The legal services sector globally is in a process of change. Law firms that do nothing in the face of this changing landscape do so at their peril, writes international law firm advisor Stephen Moss.
Let me describe the context of the changing international face of this industry.
There are two main segments emerging internationally, the ‘Global Elite’ and the ‘International Business Law Firms’. The ‘Global Elite’ are transaction-focused firms looking to the Fortune Global 250 and comparable companies as their core client group. Allen & Overy, Clifford Chance and Linklaters have entered the Australian market and Freshfields will likely enter the market within the next 12 months.
The other segment is the ‘International Business Law Firms’ that are focused on building a capability in locations where the Global 500 have their headquarters, hence their interest in all major and secondary jurisdictions globally. DLA Piper and Norton Rose are examples of such firms. Herbert Smith has merged with Freehills; Ashurst has merged in Asia with Blakes. The King & Wood Mallesons merger could be a transformational industry changer, most likely embracing Singapore and perhaps Canada as a next step before they are big and strong enough to take on a major US firm and remain dominant.
There are several more US-based international firms launching into this space, including Squire Sanders. Other major US firms are reviewing their strategic views about Asia and Australia. It is common knowledge that each of the top 20 Australian firms have at least considered the international situation they are facing. A number of these firms are actively working on an international merger/ combination strategy.
Growth in China and India has already sparked significant changes in the legal market in Australia and Asia and will continue to do so. Australia has genuine scale in the form of some serious global companies like BHP Billiton, as well as significant inbound and outbound work from China. Australia is seen as a significant bridge into the Asia-Pacific region. Asia wants resources and BHP and other Australia-based miners such as Rio Tinto and Xstrata have coal, iron ore and LNG in abundance. Inbound investment from the north to acquire Australian assets is getting stronger and stronger. Gaining access to that kind of trading flow and the inevitable movement of capital is obviously attractive to the professional services sector.
Australia’s got talent
Australian lawyers are among the best in the world and are at least as good technically and from a professional point of view as lawyers anywhere. We certainly have a reputation as being more culturally sensitive to Asia than English or American lawyers.
Many markets in the Asia-Pacific are still growing at a much faster rate than the established economies in Europe and North America and it is therefore likely that the rate of global law firm arrivals will not slow down anytime soon.
The interest of global law firms in Australia has been off the back of the rise in the economic strength of the Asia-Pacific region in general. There is the premium work being driven by the region and internationally.
The latest valuation for the Asian market for legal services is more than $75 billion and there are literally hundreds of top firms competing for this business. As business has become more global, law firms have had to follow the money to remain relevant to their client base.
Other dynamics in the sector include:
- Larger Australian firms have “nowhere to go”; they have too many partners and “full service” is no longer a valid strategy
- Australian firms choosing an Asia-only strategy face the very real danger of becoming an undifferentiated generalist with attendant pressure on rates and margins
- New international entrants are taking niche positions in selected countries
- Mergers of mid-tier firms to target corporate base-load work are being considered
- New risk-sharing pricing and delivery models – pushed by clients
- Pressure on rates and margins are growing from procurement processes – clients are less tolerant of open-ended fee arrangements
- New models of service delivery are emerging, e.g. LPO and Advent Balance Legal in Australia and Asia and Axiom Legal in the US
- More buying decisions are being made offshore
- There is an oversupply of commodity lawyers both locally and globally
- There is significant competition for top-end partners and talent.
I believe the “war for talent” in the industry is here to stay. While at lateral levels candidates' decisions are largely based on reputation, work and clients of the partner and practice area, the brand also impacts on the quality of the lawyers firms will be able to attract in the first instance. The impact of the brand is most significant at graduate level, where candidates have yet to identify with individual partners or practice areas and therefore focus almost solely on the brand in determining whether to apply or whether to accept a job offer. Being within a large international brand will almost certainly help firms to continue to attract the best and brightest.
A major issue for Australian managing partners and their firms in the future will be the percentage of market share their firm can retain in client spend and whether the overall growth in the market will compensate for their loss of share. Firms operating in Asia as a major focus will likely feel the pressure less, but they will also need to be aware of the changing commercial and competitive landscape they now work in. The commercial certainties law firms have been used to no longer exist: the rules of engagement are being rewritten by competition and a shifting international marketplace; clearly the relentless pursuit of chargeable time and profit per partner is at risk, especially for those firms unable to embrace change.
There is much to be won and lost in this new legal services landscape. Firms that embrace change, become more corporate and strategically disciplined and remember that their clients are their reason for being and move with the inevitable globalisation of their industry will likely be the winners.
I have heard a couple of firms describing the choice to go with an international strategy as a “leap of faith”, I rather tend to see it as the opportunity to take a “quantum leap”. There are clearly risks but I believe that Australian law firms and groups of partners will continue to be of great interest to a number of international firms considering their Asia strategies.
Dr Stephen Moss (pictured), chairman of Eaton Capital Partners, is an international law firm advisor and strategic consultant. He has worked with a number of Australian, UK, US and Asian based law firms on their international strategy and introduced a number of mergers/combinations over his 25 years in the legal services sector.
See Lawyers Weekly 608 on Friday 16 November for a feature on the different structures firms have adopted when going down the merger path