[00:00:00] David Morley, how are you this afternoon? I'm good, thank you, Ted. How are you? Doing great. Doing great. I'm super excited about this conversation. Um, I feel like you're my spirit animal on the other side of the Atlantic because- ... the things that you write about- Not a good thing. Yeah, that's debatable whether that's a good thing or not. But the things that you write about are just so much in line in how I've been thinking about where we're going and where we're at, and, um, we're gonna get into that. But before we do, um, let's get you introduced. So tell us a little bit about who you are, what you do and where you do it. Okay, so 40 years in 30 seconds, that kind of thing? 90 seconds. So most of my career I was, uh, uh, at, uh, Allen & Overy, now A&O Shearman, of course. And, um, I was 36 years there, joined straight from law school. Uh, [00:01:00] that firm was 100 lawyers in one office in London when I joined, and £7 million of revenue. Look it up now, it's a little bit bigger. Um, the last 14 years of my career there I was global managing partner and then, um, global senior partner. Uh, I retired after that, having served my mandatory two terms as se- senior partner like the US president, but without the jumbo jet or the missiles. And, uh, the, um, and, and then I had a career in, uh, investment. And I, uh, most recently I was head of Europe for the Quebec Pension Fund, CDPQ. So I was responsible for all their operations in, uh, Europe. They have about 16% of their portfolios, about $650 billion invested around the world, and about 16% of it's invested in Europe. So they've got some big, some big investments in Europe. So I got to see the world through the eyes of a large asset owner. Um, I'd also [00:02:00] charged a, a, chaired a, a litigation finance firm that was sold to Fortress and I chaired a small private equity firm. So I have a mix of this kind of legal transaction. I'm a finance lawyer by background, uh, big law management, uh, and the investment world. And then last year I was talking to one of my partners who I'd worked very closely with in the past who succeeded me as senior partner at A&O and led the merger with Shearman, Wim de Jongh. And we decided that, uh, from everything we were hearing, something had changed, um, in investor sentiment towards the legal sector. So we set up a consultancy business, de Jongh & Morley, very imaginatively named. And, um, and we've been helping law firms and helping investors looking at investing in the legal sector. Um, so you've got a really interesting and diverse background and are... I can't think of anyone more qualified to kind of talk through the agenda that we're gonna discuss today. [00:03:00] Um, l- let's start with just why, what, what has happened that has kind of precipitated the interest or renewed interest or accelerated interest in, um, you know, private equity and, and the legal sector? We, we, we get asked that question a lot, and I'm not sure I've got a perfect answer to it. But I've got a number of, um, possible answers to it. Um, one is that I think, uh, pretty much every other professional services space, I think it's an interesting thing in the law. It's quite an insular profession, and lawyers and law firms tend to look at what other lawyers and law firms are doing. They don't often look beyond that, uh, to what else is going on in the wider world, because most lawyers think that their business is special and nobody else could ever possibly really understand it except them. There's something in that, but I don't think that's entirely true. But if you, um, it-- well, investors don't think like that. They, they think the opposite of that. [00:04:00] And, um, I think it's fair to say that when you look across almost every other part of professional services, you will find, uh, private equity investment, private capital investment has, um, has been going on for some years. For m- for many years in some cases. And in a lot of those sectors, accountancy's a very good example. It's quite a developed market. Um, it's been going for over 10 years in accountancy. Um, and um And, and valuations have gone up because now it's, uh, there's proven success stories. You've got a greater range of investors coming in and so on. And so investors start to look around to what's the next big thing. You know, once value's reached a certain point, it's harder and harder to make money in those established investment sectors, so they start to look around. And law is the bi- one of the biggest sectors. It's a very profitable sector on the whole, and [00:05:00] generally in the past it's been largely ignored except by peripheral investors on the grounds that it's transactional, it's not recurring revenue. Lawyers are a bit of a pain in the backside. They're, uh... And, um, uh, much more dependency on rainmakers than in some other sectors. But that sentiment, I think, really changed maybe 15, 18 months ago. And, uh, the c- the consensus in the investment community started to shift. And I think it's fair to say, and I don't mean this in any disrespectful way, it's like any business community, the investment community is quite herd-like in its behavior. And they, you know, the herd decided that legal is something they should be much more interested in, and they've... And, and, and the more sophisticated investors have got themselves more comfortable with some of the old s- sort of, uh, um, conclusions that [00:06:00] people formed or myths that people had about the legal industry. There was one event, I think, which probably was, um, that probably sparked a lot of inter- It was the spark to this, and that was, um, a very respected midcap investor in the UK inflection, private equity investor. They b- took DWF, a large listed law firm, private in 2023. And I think everybody knows that Inflection are, you know, very savvy operators in the professional services sector, um, a- as investors, and I think that attracted a lot of attention. If Inflection are doing that, maybe there's-- maybe we need to look a bit harder at it. So that, that was one, that was another, uh, factor. And I think, you know, maybe one last thing was, and it's just faded with time, is there was probably a bit of stigma about the legal s- investing in the legal sector that had come from [00:07:00] the largely unsuccessful floats of law firms that happened about 10 years ago in, in the UK, shortly after the regime was liberated, was liberalized here to allow external investment, um, in England and Wales, not in Scotland, but in England and Wales. Um, and that, that, that-- most of them didn't go well. Uh, some of them ended up a real disaster, and I think that probably just reinforced people's thinking that this is just too hard in the legal sector. And that's just, and that's faded now. Interesting. Yeah. What, what can we learn, like what parallels to how private equity has transformed, like let's say the accounting sector and, you know, what can we surmise in terms of timeline as to how these How these changes might impact the, the, the legal sector. Are there parallels there we can, we can learn from? I think there are some [00:08:00] parallels. We, we don't know this, and so it's like I, I can't say this for certain, but our thesis is that the legal sector will pro-- look a little like the accountancy sector. There are differences, but there's also quite a lot of things that are quite similar. And, um, in the accountancy sector, this all started approximately 10 years ago with a number of, uh, smaller deals, um, typically roll-up and consolidation type deals. And, um, both the investment community and the accountancy community over time kind of got used to that as an idea. And about seven years later, so in around '23, '24, what had been a slow trickle of deals suddenly spiked and became a flood. And then you had deals like Grant Thornton and so on. And just to illustrate that, five years ago, the top-- none of the top 30 accountancy [00:09:00] firms in the US had taken external investment, not one of them, and many of them are on record as saying they were never gonna do it. Now, at least 30% of the top 30 accountancy firms in the US are private equity backed or private capital backed. That's in five years. So I think this is a very good illustration how typically these markets work. There's a famous quote, I think you and I have discussed it before, Ted, the, uh, from Hemingway's novel, When the Sun Also Rises, where the character in the book is asked, "How did you go bankrupt?" And he says, "Gradually, then suddenly." And that's... And I think it's that kind of idea that i-in, in markets, although, al-although each law firm leader will-- and, and each law firm think they're unique and special and they make their own decisions and, uh, in their own time, in fact, they're very driven by the market. And when all your competitors start going down this road, it becomes quite hard to stand above the [00:10:00] fray. Um, and, uh, so I think that will happen, but it will take time. We're probably two years into that. In, in our estimation Interesting. Yeah. You know, I use-- I, I, I agree with you that the accounting, you know, here in the US it's, it's, they're, they're a fairly diversified business. It's, it's tax, audit, advisory, and in the US it's, I, I would say it's the closest adjacent industry to legal. And it is a very, it has a different, a very different structure and shape, um, in terms of consolidation. So, uh, the Big Four range, uh, with Deloitte at the top at 80, 90 billion, KPMG at the bottom at about 40 billion, and then there's everybody else. And- Correct. Yeah ... number f- number five is Grant Thornton and, uh, they're in the single digit billions, right? So it's- Yeah. There's a huge gap to the next. Huge gap. Yeah. It's a totally different structure of, of the market. Totally different. [00:11:00] Um, yeah. But it's interesting, you know, after seven years, Grant Thornton, you know, they're now nipping at the heels. Um, and now, and now you've got breakaways from the Big Four who are setting up their own platforms backed by private capital. So you've got Unity, which was set up, announced last year, backed by War- 300 million from Warburg Pincus. Uh, then you've got WTS UK, which was announced this week in the Financial Times, backed by 500 million euros of capital from EQT, specifically to compete directly with the Big Four at, with a AI native-led strategy. And, and are they competing in tax, advisory, audit, or all three? Yeah, all of those, but I think more the first, the first two than the, than the, than the last one. Yeah. Well- Um, and, and they're, and they're all led by ex, uh, top guys [00:12:00] from the, from the Big Four. And you could see that happening in law. You could see that, you know, c- teams of people breaking off, forming their own platform, developing new business models backed by private capital. Yeah. Yeah. I mean, have you heard of Norm AI here in the US? I have heard of Norm, yeah. Yeah. I mean, that's, it, it's exactly, it, it's a very similar model. Um, extremely senior, seasoned, big law, um, partners who some kinda hit the mandatory retirement age and decided to peel off. Their board of directors l- is a who's who from regulatory bodies, I mean, former SEC chairs. And, um, they are doing some really interesting things. In fact, I'm gonna have them on the podcast real soon. Uh, some of the... And, and it's essentially an AI native play where you have Norm AI, which is the holding company for all the intellectual property, and Norm Law, [00:13:00] which is the practice where the- Yeah w- that, that houses the attorneys. Um, and we are forced to do that today Based on ABA Model Rule 5.4, which we're gonna talk about, um- Yeah ... quite a bit. But before we jump into that, I- I'm-- Tell me about Blackstone. Um, th- they're a major investor, and it sounds like they're interested in deploying their war chest, at some of their war chest into a law firm. Yeah. Is that accurate? You've got, yeah, you've got, you've got investors like that who are seriously looking at, um, you know, who, who, who have a specific goal, uh, to find a platform that they can invest in, um, like hundreds of million. I mean, they're big ticket investors. Um, find a platform that they can invest in and take on a journey to completely transform the way that legal services are delivered using their [00:14:00] technology and AI expertise from many other industries that they've invested in and bringing that to the legal sector. And I, I think it's an illustration of a broader point that many investors, when they look at the legal sector, they see a sector that is very profitable, has done very well. Um, most partners in most, in any firm of any decent size will think they're doing pretty well. Uh, but when investors look at it, they see, uh, m- an industry that's largely under-invested in technology and AI and, you know, and providing that kind of client experience and expanding their range of services and products, uh, that they offer. They see a lot of scope for much more tech-enabled, uh, uh, delivery, and they see the way that capital could be used to, um, amp up that, you know, what, what, uh, many law firms, uh, are, are doing. They also see, uh, m- many firms operating unbelievably [00:15:00] inefficiently. They, they look up the lockup that most, you know, the time it takes from the, an hour worked to getting that hour paid for by the client and receiving the money. They're horrified. They can't believe it. And most law firms are like, "Oh, well, that's the way it is." Yeah. It's, um-- Yeah, I'm curious on, so here, here in the US, uh, I, I haven't done this, um, formally, but I've been serving big law for 20 years and, uh, have done business with well more than half the AM Law and have had, and currently have a, a quarter, almost a third of the AM Law as clients. Um, they use our InfoDash platform for internet and extranet capabilities, and we deploy our solution in the client's tenant, so we're not a hosted solution. So that gives us a really interesting cross-sectional view. We get to see all of the interesting things and how their infrastructure is configured, how they've [00:16:00] invested, how, how they support their infrastructure- Yeah and, um, their leadership model. Um, it-- you could go to all 200 Am Law firms and look at their public-facing website, and my guess is I'd put a large wager on the fact that not one of them talks about technology as a differentiator. It's all their people, you know, their, their brand, their, the wins, um, all of these sorts of things. Yeah, the team experience and yeah. Exactly. And, and that makes perfect sense, um- Yeah ... but I think as we, as we go through this transformation, the technology story is going to be part of that differentiation equation. H-How do you see the need for outside capital and the, I, I think the inevitability of technology becoming a d- uh, at least part of the differentiation equation- Yeah how are those two things related in your mind? I, well, I think, I mean, one of the [00:17:00] driver, I think it's interesting because historically law firms, um, like many professional partnerships, uh, w- have had, haven't had much need for capital. They didn't need a lot of capital, and what they needed for business as usual they could fund out of their own cash flow or out of relatively cheap bank debt. Um, so in the past, this, this hasn't arisen, but that's changing now, I think. And, and, and many law firms sense this, even if they ha- even if they don't feel an urgency to, uh, address, uh, respond to it immediately. But many, many feel it, and many law firm leaders talk to me, uh, about this, and they feel that pressure because it's quite clear that there's a tech and AI arms race. And, and I think many law firm leaders have, they, they hold two, uh, sort of thoughts in, in tension with each other at the same time. One thought is, "I'm gonna wake up one day and my biggest [00:18:00] competitor has launched this AI tool that basically knocks us out 'cause we can't compete with it and our, and we lose all our clients to our competitor." But they also have a competing thought is, "I'm gonna waste hundreds of millions of dollars on these fancy new products that no one wants and no one will use." So this is kind of a dilemma that many, many law firm leaders, um, are facing. But I think what is becoming apparent is that you, you, you need much more investment in technology and AI. It's just not optional anymore in the way that it might have been in the past. And by the way, I don't think that is about spending money on licensing and, and products and things. It's a factor, but most decent side, most larger firms, they can fund that out of cash flow. It's more about the change management. It's about rewiring your firm to be able to deliver in a, in a AI world, and everybody is feeling their way towards that. No one's got all the [00:19:00] answers, uh, yet. But it's become apparent, and it's obvious to me I think, that the future is gonna belong to those firms that are able to fuse the, the, the technologists and the lawyers to produce products and services that clients want to buy in that AI-driven world, and that's gonna take capital. And it's also gonna change, take a, a change of mindset. M- many lawyers in, in, uh, in, in many law firms see themselves a cut above, um, everybody else. They-- You even have rules in the US that enforce that. You can't share your fees with a non-lawyer, as they're known. I think we're the only industry that labels everyone who's not qualified as s- as b- by what they're not rather than what they are. So you're a, you know, you may be the greatest CFO in the world, you're a non-lawyer. That's, if you work in a law firm, that's really, that's gotta change. I mean, with that attitude's gotta change. And the, the, the future, I think, [00:20:00] is definitely about, is, i- I think it will be a multidisciplinary future. I can't see a world where it's a lawyer only. Well, in the, in the old days it c- you know, maybe that could true, that could be true. It was, it was all about the quality and the, uh, and, and the skills of your, and, and the client-winning skills of your lawyers. Um, and those things will s- remain important, but more and more and more you've got to, you've got to marry that with the technology to be able to keep up with evolving client demands. Yeah. I, at this point, um, I am certain, I've suspected it for quite some time, but now in, in my mind, I'd be willing to put a six-figure bet on the future of what law firms look like. The, the cash basis partner model is, is going to die a fairly quick death, and the future of law firms are gonna be an ABS C corp with two to five engineers, [00:21:00] um, project managers, business analysts for every lawyer. And that, that is what the, the, the midterm... Long term it's really hard to say, but I think the sh- Mm ... the, the, the midterm, which I'm defining as maybe three to five years, that's what the, the law firm of the future is going to look like. Um, I, I- Yeah, I don't disagree. I don't know about the timeframe 'cause I, I think that's difficult to say. That's a tough one, yeah. And things often take longer. You know, the legal industry is pretty resistant to change. And, um, well, it's interesting because it can be very resistant to change, but it can also be very quick to get on the train when they finally realize the train's leaving the station. So, um, you know, they're, uh... You can accuse lawyers of many things, but generally speaking, you can't accuse them of being stupid. They will figure it out. 100%. Yeah, and, and the timeline on that is the most difficult part of that equation to put a number on, but I think- It's the direction of travel, though, that's important, I think, at this stage. Mm-hmm. When you're thinking about the decisions you're making [00:22:00] about how you configure your firm, your strategy, and so on, that direction of travel seems pretty clear to me. You don't need to bet the whole farm on it, but you should be making some bets. Right. Yeah, and the speed and acceleration of the travel, um, this really does seem to be... I was skeptical of the scaling law's ability to sustain, and I've been proven wrong in that. I mean, if you look at just what's happened in the last 90 days in the AI world, the ad- the leaps forward have been absolutely mind-blowing. It is, it, it really is awesome, yeah. It really is. So, yeah. So the scaling laws have, have stayed intact. I really thought that once we hit, once we, these, these models have consumed all of the ava- available data, that we would start to flatten out on that innovation curve. But we have engineered new mechanisms to leverage innovation through things like inference, [00:23:00] and, um, it has, it has really been a very steep, um, exponential curve. So looking at the direction of travel and the speed of travel, um, and then looking at the pressures that inside legal teams ha- have historically faced and are increasingly facing from boards on Uh, reducing external legal spend based on all these advancements. You know, inside legal teams have always felt pressure to reduce legal spend. You know what's interesting? I don't, um, this, I don't think this is probably true to the same degree in the U- in the UK, but here in the US, um, ALSPs leverage mid-single digit market share. Which is really interesting, like, um, because so much, if you look at the pie chart of legal work, um, it's a fairly small slice that's bet the company. Yeah. The, the, the majority of that pie chart is operate the company legal work. Yeah. And much of that is, [00:24:00] is easily accommodated in alternative models like ALSPs, but the work doesn't seem to go there, even though there's pressure from these inside legal teams or, or from the boards on the inside legal teams to reduce external legal spend. Yeah. Um, I-- my theory here is that AI is going to drastically increase that pressure because boards are gonna see what's possible firsthand. They know there, there, there can't be... I think, and I'd be curious your take on this, why ALSPs haven't gotten the traction Um, that one would expect. It's, it's really a matter of convenience and trust, right? Inside legal teams are i- incredibly overworked. They have a mountain of matters that have to be dealt with and very thin, thinly structured organizations in which to deal. And so things go where they go. Um, I don't know, what is your take on all that? I th- yeah. Well, there's a [00:25:00] lot of questions in there Yeah. Yeah. Um, I think on, on the, uh... First of all, I would say I don't subscribe to the idea that, you know, AI means the end of lawyers. Um, I, I don't-- You're not suggesting that, I know. But, um, you know, some of the sort of scare stories that you hear at the moment, um, about, you know, firms don't need to hire a trainee, you soon g- will get rid of a whole, of, of all their associates and so on over time. I don't, I really don't buy that. And for lots of reasons, uh, partly because I think it's the next generation who will figure out. It won't be guys like you and me, it will be the next generation who will figure out really how to get the most out of these, out of this, uh, new technology, and you need those guys as part of your firm, and you're making a huge mistake by cutting them and just relying on the senior, uh, senior people. Secondly, I think this idea of the so-called Jevons paradox, I think is likely to apply. [00:26:00] Uh, I, I think you know Jevons was a, a Victorian economist who observed that when steam engines were first coming in in the Industrial Revolution, um, and they became more and more efficient in terms of how much coal that they were consuming. But he observed that the consumption of coal went up, not down, because as the steam became cheaper, 'cause it was using less fuel, people wanted more of it, and, and could use it for a whole range of other purposes. And I think that will be true of the legal industry, that there is a vast reservoir of untapped legal demand around the world. The legal industry at the moment only serves a small slice of that, and if we can figure out ways, which I'm sure we will, to develop products and services that can serve that wider market, there's gonna be plenty to go around. So I don't subscribe to the idea. And I think you will always need, at least in our lifetimes, uh, who knows? Unless you, unless you think AI's gonna take everyone's [00:27:00] job and we're all, uh, which is, you know, there's not an indistinct possibility of that, but it's, it's not my central scenario. It's not my base ca- my, my, uh, base plan. Um, but, uh, that in most scenarios, I think there's always gonna be a need for that human judgment, human creativity, human, uh, empathy, uh, and reputation that goes with, with, which is what people seek when they're seeking legal advice typically. But can it be delivered? Can the work be delivered much faster, much more efficiently, much more, uh, effectively with fewer errors and covering more ground? Absolutely, yes. Absolutely. Yeah. Um, but I'm still pretty optimistic about l- about the future of law and lawyers. I think there's, um, you know, I'm, I'm, I'm a, I'm a buyer. Yeah. Um, and, and you know, and I, I have, I have been [00:28:00] oscillating back and forth between, you know, doomsday and nirvana. Um, I, I'm, I'm currently leaning more on the optimistic side, and I heard a really good Um, uh, point made by David Sacks, who's kind of the crypto czar here in the US, and he talked about how Anthropic has said that coding is solved. In fact, they had Boris Tschentscher, the guy who wrote Claude Cowork, on a podcast, and he says he has not written or edited a line of code since November, and we're recording this in mid-March, so more than four-plus months. So coding is solved. But if you go to Anthropic's website, they have senior developer job recs paying $500,000 a year that they're looking for them, which points out an interesting kind of contrast or tension. Yeah. And, um, if coding is solved, why is Anthropic still hiring half a million dollar a year developers? And I think the answer to the question is, [00:29:00] um, and this I believe is true with lawyers as well, is, um, engineers solve problems. Coding is a task associated with solving a problem, and, and the same is true in, in, in legal work. You know, maybe a document or the work product is a mechanism to solve an, a, a matter or, or an issue. And the likelihood in software engineering, and we, we, I believe is also true in, in the legal world, is that we are gonna have many more problems to solve. Think about the robotics. We're talking about robotics, you know, doing plumbing and carpentry work and manufacturing. All that requires software, right? There is gonna be a hundred X n- demand, increase in demand for software, so we are gonna have more, not less, demand. I- how does that translate in the legal world? Do you believe- No, I agree. I, I, I think because, you know, when clients [00:30:00] have, uh, come to lawyers to help them solve problems and solve and, and, uh, and get stuff done, um, in a way that they can't do themselves. And, you know, they will still need-- although the AI may be crunching through some of the grunt work. You know, I look back at my career and I think, "My God, look at the time I spent doing stuff." Now you can just press a button and, and, and get it done. And, um, but, but I think there's, there's still gonna be, uh, for the f- for the foreseeable future, there's gonna be a need for people who can ask the right questions, who can evaluate the answers that are coming out, uh, of the machines, and who can apply them in the context of the humanity that is the client, you know? And, um, uh, uh, and, and I think there will be a, an increasing need for that because exactly as you say, the world's becoming more complex faster than the work's getting commoditized. Yeah, that's a great point. And you know, I-- [00:31:00] interesting, uh, story here. So we have a, uh, we have a product we're calling AI Studio at InfoDash, and we had a, one of our law firms, one of our extranet customers, um, they're a Canadian firm, and they have all of this medical, um, regulatory data in this really, um, carefully curated database that they wanted t- uh, to use our extranet platform so their clients could log in and ask questions about the data. So we built that out for them, and we have another client, extranet client, they're a labor and employment firm, and we thought, ah, th- they currently have a client portal where they also have a carefully curated database of all the labor and employment regs for all 50 states, and their clients log in and peruse it, and they pay them. Th- this is a revenue generator for them. They make almost $10 million a year selling this subscription. And we thought, "Ooh, what we've built over here for this Canadian firm, what if we take that same technology and talk to this L&E [00:32:00] firm and see if rather than logging in, clients upload their documents and exceptions get flagged?" Well, you know what we found out? Um, they have a team of about six lawyers that this is their full-time job to maintain this database. And what we found out is that every little jurisdiction like St. Louis City and St. Louis County, Missouri, writes this language differently and that it is, they tried to get AI to make sense of it and it is absolutely a non-starter because everybody does it differently. So it's like the w- the need, maybe you can do it at a federal level, but it, in all of these local jurisdictions, there's so many, there's so much nuance that we're still pretty far away from AI being able to take all of that. Would you agree? Yeah, I, I would agree. I think, I think AI will be capable of, uh, and probably already is actually, of organizing that kind of, uh, data, uh, eventually. But what you [00:33:00] describe, it reminds me of, uh, uh, it makes me think that there's many more possibilities for, um, delivering products to clients. And they, um, you know, um, uh, Richard Susskind, who, who's, uh, I've known Richard for many years, who's written, written books on, uh, famously his book, The End of Lawyers? Question mark. Um, he, um, but he's written for many, many years on the transformation, on the impact of technology on the practice of law, uh, and so on. And he has a, he has a great way of putting it. He says that clients typically are looking for a fence at the top of the cliff rather than an ambulance at the bottom. Mm. And, uh, I, I think there are lots of products, uh, that are yet to be invented that will serve all sorts of legal needs that clients don't even realize they have at the moment. So a g- a very good example of this is a business that, um, we started when I was, when Wim and I were, uh, running, [00:34:00] uh, A&O. It's called AO Sphere, and it came out of, uh... I'll, I'll just explain it very briefly because I think it- It will help listeners to understand how this type of product might work. So we had-- It was started almost 20 years ago, and it was sold a couple of years ago just before the merger, uh, with Shearman, uh, for, with a valuation of about $300 million. So it's quite a nice business. And it was started in response to, we had clients, hedge funds, institutions, inve- big investors, investment banks all around the world who were trading shares on publicly listed shares on exchanges all around the world. And every exchange has rules, every jurisdictions has rules that once you go above a certain, uh, level of shareholding, you have to make a public disclosure of how many you've got, whether it's 5%, 3%, uh, or, or whatever. And this is a real pain point for clients because keeping track of those rules in every different exchange [00:35:00] and knowing the answer the moment someone wants to do that trade was, is really difficult. Finding a lawyer who's willing to answer that question, uh, maybe at midnight in the US when it's whatever time it is in Tokyo on the Tokyo, uh, exchange when they wanna trade, um, or, and finding some... You know, actually finding a lawyer who knows the answer to that question, um, is a really, really hard task. And it became clear to us when a big investment bank said to us, "You know, we've got a guy in our general counsel office and he's got a shoebox, and in that shoebox he's got the, all the bits of advice that he's had from lawyers around the world over the last few years on these topics." And so when we're gonna do a trade in New York, he shuffles through his shoeboxes, sees this piece of advice he got two years ago from a lawyer in Japan, and they go with that because it's the best they can do. That's a knowledge management system right there. But it's gotta be... You know, but it's, but... And, and so we thought we can [00:36:00] solve that because we, at that point, you know, we were a very international firm. We had, um, we had a lot of offices around the world, but als- we also had relationship law firms in almost every country in the world. We were used to doing that kind of work for clients when they wanted to launch global products and so on. But we weren't geared up for, and most law firms are not, to providing a kind of steady stream of answers to these sort of one-off 10-minute questions, you know? And, um, so we, so we decided to build this business. We hired a guy who's not a lawyer, he was an engineer, and he made a, he's made a fantastic success. That guy has probably, in the end, made more money for the A&O partners than any other partner. And he's not a lawyer. And, uh, and that p- you know, so now that business, AO Sphere, is now owned by, uh, or most of it is owned by, um, Inflection, who bought it two years ago. And I'm sure they will m- make a massive success out of it because [00:37:00] Wim's still on the board, and he is, you know, uh, he's r- he said many times he's been amazed at the business expertise, the, uh, focus, you know, the value creation discipline that they've brought to that business. A really interesting example of, of both of, of a product-led, uh, legal business. You know, I mean, it's, it's not all doom and gloom in the legal world. Like ARR is a beautiful thing, and the valuations associated with a recurring revenue model. Uh, so it-- You know, my wife and I have talked about this, uh, on the podcast before. We own five gyms here in St. Louis, and, um, we, we do pretty well. We've been pretty successful with it. Uh, she was a first-time entrepreneur. She did way better at it than I did my first time, um, which has been great. But when we sell those businesses, maybe three and a half, four times EBITDA, um, whereas when [00:38:00] Info Dash, if we were to put this on the market, we would probably sell for about 10 times revenue, right? So massive , uh, swings in terms of potential outcomes. So if lawyers- Yeah ... can get on board with the upside associated with doing things a little differently- Yeah ... it paints a really pretty picture for what, what can happen. It, it comes back to the point that you made earlier about the model, Ted, 'cause I think you and I, again, have chatted about this in the past. But, you know, we have a, um, a partnership model in the legal sector, which is pretty much a, a monopoly, has a monopoly on the private practice of law globally. Almost everywhere you go in the world, you'll see the same model. Sometimes slightly different legal wrapper and whatever, but essentially the s- uh, same model of, of a partnership model, typically naked in, naked out, very little capital required when you join, very, and you get out the same nominal amount when you leave, and a full distribution [00:39:00] of profits every year. And that, let's be fair, that has worked extremely well for partners. Not so sure it's worked so well for staff, um, not necessarily for clients. But certainly for partners, they've done ver- very, very well out of that model, particularly over the last 20 or 30 years, where the demand for Top-end legal services in particular has just exploded. Um, and however, that model has weaknesses, and those weaknesses are now becoming much more visible, I think. The first one is that it's very hard to invest. It was a struggle even for us, and I can say this, I think, at A&O, to invest in AO Sphere. Um, partners didn't understand it, and also a sense, and it's a p- completely rational on the part of a partner to say, "Why would I invest in something which is not gonna pay off for five or six years? I might not even be here. You know, I might have retired. I might have died. I might have, you know, I m- I might have just left and gone somewhere else." And so [00:40:00] there's a kind of a, a real inertia against investment because it's not economically rational for the individual. It is for the firm, but not for the individual. So it's a good example where the individual lawyer's interests are not aligned with the long-term interests of the firm. And then the second major issue, and this has become, this is particularly an issue at the top, is that partners, um, effectively are free agents, and there's no real financial incentive for them to stay. There's no long-term incentive for them to pla- stay, and there's no real penalty for them to leaving. That is really strange. When you look across, most lawyers at most law firms will not have any clients that operate their business like that where there's just no way of r- no effective means of retaining your top talent and aligning them with the long-term interests of the firm. And, um, so, and, and this, and the velocity at which [00:41:00] partners are moving firms now is just increasing exponentially under-- and it's a, it's market forces, uh, uh, at play, and it puts a real, real strain on the model, those two things. So I think y- more firms now, some of the-- We've had some great conversations with s- some, some of the top firms in the profession focused on this point and thinking this through, like how, what do we need to do to change this? Because there's something needs to change. 100%. Yeah, I mean, I jokingly call big law here in the US as, uh, it, it's a hotel for lawyers. Um, the, the lateral mo- It didn't used to be like that. It didn't used to be like that until quite recently because you had bonds that held the partners together. You know, they c- often they'd been to the sa... They had similar backgrounds. They'd worked together on, on deal. And, you know, and there were much lower expectations about what you did. It was more, it was more, uh, kind of vocation. Uh, but that's ch- you know, the market forces have driven that change. And, and in large [00:42:00] part, that, a lot of that change is, ironically, is being driven by private equity, private capital, because these, at the very top where the, the velocity of movement of lawyers between firms is at its highest, almost all of them are working for private capital clients who, ironically again Very rarely move. Yeah. Why? 'Cause they've got vested carry and There's, uh, they're, they're structurally very, very painful for them financially to move from one firm to another. You don't-- You do see some of it, but it's pretty rare. Um- I, I wanted to ask you, 'cause we only got about five minutes left, and you, you wrote a fantastic a- article on LinkedIn, um, that I really enjoyed called Out-Outdated and Outflanked: Time to Scrap Bans on Non-legal Ownership. And again, my listeners will... I, I talk about this all the time. Um, tell us what the Maginot Line is and how it applies to y- your article. [00:43:00] So my, my thesis, uh, on these rules, which by the way don't, we don't have the same rules in England and Wales o- or in Australia, they, they were changed many, many years ago to allow, explicitly allow external investment. But in most states in the US, except Arizona, and most countries in Europe, uh, they have similar rules which effectively do not allow non-qualified lawyers, uh, law- uh, people who are not qualified as lawyers to own, uh, the, uh, have an ownership interest in, in a law firm or to, um, share fees, um, with, with the lawyers. And these are rules that go back a long way. Mainly, they were, they were mainly brought in when law firms were one or two people in individual towns and whatever, and much more susceptible, uh, to influence. And they now effectively mean that the only way you can invest in those jurisdictions where these rules [00:44:00] apply, the only way you can invest is by setting up a, a different structure, an MSO-type structure, managed service organization structure. And that is a very workable workaround. It does work. It's been used in healthcare, it's been used in, in, in other scenarios, and it is being used in law at the moment, particularly in the US. It's the hottest thing in town. And the problem is, with those rules, is they look as though, they look very impressive. They look as though they're keeping the profession, you know, free of contamination from external influence. But, you know, private capital is like water. It will find its way through every crack. And there are these structures, the management service organization structures are being used and will be continued to be used, and it will continue and, uh, and more and more and more of them will happen. And effectively, those rules are just left stranded. And the Maginot Line, the reason why I use the Maginot Line, uh, [00:45:00] metaphor is because it was a very impressive line of fortresses that was, uh, built by the French after the First World War to stop the Germans invading them, uh, again. And what happened in the Second World War, the Germans invaded them again. They didn't, they didn't assault the Maginot Line. They just went round it They just went through neutral Belgium. And, and so the Maginot Line, which was this incredibly im- impressive set of for, um, of, uh, um, fortifications was just outflanked. It was turned out to be completely useless. And I think that is what is happening to those rules. Um, they, they, the, the people are getting around them right now. Um, and the problem with that, there's a number of problems, but one of the problems is it's adding cost, it's adding complexity, it's making the whole structure more opaque. It's making it harder to regulate in the future. And there's a long-term [00:46:00] danger for, uh, lawyers as well in this, and I'm, I'm writing another article on this. It's gonna be published soon. Um, because if you're not careful, the MSO, uh, owns the hive and the lawyers become the worker bees because all the value creation starts to shift towards the systems, the data, the client management system, the branding, which is all held in the MSO That's such-- Those are two really useful metaphors. Yeah, I have been, um, very vocal about the impediments that Model Rule 5.4 here in the US creates towards a successful post-transformation industry. And, um, you know, besides just the capital restrictions, it also-- We-- Law firms are going to, it, it-- This isn't gonna happen tomorrow, but over time, as we become a tech-enabled industry, [00:47:00] we are gonna need to attract talent from Silicon Valley and tech companies. How are we gonna do that w-when you're competing with, you know, stock options and, and other longer term incentives that, that- Yeah ... that are m- compete in the marketplace for this talent? Um, so I have been, um, beating the drum hard that, you know, I, I've gotten, and you and I actually talked about it, uh, last time we spoke, about how the resistance of lawyers to, to changing this. I, I'm a-- I believe that in the next one or two years, lawyers are gonna be the ones pushing for the change, um, once they see how difficult it's going to be to attract the capital. You know, MSO, it's a band-aid. I mean, it's a backdoor and yes, it's effective- It's an artificial workaround. Right. There's no reason no one would use an MSO, uh, except to get around the rules. You, you don't, there's, you don't, you don't have the-- They're not [00:48:00] a feature in the, in the England and Wales market or the Australian market 'cause you don't need them. Right. It's just added cost and complexity. Why would you do that, add that to a deal if you don't need it? So they are purely artificial devices, and they j- they work legally. Mm-hmm. Uh, but like all such regulatory devices, they contain kind of hidden, uh, problems that tend to come back and bite you later. Um, and I think they'll bite the regulators. And I, I, uh, I'm, I think you're very optimistic, Ted, to think the ru- the rules might change in the next year or so. But- No, not the next year or so. I think, I think there's gonna, I think there is going to be a groundswell of support for the rules to change in the, in the short to midterm when th-there is a, wh-when lawyers, when law firms realize how difficult it is to re- to recruit and retain, um, business of law support functions that have historically not been strategic but w- are going to [00:49:00] increasingly become so. Um- Yeah ... I, I think that there's going to be a I know there's a lot of resistance. In fact, in the, um, I had a gentleman on the podcast from a law firm, uh, and it, who's based in Arizona, and they were the only firm, I don't know how many exist, that supported, um, you know, the, the ABS modification rules. Um- Yeah one, one law firm out of probably hundreds. So we got-- I, I agree, we got a long way to go, but I think- I think, yeah, well, I think you are right in saying that when the lawyers realize it should be changed, it will be changed quickly. Mm-hmm. But, but they don't. And ma-ma-many- Yeah ... lawyers think that somehow it's protecting their kind of monopoly of practice. That's never how they express it, of course. It's always expressed as d- you know, um, a matter of public interest and so on, and, and avoiding conflicts. But, you know, we've operated that system in the UK for almost 15 years now. It's operated in Australia for over 20 years. Who owns the [00:50:00] firm can be completely separate issue from the rules, the ethical rules and compliance that, um, are applied for, to an ABS, and it's worked perfectly well in the UK and in Arizona as well for the last, what, four or five years- Mm-hmm um, and Australia. The dog has not barked. There, there has not been a major disaster. It just hasn't happened. And, um, there's, you know, the idea that only lawyers, uh, can exercise the ethical judgment and so on, that is, um, a- um, and comply with the ethical rules that I agree are essential to protect clients, uh, seems to me to be absurd. Yeah. It's nonsense. Um, it's very- And, and you're, and you're right. We're-- The profession is holding itself back. This is my central argument on this. The profession is holding itself back by not allowing, uh, to, not, not allowing shared, um, equity with [00:51:00] people who are not lawyers, except in, yeah, almost, um... And, um, holding itself back in not allowing external investment except through these convoluted routes. Um- 100%. Yeah, 100%. Um, we are, we are in, uh, alignment. Um, this has been a fantastic conversation. We barely got through the first part of the agenda, which, uh, that's a, that's a sign of a good conversation. Talking too much. Um, no. We-- This, this was absolutely fantastic. I'd love to have you back on. I'll be in London, um, at least once this year and, um, I, I, I definitely at the Financial Times event. I don't know if that's something you attend, but, um- Yeah. Yeah, I usually do, yeah. Yeah ... uh, I'd love to meet you in person and, um, yeah, let's stay in touch. This, this was a lot of fun. Great to s- great to see you, Ted, and, uh, yeah, loved the conversation Awesome. All right. We will- Hope your, your listeners enjoy it. Yes, I'm sure they will. All right, have a good one. [00:52:00] Take care. All right. Bye-bye. Thanks. Thanks for listening to Legal Innovation Spotlight. If you found value in this chat, hit the subscribe button to be notified when we release new episodes. We'd also really appreciate it if you could take a moment to rate us and leave us a review wherever you're listening right now. Your feedback helps us provide you with top-notch content.