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Tidying up the tiers

Tidying up the tiers

The definitions of what constitutes top, mid and small tiers of law are changing, writes Claire Chaffey, but finding a general consensus on which law firms fit where may simply be impossible. Th

The definitions of what constitutes top, mid and small tiers of law are changing, writes Claire Chaffey, but finding a general consensus on which law firms fit where may simply be impossible.

The notion of tiers separating the large law firms from the medium and small sized ones is a touchy subject. It is not a topic of discussion into which many firms particularly wish to delve, nor is it something which is easily defined, measured or valued.

To some, terms such as "top-tier" and "mid-tier" are arbitrary classifications holding little or no relevance. While to others, such labels send a clear message about their place in the market.

It is a subject which rouses passion and polarises opinion, often depending on where firms are situated on the traditional rung.

Few, though, can deny that tiers do in fact play a significant role in industry parlance and understanding of the Australian legal profession, especially in relation to how firms are perceived by clients and industry peers.

It is, however, apparent that many firms see the meaning of tiers differently to how they were once defined, and this view is being further skewed by the arrival of an influential new player - the global law firm - which many in the industry predict will further push the boundaries of how the legal services market is segmented.

The tradition of tiers

The Australian legal market has traditionally been separated into three distinct groups: top-tier, mid-tier and boutique. According to IBISWorld industry analyst Sam Ellis, there are many accepted factors which go towards what he describes as the "fairly arbitrary process" of defining legal tiers. Such factors, he says, include the number of employees, number of offices, the range of service capabilities, and the size and profile of clients and engagements.

But revenue has long held the most sway as a metric defining which law firms make up Australia's top-tier.

It is revenue that places Mallesons Stephen Jaques, Freehills, Minter Ellison, Clayton Utz, Allens Arthur Robinson and Blake Dawson in the top-tier - also known as the Big Six - with Corrs Chambers Westgarth straddling the revenue border between top-tier and mid-tier.

Though Ellis says it is difficult to pinpoint the exact moment when tiers emerged in Australia, he offers the following explanation: "It is something that developed over a period of time throughout the twentieth century in industrialised nations as mergers and acquisitions between successful firms yielded the creation of standout large firms across a number of industries ... This was, in turn, driven by the need to service clients that were expanding nationally and internationally."

Does size matter?

Many firms, particularly those outside the top-tier, suggest the classification of firms based on revenue is not useful for clients or the industry.

Middletons managing partner Nick Nichola certainly sees it that way.

"You can measure a law firm, or indeed any business, on a range of metrics and categorise accordingly. However, I find little meaning in such classifications and I am not sure clients find it helpful either," he says.

"Middletons' goal isn't dissimilar to many other ... law firms and who we compete with will vary according to which area of law or industry," adds Nichola. "I'd rather our clients decide where we sit in the market rather than some arbitrary classification."

Wayne Spanner, a partner at Norton Rose, acknowledges that the division of tiers based on scale - both in terms of revenue and reach - has been a relevant part of the market, though argues that it is not as important as it once was. "Clients do not simply use firms because they have the top-tier tag," he says.

"I think they're quite capable of discerning who is best in the market, and I think nowadays ... they think size is not that important or as significant as it might have been when the tag came to prominence."

Sharon Cook, managing partner of Henry Davis York, fervently believes size is secondary to expertise when measuring a firm's worth.

"In my view, the term top-tier describes the size, not the quality, of a firm," she says.

"I object to the term [mid-tier] as it suggests we are of an inferior quality [when compared to other firms]. We provide top quality service and carry out high-end work, but we don't have the size of some of the bigger firms ... We have no plans to be all things to all men. We don't need to be a top-tier firm to perform high-end work."

Reputation, not revenue

It's not surprising that Mallesons - a firm which is unquestionably ensconced in the top-tier - attests to the lingering relevance of the traditional tier structure in the legal profession. However, chief executive partner Robert Milliner makes clear his view that reputation ultimately distinguishes which firms occupy the top-tier - not size or revenue (though these, he says, are certainly factors).

"It comes down to the reputation of the firm, based on its people, quality of service and depth of expertise, as well as peer and client reviews," he says.

"Clients are highly aware of firm capability and relative performance. Regardless of the views of the profession, it is how clients regard a firm that is critical."

But according to Telstra's general counsel, Will Irving, a firm being in the top-tier is only relevant when it comes to large-scale litigation and voluminous transactions.

"The rest of the time," says Irving, "I'm interested in the individual lead partner and the team who are doing the work. Whilst often the most experienced and knowledgeable people are at a top-tier firm, there are superb lawyers at smaller firms too."

Irving agrees with Milliner when he says that reputation is a crucial consideration for clients. "[Whether clients give credence to tiers] all depends on the matter, the type of work and what the reason for briefing a firm is," says Irving.

"I don't think the tier matters, but the firm's lawyers - and to some extent its reputation - certainly does. Firms in the same tier quite often have very different strengths, and [reputation] matters a whole lot more than the tier itself."

Blurring the lines

If firms are beginning to argue - or have already accepted - that size doesn't matter and it is actually reputation which defines the top-tier, it is perhaps logical to infer that the pool of firms in the top-tier has expanded.

IBISWorld's Ellis seems to think so. "The notion of tiers provides a helpful form of 'short hand' which aids discussion, but the borders between tiers are blurring," he says.

"While there remain some engagements that tend to be solely the domain of the recognised top-tier firms due to their size, many clients are seeing benefits in using smaller firms for matters that don't require enormous scale. As this occurs, the gap between the recognised top-tier and mid-tier is narrowing."

Irving also believes that if questions of size are set aside, then the top-tier has expanded. He specifically names Gilbert + Tobin and Arnold Bloch Liebler as two firms which he considers to have crossed the line.

Milliner, however, does not agree. "In our view, the number of firms in Australia that can genuinely carry the top-tier label on a national basis has actually contracted," he says. "In this market, as in any other, firms are judged on their track record."

Slotting in the global firms

A crucial factor which must be considered in the debate regarding tiers is one which threatens to deconstruct the traditional notion of tiers in Australia: the arrival of global giants Norton Rose and Allen & Overy.

Whilst they are unable to compete with the Big Six in terms of size, they certainly occupy the upper echelons of reputation and prestige in the global legal industry.

So how do they fit into the traditional tiered structure?

According to Spanner, the globalisation of the legal market is set to dramatically alter the traditional classification of the top-tier.

"We are across the table from the large firms ... I think the globalisation of a firm like ours turns the tier model upside down. It's not all about size, and I think it is really about industry sector experience," he says.

"I think the main issue is that now, if you have the capability and sector experience, you will be selected by the client for your work irrespective of your size."

Spanner predicts an influx of 10 to 15 global firms into Australia in the near future and as such argues that Australia's long-held idea of which firms occupy the top rungs will have to change.

"Global] firms have the relevant expertise and experience of global practices that can be brought to bear in Australia and you would have to say that competes with what has traditionally been known as the top-tier market," he says. Spanner adds that global law firms have the capability to rapidly and broadly mobilise resources to meet client demand, and therefore sector expertise has no boundaries.

"Firms that don't have a global presence are going to find it difficult to position themselves in the market because the competition from the global law firms is going to be enormous ... I think [the golden catch-phrase] is going to become, 'We're a major global firm' [as opposed to top-tier]."

Irving also agrees that if global firms continue to move into the Australian market, the potential to unravel the tier fabric is certainly there.

"If [global] firms end up recruiting top candidates because they can offer a seamless career path - here, overseas and back again - then [they] will become much more significant," he says.

"Like the national mergers of the 1980s and early 1990s - which saw pretty much every major Melbourne and Sydney firm merge one way or another - if the trickle [of global firms] becomes a strong flow, it will have a transforming impact in the next 20 years."

A future definition...

Opinions about which firms occupy the coveted top-tier - and whether it is really a relevant consideration - will, no doubt, continue to vary.

Firms already appear to be shifting from a revenue-based definition of the top-tier to one which prefers sector reputation - even if such a change has yet to fully infiltrate industry psyche and language.

But with hugely successful global firms arriving on our shores - albeit condensed versions of what's seen overseas - and more looming on the horizon, the traditional notion of tiers has never been more prone to evolution.

In response, firms appear to be scrambling to assert themselves in specific market areas and are making it clear to clients that when it comes to law; it's not the size that matters, but what you do with it.

But just as giving every runner in a race a blue ribbon deems the success of the top runners irrelevant, you can't label every firm as top-tier.

Perhaps tiers will become just that - irrelevant - with many firms already heralding the demise of such definitions.

More likely, though, is a remodelling of the current structure which disperses the label amongst a broadening range of increasingly specialised players, with sector reputation - not revenue - firmly at its heart.

The problem is, with such a subjective metric replacing an objective one, who will judge?

Time will tell.

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