local lawyers to join them. Criticisms levelled at verein firms not being ‘real firms’ are nonsense, driven largely by legal services media who find it difficult to accommodate such firms in their league tables.

The ‘Big 4’ global advisory firms and Baker & McKenzie are examples of verein firms (or verein-like firms) that have been around for decades and thrived with that model. Should such firms be allowed to establish in Nigeria? It is difficult to understand the justification for trying to exclude a law firm that is in fact a global network of co-branded individual law firms from establishing in a particular jurisdiction, if they can provide a service that will promote economic growth and diversification without contravening that jurisdiction’s immigration law – for instance by hiring entirely local lawyers, in exactly the same way as the ‘Big 4’ advisory firms operate.

6. An inclusive, collegial governance system

Challenges exist in transitioning from a founder-owned firm to a larger, multi-partner business. One of the most difficult is for founders to willingly suspend and transition their control to the degree that partners who are not founders (or perhaps family members of founding families) feel a real sense of ownership. In some non-African jurisdictions (e.g. Indonesia) the entry of international firms to the market disadvantaged local family-owned law firms who lost partners who chose to move their practices to the international firms. Similar challenges are expected soon in India, too. The standard of legal advice available to clients in Indonesia improved, though, both through international firms and local firms who have survived by improving their own standards. 8

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Figure 9. One measure of the depth of specialisation in the firm is the number of practice groups to which individual partners claim membership. In firms with very general practices, it is commonplace for partners to list themselves under several practices - sometimes quite diverse. In firms with deep levels of specialisation, partners tend to align with one or sometimes two [closely aligned] practices, but seldom more.

7. Appropriate technology, including for knowledge management

International ‘BigLaw’ firms are to a degree hampered by their [very expensive] legacy technology systems. While problems of internet bandwidth persist in many parts of Africa, as this improves so too will opportunities for African large law firms to leapfrog to the latest communication and other technologies. A leading U.S. ‘legaltech’ commentator, Bob Ambrogi, estimated a few months ago that there were over 600 legal technology start-ups in the USA alone. In developing new systems, African law firms should look at what is emerging at the fringe that could be valuable to them, rather than just adopting what the South African or London firms are doing.

8. Key client accounts (and perhaps a strong client industry sector focus)

It is impossible to treat all of a firm’s clients equally and one thing that the large African law firm of the future will have in common with today’s ‘BigLaw’ is a sophisticated approach to identifying key clients and developing the firm’s advisory suite around their needs.

9. A clearly articulated, competitive market position

Developing a clearly differentiated market position is difficult when one is selling essentially the same services as one’s competitors. Yet, it is vital. This perennial problem is as valid in developed legal services markets as it is in emerging economies. For many firms, the differentiation will be on the basis of a focus on particular industry sectors. This is because specialisation is expensive in terms not only of money but also time and effort. So, to be as good as the [other] market leaders in a particular area requires focus. If one’s major clients are in energy and financial services, for instance, then it makes sense to specialise in those sectors and spread geographically within those sectors.9

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Developing a clearly differentiated market position is difficult when one is selling essentially the same

services as one’s competitors. Yet, it is vital.

Figure 10. The largest global law firms are quite modest in scale compared to other kinds of global professional service firms.

Source: Bloomberg; MPSFG analysis

The largest global law firms are modest in size compared to other PSFs

Source: Firm websites, MPSFG research

The ‘Big 4’ global advisory firms are intent on significant growth in advisory services

• Pricepressureonaudit

• Rotationofauditors

• Largescalemeansdeeppocketsforinvestments

• Deeprelationshipswithbusinessesinallglobalcentres– evenquitesmallones

• Havelargely‘crackedthecode’ofbusinessefficiencyinservicedelivery

Figure 11. The scale, expertise, efficiency and global reach of the ‘Big 4’ global advisory firms (Deloitte, PricewaterhouseCoopers, EY and KPMG) create competitive advantage that law firms will be hard-pressed to match, in some but certainly not all areas of law. Thriving in the future will need to include picking areas where your firm can out-compete ALL competitors - not just other law firms. 10

Sources:Firmwebsites,Bloomberg,Wikipedia,MPSFG analysis

Sources:Firmwebsites,Bloomberg,MPSFG research and analysis

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Robert F. (Rob) Millard

Rob Millard is a partner and the head of the strategy practice at the Møller PSF Group, a management consultancy based at Churchill College within the University of Cambridge. He is also co-chair of the International Bar Association’s Law Firm Management Committee and a past chair of the American Bar Association’s International Law Practice Management Forum. Over the past two decades, he has advised law firms on both sides of the Atlantic, in Africa and elsewhere in the world. He has co-authored books on law firm strategy, partner compensation and several other aspects of the business of law. He has spearheaded a number of IBA and other initiatives aimed at enhancing the competitiveness of law firms in sub-Saharan Africa, including in Ethiopia, Kenya, Nigeria, Rwanda, South Africa, Tanzania, Uganda and Zimbabwe.

10. Thoughtfulapproachestodeliveringefficiency

Most law firms have already gone through the “easy” cost cutting measures. Efficiency is becoming more difficult to find but much can be learned from other innovators. The large African law firm of the future will be as good at legal project management as the leading international firms. They will understand and apply strategic pricing and source and execute matters in such innovative ways as to deliver quality at a price that clients are prepared to pay, with profit margin preserved.

If the above does not sound too different to the recipe for a successful large African law firm today, that is because it’s not. The future of law is emerging slowly, closely following the future of business and the future of society and the future of the world in which we live. There is no “big bang” solution. Most of the improvements that we need to make to our firms in order to grow and prosper are already out there in plain sight, too. What we can do though is develop a view of what improvements make most sense to our own firm in the short term and work to implement those, all the time listening closely to what our clients say and watching what unfolds in the market.

Most of all, I do not for a moment believe that the large, successful African law firm of tomorrow will be just like the leading European or North American law firms, but smaller - let alone (as I have heard some suggest) as they were a few years ago. I really do believe that there is a chance to develop something uniquely 21st Century African. To develop firms that make a disproportionately large contribution to realising the potential of this great continent and actively promoting the rule of law and access to justice, while at the same time making a very decent living for their partners, too. My challenge to you today is to make this so.

References:

Galanter M. and Palay T., 1991. Tournament of Lawyers – the transformation of the big law firm. The University of Chicago Press.

Hadfield G.K., 2016. Rules for a Flat World – why humans invented law and how to reinvent it for a complex global economy. Oxford University Press.

Schwab K, 2015. The Fourth Industrial Revolution. World Economic Forum. Accessible at:http://www3.weforum.org/docs/Media/KSC_4IR.pdf

Smigel E.O., 1963. The Wall Street Lawyer. Free Press.

Wood P.R., 2016. The Fall of the Priests and the Rise of the Lawyers. Bloomsbury Press.

[email protected]

Tel: +44 1223 655-352 11