The outlook for the European legal market remains grim, prompting many firms to focus their energies on growth areas like Asia. Leanne Mezrani reports.

Europe’s struggle to pay its debts has reached crisis point. Five countries (Greece, Portugal, Ireland, Italy and Spain) are in danger of a possible default due to what was described as “the most serious financial crisis we’ve seen, at least since the 1930s, if not ever” by the Governor of the Bank of England in 2011.

The Eurozone crisis has also been blamed for the deterioration in law firm revenue in Europe and beyond. Two of the largest law firms in the UK reported flat-to-lower annual revenue growth. Linklaters and Freshfields Bruckhaus Deringer released financial results recently revealing a decline in profits per partner for the 2011-12 British financial year (FY). They are some of the weakest to emerge from the UK’s Magic Circle. Interestingly, Clifford Chance and Allen & Overy, also Magic Circle firms, reported stronger financial results.

David Morley is the worldwide senior partner of Allen & Overy, which increased its profit by seven percent to £486 million for the 2011-12 British FY.

He credits the firm’s revenue figures to a European strategy that takes a long-term economic view.
“We need to steer [the business] through the current uncertainty being felt across Europe.”
Morley acknowledges that the Eurozone crisis is shaking business confidence and, consequently, activity levels for law firms in Europe. He points out, however, that economic problems are not impacting every European country uniformly.

The region’s economy may have already slipped into recession had it not been for better-than-expected GDP figures from Germany and France. Germany, Europe’s biggest economy, posted quarterly growth of 0.3 per cent, an improvement on the 0.2 per cent forecast.

Allen & Overy has capitalised on Germany’s positive GDP result, Morely reveals. “We are continuing to invest in some key jurisdictions we have been underweight in, and are looking to take advantage of the opportunities that current market conditions present for us.”

There are also growth opportunities in certain sectors, according to Peter Charlton, managing partner of Clifford Chance Asia. The parent firm Clifford Chance posted a seven per cent increase in revenue to nearly $2 billion for 2011-12. Like Allen & Overy, this global appears to be only mildly affected by the Eurozone crisis.

Charlton says the current state of Europe’s financial system has meant more restructuring work for the firm. He explains that Clifford Chance is working with a number of financial institutions to introduce strategies that meet the demands of the current economic climate. The firm is also advising banks on how to navigate regulatory change in that industry.

“Regulatory investigations are keeping the firm’s litigation and dispute resolution services very busy,” he adds.
Morley agrees that Europe’s debt woes have generated some high-end work for law firms in such areas as restructuring, litigation, forced disposals and work in the regulatory space.

But Charlton maintains these pockets of growth are limited and do not reflect the generally flat European market. For his firm, M&A and capital markets have taken the biggest hit due to the downturn. “Capital markets are probably the weakest practice,” he says. He blames investor confidence and sentiment, which he describes as “quite unpredictable”.

The rise of Asia

The subdued market in Europe stands in stark contrast to accelerated growth in Asia, Charlton continues.
Clifford Chance’s Asia-Pacific arm is enjoying double-digit growth “primarily because Asia is growing quickly compared to other parts of the world, so we have grown with the market”, he reveals.

Charlton also claims that while some resources have been shifted from slower markets (eg Europe) to Asia “it doesn’t amount to much”.

“Our Asian business has grown organically,” he adds.

James Collis, Ashurst’s managing partner, says his firm has not relied on organic growth, making a strategic move into Asia when it combined its Asia practice with Blake Dawson’s (now Ashurst Australia) in March this year. He reveals that the aim of the partnership – the first step towards a full merger to be finalised in 2014 – was to get critical mass in Asia quickly.

“Between us we didn’t have the time or resources to build up organically in the same way we did in Europe,” he says.
When Ashurst and Blake Dawson were in merger talks, there were fears that the firm would overlook Europe and focus its attention on Asia, Collis continues. But he is quick to add the firm does not plan to shift resources from Europe to Asia. “The last thing we want to do is write off Europe ... it’s important that the European offering remains strong,” he says.

Collis, who spent seven years in Ashurst’s Paris office, admits “there’s a lot of focus on Asia, but not to the exclusion of Europe”.

Global shifts

Globalisation is the real cause of resource shifts between regions, Collis claims. “In an increasingly globalised business you are going to see more and more mobility of resources between offices generally because that’s just symptomatic of how a global business operates.”

Ashurst’s Australian deputy managing partner Helen McKenzie echoes Collis’ claim by saying that globalisation is moving investments to areas that present growth opportunities and, currently, the hub of activity is Asia.

“The shift of capital in a global sense over the past 10 years has gone from the US and Europe to our part of the world, particularly Southeast Asia and China. Being close and being in a convenient time zone ... [Australia is] well positioned to take advantage of that shift.”

Like Collis, she believes that a global tie-up was necessary for Ashurst Australia to respond to growth opportunities.

“The Australian firm had less of a prospect of winning deals in our own right,” she says. “Now we have a key presence in Asia and the capability to service deals.”

Revenue from the Asia practice has grown at a higher rate than domestic growth, McKenzie reveals, with the Australian market feeling the “ripple effect” of the Eurozone crisis.

“There’s no doubt decisions in Europe have an impact in Australia,” she says.

“We are certainly seeing a slowing down of business investment and deals, and we have to be sensitive to what’s happening overseas,” she adds.

Charlton also recognises that Europe’s economic troubles have extended beyond Europe’s borders. But he remains optimistic that Europe will recover soon, “it’s just a question of how long it will take”.

Morley agrees, claiming that Europe will “undoubtedly remain a key player in the global economy”.