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Australia’s great dividing range

Australia’s great dividing range

Australia

The bedrock of traditional legal services has been subject to intense pressure in recent times, and from all directions. Fissures have emerged and split law firms into distinct groups, with global mergers casting the classic mid and top-tier layers into disarray.

In this special feature, Lawyers Weekly speaks with some of Australia’s remaining independent firms and asks what challenges the modern market poses and how they are finding success between a rock and a hard place.

A global metamorphism

Australia’s law firm stratigraphy was once a much easier concept to drill down. The shorthand of top-tier, mid-tier and boutique classification for legal service providers used to say something very specific about the clients a firm served, the size and scope of its practice groups and the fatness of its profit margins –but things have blurred.

While competition is fierce across the board, the pressure to innovate better and faster than the foray of NewLaw outfits that are bursting on to the scene, as well as picking a magic price point that satisfies the appetite for efficient, high-quality legal work, has made for a compelling case for some national firms to tie up with a global entity. Forces have driven some to the edge.

A recent example of this coming to bear is a portion of the fractured Gadens federation merging with global monolith Dentons. The Melbourne office of the prominent domestic law firm opted out of the international tie-up that was finalised in December 2016. Gadens offices in Sydney, Perth and Port Moresby meanwhile proceeded with the merger, with the Brisbane office also coming along for the ride to have an affiliate relationship with the global law firm but electing to hold on to its Gadens name.

Dentons global CEO Elliott Portnoy told Lawyers Weekly at the time that the firm’s entry into the Aussie legal market was “dramatically different” in its "polycentric" approach by adding entire firms with similar values to the network rather than going after lateral hires.

“For us, the ability to combine with an extraordinarily talent group of lawyers in Australia is the fulfilment of our clients’ desires. And we’ve already seen in a very short period of time the flow of new work from offices all around the world into Australia,” Mr Portnoy said.

Then six months later, the merger between mid-tier stalwart Henry Davis York (HDY) and global firm Norton Rose Fulbright (NRF) was announced in in June 2017. Like many global mergers before it, news of the union has led to the shedding of a number of partners.

The official reasons for the marriage were given in a public statement, attributed to HDY and NRF big bosses Michael Greene and Wayne Spanner. Both legal leaders described the merger prospect for their firms in optimistic and future-focused terms, leaning on the tag line: “a powerful combination for Australia”.

According to Mr Greene, HDY had been considering how to “re-engineer” the “proud and respected Australian law firm” for the future for some time. He went on to say in the statement that following client consultation, the HDY partnership agreed that “the time was right to look to join forces with an elite global law firm to continue to provide [clients] with an even greater level of service and industry expertise”.

The message that law firms are responding to client needs is a common justification given in favour of both the decision to merge with a global firm or the choice to hold on to independent status. The views shared for this feature suggest that different business leaders are fixed in their belief that one course is better for profit and productivity than the other. They all say the strategic steps taken in the past four years have positioned them well.

Of course, having a good position is also a matter of perspective. At the time of the HDY-NRF merger announcement, NRF global chief executive Peter Martyr noted the benefit of “critical mass” that HDY would bring the firm in Australia. The combination would help fulfil the ambitions of the NRF’s global strategy, he said.

“The addition of Henry Davis York will give us the critical mass we need in Australia to take full advantage of the steps already underway, at a global level, to modernise our business through the implementation of our 2020 business transformation strategy. This combination will allow us to bring the benefits of this transformation to more clients,” Mr Martyr’s statement said.

HDY’s integration with NRF is expected to be completed by 1 December 2017.

At the time that this article went to print, six lawyers from the 124-year-old Australian firm had chosen to opt out of the tie-up and quit the HDY partnership for domestic rivals Corrs Chambers Westgarth and Mills Oakley. In the same month, four NRF partners also jumped out of the global firm to launch an office for Pinsent Masons in Perth. In August confidential sources have reached out to indicate that more HDY departures are expected to eventuate.

Ten years ago, Mr Spanner had told Lawyers Weekly in what now looks like a prophetic interview about the waning relevance of Australia’s tier parlance that global law firms had no boundaries with respect to sector expertise because they were well placed to mobilise resources rapidly and broadly to meet client demand. Back in 2007, Mr Spanner’s prediction for the near future in Australia was an influx of at least 10 global firms to enter the local market.

Scratching the surface

In a climate where clients are demanding more for less, and where innovation is pushing change in all facets of business at a rapid pace, more lawyers are fighting for clients from the same pool. Domestic firms in particular are vocal in being regarded as preferred counsel for a great many international clients. This is the case for those hailing from the traditional top and mid-tier ends of the market scale that do not want their proud independence to be perceived as isolationist.

Far from it, in fact, domestic Australian firms see themselves unburdened by the dictates of an offshore board and equally desirable as an Australian referral for some of the major international powerhouses that do not want to send clients to magic-circle competitors or rival firms of similar size.

To understand the temptation, a national top or mid-tier law firm is presented with when a global merger is on the cards, four big bosses of independent firms offered their assessment of the current market conditions. The majority predict more mergers in future but also indicate they are benefiting from the opportunity that movement of this kind has left for others to swoop in on.

Being entrepreneurial in a buyers’ market

Gilbert + Tobin’s chief operating officer Sam Nickless says he can see why the prospect of a global merger may appeal to some breed of lawyers but he also dismisses the idea merger moves informs the way his firm strategises its market foothold. For one of Australia’s youngest leading independent corporate law outfits with offices in Sydney, Melbourne and Perth, the focus at G+T is on a two-pronged strategy of excellence and productivity.

“I can hear the logic in mergers, certainly. I think for individual groups of partners there is an element where people will want to get a bit more scale and solidify some of the in-bound referral work, but it doesn’t inform our strategy a lot,” Mr Nickless says.

“But these mergers going on are not a big discussion point in our partnership meetings and the strategic conversations that I have.”

According to Mr Nickless, in some cases mergers can spell good news for top-tier national firms such as G+T. He suggests that this opportunity directly relates to the shrinking pool of independent Australian firms, which international firms without a local footprint would prefer to recommend to clients.

“When mergers happen, they do sometimes create opportunities for us because that will be another independent firm that is no longer independent and therefore, the inflow of referral business from offshore firms may no longer go there.

“Although, if it was a global firm merging with a local firm that had been a source of referrals before, that could be a challenge because the offshore firms that aren’t in Australia don’t want to send their clients to a competitor,” Mr Nickless says.

G+T has set its sights on developing expertise in its complex transactions space and has specific ambitions for its corporate and M&A practices. Mr Nickless also identifies major disputes, infrastructure financing and regulatory work as promising growth areas where the firm is paying careful attention.

Speaking about current market conditions, he notes that while the mood has improved and “settled down” in the last five years, competition is fierce. Mr Nickless believes it has become a buyers’ market, which he claims is a good thing because rival firms have come to hold one another to account for the quality, price and service on offer.

“The increasing use of technology and our clients’ understanding of what the potential benefits of technology are (and starting to price that into what they expect to pay for services) means that all of us as firms need to make sure that we are responding,” Mr Nickless says.

“I don’t think you can just stand on the fact that you’ve got the best lawyers and the best practitioners alone. That’s why G+T is pushing hard on the productivity side as well, because we need to be able to do as much as we can in an automated way with quality legal judgment on top. That’s the kind of unbeatable preposition,” he says.

The G+T partner adds that the firm is keeping a close eye on the manoeuvres of top-tier rivals, including the strategy of the big four accounting firms whose legal services arms have been building out in recent times.

“Their emergence in the legal space is definitely a dynamic in the market that we need to be across and we need to be thinking about.”

Mr Nickless also speculates that in an environment where some competitors are posting flat revenues, it must be difficult for certain camps to retain their top partners. He says merger in this context could be a sensible option for firms wanting to keep a lid on evacuating talent.

“The benchmarking that we see on the overall market is that the revenue level is flat and there are some growing and therefore there are some that must not be growing. Once you start to see decline in terms of growth, then you can have a very difficult situation because your partners can be attracted to other places that can pay them more.

“That is a challenge for firms and maybe one of the reasons why they might let you merge – a merger could be better than having a whole group of partners all going at once,” Mr Nickless says.

For G+T though, the self-directed destiny that comes with staying independent is central to the emphasis on entrepreneurialism that the firm’s culture thrives.

The scope for a law firm business to be agile in this way and adapt fast is something G+T has no plans of ditching. Mr Nickless says it is the very reason the firm can attract the respected practitioners that it does.

“Independence allows you to create an environment for the sort of partners that we like to attract, who also value their independence and like to feel that their destiny is in the hands of a group of people that they can see around the table together.

“It can work as an independent because you can move quickly, and you can prototype, and you kind of work in a collaborative team with a small group of people,” he says.

The mid-tier punching above its weight

Michelle Dixon, the Melbourne-based CEO of Maddocks, alludes to something similar when she talks about the broad culture shift taking place within modern mega-firms. She acknowledges that there are many different market pressures challenging national domestic firms, businesses such as Maddocks have found themselves to be the beneficiaries of change. Top lawyers want to belong to agile workforces and call their own shots, Ms Dixon says.

“We’re finding that it’s much easier for us to attract fantastic partners from some of the larger firms. And we have clients coming to us because we’re not interested in some of the rigidity that you get at some of the larger firms or the international firms.

“Maddocks is an equal profit share partnership. We do that because it breeds collaboration, which means our clients are looked after by the right people in the firm. There’s nothing in our remuneration structure that is a disincentive to ensure that the right person is looking after the client,” Ms Dixon says.

Those partners who are entertaining the idea of jumping from a global law firm and joining a domestic partnership want to cut loose from the strong possibility of conflicts of interest with a firm that represents so many client interests around the world, she added. This is a relevant observation given Maddocks’ recent coup in acquiring the entire team of the of DLA Piper Canberra office lawyers, which include two partners and 8 lawyers. The specialist government team parted ways with its international home.

“As part of an international firm, [DLA’s Canberra lawyers] were increasingly being subject to conflicts that were preventing them from doing a lot of the government work that they do.

“Obviously, the bigger you are and with the broader reach, the greater the number of clients you will have worked for somewhere in the world and therefore the more likely it is you will come into conflict issues. Being smaller, being domestic, we have less of those conflict issues and that’s very attractive to people who actively practice in the government space,” Ms Dixon says.

It is a sound example of how mergers that present opportunities to improve the critical mass to global firms like NRF can have the unintended consequence of hindering the business of certain practice groups like those servicing government.

Furthermore, Ms Dixon says that the profitability of a firm of a size like Maddocks can be seriously underestimated. Contrary to the view of some, she says mid-tier firms can rake in bigger profit margins than the firms servicing the top end of town.

“Assumptions are made, I think, by the big firms particularly about what firms our size can or can’t do. You will find that some of the firms in our part of the market are far more profitable than larger firms.

“The market is obviously changing a lot, but it is just not right to say that it is a disaster to be in a mid-tier. Maddocks has had 8 per cent revenue growth this year and we expect we’ll have at least 10 per cent revenue next year. We’re stronger than we’ve ever been,” Ms Dixon says.

“Success comes down to a willingness to invest and I think if you have your culture right, you will have buy in into a strategy about investing in your people and how they work in order to deliver those best services.”

The mid-tier boss adds that the firm’s strategic objective would be to sharpen its pricing tools so that clients can be quoted for legal services with greater certainty. This is in addition to the firm’s innovation agenda and commitment to flexibility, she says. Ms Dixon also rules out the possibility that Maddocks will consider a merger of the like of HDY and NRF.

“We are very proudly a domestic firm. We have no desire to be an international firm, and we’re unequivocal about that. There is no ambiguity about that. When we started Sydney, when we started Canberra, we did that by recruiting the right people in and then through organic growth – so merger is not something that we’re interested in,” Ms Dixon says.

The case for re-engineering business

Competition for the hearts and minds of clients and the brightest lawyers Australia’s market has to offer is an issue for all firms, but the changing market has meant doing so effectively has drastically changed in recent years. Sparke Helmore’s Mark Hickey says that demonstrating and selling a clear point of difference in what he calls the “new paradigm” for law firms is critical. Technology and the way it is harnessed and embedded in a firm is a key part of Sparke Helmore’s strategy, he adds.

“Digital disruption, the restructuring of businesses, the internet have had significant impact on our clients, particularly in the banking industry and the insurance industry with hyper competition coming in.

“That, in conjunction with the GFC, has seen the clients now making it very clear that we are in a new paradigm for providing legal services and that we have to step up to the challenge and the change,” Mr Hickey says.

Sparke Helmore’s chairman of partners, who is based in Newcastle, says that business transformation or “re-engineering” the delivery of legal services has been a priority for global and national firms alike. Those unwilling to change tack in their approach to business and who fail to make serious investment in technological innovations will be left behind, he suggests.

Mr Hickey has gone on to say that work in the order of process-driven litigation, investing in data analytics and restructuring the business have been some of the ways that Sparke Helmore is meeting these modern challenges. He underscores sectors in insurance, banking and finance as spaces where clients are driving the call for this change, adding that there is also a need to engage and reward the firm’s workforce with the innovation agenda.

“Lawyers tend to put themselves at the centre of attention of clients, but I believe that [legal services] are one part of the puzzle that clients need to have looked after. The firm is committed to sticking with its core legal competencies but where we have to provide adjacent services that are relevant to the law, we will do that and will invest in types of things like allied revenue lines,” Mr Hickey says.

“It’s a whole different paradigm to what it was when I started law. What I think we have to do today is cater for the young lawyers and enable them to invest and be involved in the business process. Part of that is the Bright Sparke initiative that we have at the firm, which is an innovation hub. It works on the basis that younger people are getting involved in that and we see it as a good thing for the firm, for clients and for retention.”

A more fundamental shift taking place in the mid-tier workforce is the way that lawyers now envision their career trajectory. It matters because senior talent from a number of global firms are increasingly being lured to national firms with a sense that the culture of an independent firm has better synergies with smarter business. In a crowded market, where the departure of leading partners and teams can bring heavy blows to a national law firm, Mr Hickey says, retention is critical.

“Unless we focus on our key values, it’s very hard to maintain high retention. Provided that we have flexibility, we embrace diversity and we have other opportunities for young lawyers to get involved in things other than just being 9am-to-7pm, at-work lawyers; I think it can be effectively addressed,” Mr Hickey says.

“Retention is one of five key metrics set out by the Sparke Helmore board. Both retention and values are two main metrics that the board looks at in terms of making sure that we keep abreast of the market in terms of diversity, market remuneration, and providing more exciting opportunities for our lawyers, which includes innovation and being involved with national clients. It’s about providing a good place to work.”

Smart price points

Pricing for services is where Tony Macvean sees a universal hardship being levelled against all firms in Australia, from NewLaw boutiques to the globals alike. It is a view consistent with that shared by Mr Nickless, who uses G+T’s investment in NewLaw market entrant LegalVision to demonstrate that clients need more mixed options to adjust to their different needs.

“It’s competitive at the top end and competitive in the middle as well. And with price pressure, there is a shift of work in house, and there are reducing volumes,” Mr Macvean says.

At Hall & Willcox, servicing corporate clients’ operational, ‘business as usual’ requirements has been a move that has served the firm well. This is certainly so in a market where the likes of G+T are focused on improving dominance in complex matters and large commercial transactions.

Mr Macvean says that by cultivating its ‘Smarter Law’ initiative, the firm has been successful in being appointed to legal panels for operational corporate work of this kind. He says Hall & Wilcox’s strategy relies on forging and maintaining relationships that gives lawyers a clear insight into the client’s value-conscious pricing needs.

“Business-as-usual work needs to be delivered at a certain price point where clients know what they’re going to pay and they feel like they’re receiving value. We think that we can do that well,” Mr Macvean says.

“It is a balance. If you go in too low [with your pricing], it’s just poor quality or lack of investment in the business. At the same time, for that operational ‘business as usual’ work, it needs to be provided at a price that demonstrates value.

The right price point calls on firms to be accurate in picking a figure that reflects the volume of the business coming to the firm, Mr Macvean suggests. He also sees merit in building client relationships that persuade them to invest with the firm and their mutual interests.

“You have to reflect all those different factors in coming up with a price that’s fair from the client’s perspective and fair from our perspective and provides value.

“There is no doubt that there’s competition and the work needs to be done at a price that is competitive and that is less than what the top tier firms might have traditionally charged for that work,” Mr Macvean says.

Hall & Willcox’s attempts to get a handle on collaborative problem-solving for clients, particularly those in the insurance and financial services spaces, is also about reinforcing a culture that is ready and willing to respond to disruption. Mr Macvean says it is a long-term commitment that no firm can afford to lose sight of.

“Culturally, our willingness to embrace that things are changing and to challenge ourselves to do better and to come up with smarter solutions is one reason that we’ve done well. And as I say, there’s lots more to do.”

“We recognise that it’s a competitive market and that there’s some disruption we have to embrace – so we’ve got a long way to go.”

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