foreign currency

Currency woes strike again!

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It’s that time of the year again when law firms in the UK (at least those with LLP status) publish their annual accounts and, once again, it would appear that currency exchange fluctuations have played a significant part in the profit and loss (P&L) sheets of most with international operations (‘Currency woes hit growth‘ – subscription required).

As I pointed out back in March 2013, and then again in August 2014, the Australian operations of international law firms were not going to be sitting pretty when it came to reporting full year earnings in GBP or US$. At the time the experts were predicting mid 80 cents on the US$, and things can only be said to have taken a turn for the worse since then.

Failing a dramatic turnaround in commodity prices, it doesn’t take a genius to work out this will remain the same unless – or until – the Australian arm of international firms can muscle in on the [hopefully much more attractive US$] rates their offshore partners set up for them on advisory or transactional matters (see my post ‘Can a falling A$ make selling Australian legal services easier overseas?‘).

Alternatively, if you are an international firm with operations in Australia you could do what I have seen a number of firms doing during this reporting season and talk up you Australian earnings in “local currency contributions“. Because all things being equal, these firms have worked hard over the past 12 – 18 months to get their strategy on track and have most likely seen real growth in local currency contribution terms.

Foreign exchange woes hurt Australian arm of K&L Gates

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Back in March 2013 I wrote a blog post on how foreign currency fluctuations were likely going to hurt international law firms with a presence in Australia, over the following 12-18 months, unless the firms hedged against this exposure.

Not wishing to be one who says “told you so”, but a report in today’s Australian newspaper (‘Exchange movements take their toll on global law firm K & L Gates‘ [subscription required to read whole article]) affords me the luxury of being able to say exactly that.

According to the article,

“[K&L Gates] global revenue increased by 9.3 per cent last year due to the merger with Australia’s Middletons…”

but,

“…things would have been much better had the US dollar not appreciated by 6.8 per cent relative to the Australian dollar…”

As the Australian sets out, it is largely thanks to the extraordinary level of financial transparency on the part of K&L Gates that we are able to ascertain the effect that currency fluctuations have had on the firm, and the firm should be highly commended for this.

That said, it is highly unlikely that K&L Gates will be the only international law firm with a presence in Australia that will be affected by this. Even firms who have to report in British Pounds or Euros, as opposed to US dollars, will likely have felt this effect on their balance sheets. The only real question is the level of effect it has had.

And the warning I put out there to the Australian partners of international firms largely remains in tact:

in order to keep your fellow partners happy in London, New York or Chicago, your Australian-based revenue will need to increase by approximately 10 to 20 per cent over the next 12 months for you just to standstill.

So before you agree to any increased revenue target budget, keep in mind the compound effect foreign currency movement are likely to have on your commitment.

Alternatively, you could get a commitment from your offshore partners that they refer work into you on which you can charge offshore currency rates – say US dollars; in which case, you could get away with working about 10 per cent less over the next 12 months.

And who said being a law firm partner was easy!

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