international law firm

Q2 2014/15 CommBank Legal Market Pulse report

The CommBank Legal Market Pulse report for Quarter 2 2014/15, conducted by Beaton Research + Consulting, has been published. Providing useful insights into the latest trends and developments impacting on the Australian legal industry, this report has rapidly cemented itself as a staple among serious legal business developers in Australia.

Interesting outtakes from the latest report include:

unsurprisingly, given the continuing political uncertainty and falling commodity prices, many law firm leader believe there may well be a downturn in the broader economy over the next 12 months.
one in three firms are looking to expand geographically by opening new offices, with an emphasis on Perth, Brisbane and Canberra being the locations of choice. This is an interesting development as it had been the stated strategy of many firms in Australia for a long time not to expand outside of their geographic stronghold base. For example, for a long time HDY were only ever going to be a Sydney firm serving national clients. Now they have an office in Brisbane. Likewise for G&T (new offices in Melbourne and Perth). What I would be interested to find out though is how much of this expansion is self-driven and how much of it is been driven by major clients looking to rationalise the number of law firms they use? If that question was asked, I suspect we may find that this trend is more client-driven than firm-driven.
Asia at 89%, UK/EU at 67% and Brisbane at 52% are seen as being the geographic areas with the highest revenue growth expectations. Sorry but I find this nothing short of astonishing. Have any of these respondent law firms looked at how crowded the Brisbane and Asian legal markets are? And wasn’t it only a few months ago that PwC were reporting that return on equity for Asian law practices was the lowest globally (at somewhere in the 20% range). [that said, Clifford Chance did recently announce a desire to increase revenue in Asia by 25%]
expected changes in realised rates is a 1% (+) increase. Pathetic! Might I suggest the firms concerned consider not increasing their rates by 5-10% this year and instead concentrate on trying to get more than 80c in the $ in realised billing rates.
negotiating price with clients, at 81%, is seen as the biggest business challenge facing law firms. Here, I would hazard a guess that negotiating the price we want from our clients is probably the real business challenge as it would seem that price negotiations in law firms is a one way conversation at the moment.
the practice area with the highest revenue growth expectations is Government (at 55%). With the announced forthcoming closure of the Australian Government Solicitor potentially putting up for grabs around $111.3 million in revenue for private practice law firms, perceived growth in this sector shouldn’t be too surprising. What does remain to be seen is how much of this pie firms other than Clayton Utz (at 11% for 2013-14) can get their hands on.
54% of law firms surveyed believe revenue from “non-legal services” will increase over the next 2 years. While I was unable to find a definition of “non-legal services”, the relatively low (at 54%) number of law firm leaders who saw growth in revenue in this area does surprise me. This is especially so if services such as the recently launched Orbit by Corrs Chambers Westgarth is seeing as constituting “non legal services” (in that it is not core legal advisory work).
and finally, 70% of law firms see “recruiting partners and staff from competitors in the new location” as being the most likely method of geographic expansion, while only 30% saw this geographic expansion occurring as a result of a “merger with an existing firm” – so be on the lookout for 2015 being a very business year for lateral hires!

If you haven’t already done so, can I suggest you download a copy of the report. It really is an interest read.

Are the legal press letting the importance of revenue get in the way of a good story?

An interesting news item appeared on the Global Legal Post website overnight (Australian time). Citing a recently published (January 2015) Legal Services Market Research Report by IBIS World, the Global Legal Post item, which is titled “Australian firms on the hunt for increased revenues” states that:

Pressure on revenues is forcing Australian firms to look overseas in a bid to increase turnover.

First of all, if I’m allowed to say, this is irony in action!

Given the number of international (mostly British) law firms that have entered the Australian legal market in the past five or so years as a result of perceived or real limitations on growth in their own domestic markets, to now be informed that one of the consequence of this action is that Australian firms now need to look overseas to grow their own revenue is, well, ironic.

More importantly – aside from being wrong as the IBIS Report clearly states that the market in Australia is growing (if admittedly at a snail’s pace) – is that it misses a crucial point; namely, increasing turnover for turnover’s sake is nothing short of a wasted effort!

But don’t take my word for it, as the prominent industry strategist and pricing expert Richard Burcher rightly points out in his comment to the link I posted to this on LinkedIn last night:

Surely it is bottom line growth that matters? And the assumption that this can only be achieved through top line growth is profoundly flawed. The application of a more sophisticated firm-wide approach to pricing can yield a demonstrable increase in revenue by on average 5% to 8%. For most firms that produces a profitability increase of 15% to 25% with the same clients and the same work. No wonder more than 50% of post merger firms report that it failed to deliver to the bottom line.

Precisely Richard.

Unfortunately, however, this is not the only example of this type of legal press reporting/thinking.

Only the same day (Monday) The Australasian Lawyer reported – citing (wrongly in my opinion) another UK website – that the Australian arm of DLA had been “fingered for [the] law firm’s drop in revenue” as if huge levels of shame needs to be attached to this [revenue drop] given that it

follow[ed] a transition period where underperforming partners in the region [Asia] departed.

Well I happen to know a number of the partners who left DLA last year and one thing I can say with absolutely certainty is that they were anything but underperforming. More accurately, what they were was in practices that were no longer strategically aligned to where DLA sees the future of its business (something I think is made clearer in the UK version of this news). And, in a partnership sense, there is nothing wrong with having conversations like that. Indeed, they are to be encouraged.

So as with the discussion around revenue and profit, the discussions around revenue and strategy, while related are two different issues.

And all of this before we even get into the very real discussion of whether or not one law firm’s growth has to come at the cost of another law firm.

Indonesia – the next frontier?

To those wondering what the next marketing and business development frontier in the Asia-Pacific will be for law firms now that China and India have started to go off the boil, I can say “the hunt is over” – Indonesia will be the ‘hot’ new buzzword of 2015.

An article published in Singapore’s Straits Times today [26 January 2015] – “Foreign law firms eye Indonesia market – Global players drawn in by opportunities as Jakarta pursues investment deals” by Wahyudi Soeriaatmadja in Jakarta, sets out a number of compelling reasons (as well as limitations) as to why more global law firms are looking to try an get active in this rapidly expanding and increasingly attractive market.

Of note:

Indonesia is South-East Asia’s largest economy
The country has an extremely ambitious 5-year infrastructure (roads and railways) development plan
The government of newly elected President Joko Widodo is looking to boost gross domestic product (GDP) growth by 7 per cent over the term of its government

Add to this list that Indonesia has one of the fastest growing middle classes in the world, and setting aside some of the practical limitations in place on foreigners practising in Indonesia, given the close proximity of Australia to Indonesia it is somewhat surprising that Australian firms don’t appear to be having the same tactical strategic business development approach to this market (as outlined in the article) that firms in places such as Malaysia do.

Of course, this very likely will change during the course of the year as ‘Indonesia‘ becomes the buzzword of 2015.

Acritas’ Sharplegal Survey: Vive La Différence – or you’ll lose work!

The days of the male dominated culture in law firms are numbered if said firms want to have any chance of continuing to win work from the growing number, as well as importance, of female in-house general counsel according to the latest research undertaken by Acritas’ Sharplegal (an annual global legal market survey of over 2,000 general counsel) revealing how differently male and female buyers approach the purchase of legal services.

Bottom-line take out from the covering article – on the Acritas website – announcing the survey result that should get every male law firm partner and their business development team’s thinking caps on is this:

Firms that are able to demonstrate in-depth knowledge of their female client’s business and her needs also stand to gain higher levels of favorability from her – an all-important step on the path to winning work.

This statement is also directly reflective of Lucy Siebert’s (international counsel at Australia’s Telstra) comments at the recent Legal Week Asia regional ‘Corporate Counsel Forum’, held at the end of November 2014, where she stated that:

We [Telstra] specifically look to see that they’re ensuring the best possible talent pool for us – not just white Anglo-Saxon males. We’ve got a very strong diversity policy and so we expect that to be something that is also important to our panel firms.

Crucially, law firms who are looking to win a greater share of work from female in-house counsel should note:

When asked what drove the likelihood to recommend a firm, a much higher proportion of women than men spoke about responsiveness as a deciding factor.

And specifically that:

Not only was it the quality of communication that mattered to female in-house counsel, but also the speed and level of interaction they experienced.

Interestingly, the survey also reports that:

43% of women working in senior in house legal roles said they used LinkedIn on a daily or weekly basis, compared with just a third of men. Furthermore, only a quarter of women said they never used the social network, compared to two fifths of men, suggesting that new business approaches to women may be better made online than ‘on the golf course’.

A final ‘thought for the day’ is the following by Lisa Hart Shepherd, CEO of Acritas [commenting on the survey findings]:

“A change in thinking and culture is needed if men want to impress an increasingly influential group of female in-house counsel who value business understanding and efficient communication over reputation, personal relationships and trust when choosing their preferred legal partner.”

Law firms are failing to support clients in South East Asia – really?

Yesterday I read an article on the lawyersweekly.com.au website by Felicity Nelson titled ‘Law firms are failing to support clients in South East Asia‘. This article cites recent research done by Acitas, including:

45 per cent of multinationals require legal advice in South East Asia;
34 per cent of Australian multinationals’ legal spend now goes outside their home jurisdiction; and
60 per cent of Australian in-house counsel surveyed said they needed legal advice in South East Asia

There is no doubt in my mind that Acitas research is both good and thorough. I have high regard for them.

But there is one niggling issue I have with the title of this article and that is this: while it would be fair to ‘Australian’ law firms (such as Minter Ellison or Clayton Utz) are not particularly active on the ground in South East Asia – and we can debate the merits of that strategy till the sun comes up – it’s a far cry to then extend that argument to say:

Law firms are failing to support clients in South East Asia.

And why do I say this?

Well, some firms with a presence is South East Asia and Australia – and who therefore must have a strategic plan around meeting their multinational clients needs in both jurisdictions – include:

Allen & Overy
Baker & McKenzie
Clifford Chance
DLA Piper
Linklates – Allens
Norton Rose Fulbright

Keep in mind that these are international law firms with an actual presence in South East Asia and Australia with a declared strategy of having multiple offices in order to meet the needs of their multinational clients. They’re not ‘fly-in, fly-out‘ operators; so they don’t have to worry about some of the very real strategic and cost issues that Lisa Hart Shepherd, CEO of Acritas, points out in the article and which I made only yesterday around organic growth and local knowledge acquisition!

My only question having read Nelson’s article is this then:

What the Hell are these firms doing if, as is alluded to in the article title, a large proportion of Australian and multinationals in-house counsels’ needs in South East Asia are going unmet?

and having read the results of Acritas’ survey in the article,

What do these firms plan to do to meet these very real needs now?

* I would recommend you read the Lawyers Weekly article, it raises w hole host of additional issues not covered in this post

Does my law firm need an Asian strategy?

I go to a lot of meetings at which the state of the Asian* legal market is discussed during the course of a year. At a lot of these meetings, it is taken as a given that the relevant/respective law firm “needs” to either be in Asia, have an Asian strategy, or both. But, as is the case with a lot of prospect mining in this industry, short consideration seems to be given to the pitfalls of getting involved, and the most important strategic question of the lot:

“Why?”

as in:

“Why do we (as a firm) even want to be involved in the cutthroat market of Asia?”

is all but glossed over.

Keep in mind that most law firms won’t make money in their first few years of involvement in the region (and I should know, I have first-hand experience helping with the success of a start-up law firm that later became part of Clifford Chance). Indeed, some firms have been active in Asia for over a decade and still haven’t made any real money (and now exist on the principal that they have “a lot invested in the region”). And with a number of firms saying they want to grow revenue by 30 or so per cent year-on-year, if you do decide to get involved in the region then your firm’s commitment can easily and quickly translate into millions of dollars.

With all of this in mind then, it is important that your strategic reasons for being involved are more than simply a partner’s desire to live somewhere a little more exotic than cold, windy [insert name of city] or because you heard on your train ride to work this morning that XYZ company may give you a job in Rangoon at some unspecified time in the future.

More specific questions your firm needs to be asking include:

does the firm have short-term, medium-term and long-term strategic goals in place that will help measure whether your foray into the market has been a success?
has the firm identified which of your existing client base is active in the region?
do any of your firm’s clients have strategic growth plans for the Asian market?
are your firm’s potential clients in the region growth prospects, or are they mature players whose account you need to keep?
is your firm pursuing an aggressive acquisition policy or more conservative rear-guard protectionist policy?
how are looking to grow in Asia – lateral hires in the markets we want to be in (preferred method for South East Asia)? Or are we relocating partners from elsewhere into the jurisdiction (favoured method in Korea for example)?
what performance related metrics has the firm put in place to encourage its partners to be actively involved in the strategy (for example, is there cross-referral profit points?)?
what local issues will the firm need to include? – For example, how many law firms send lawyers to Asia without sending them on a cultural awareness or language program (in the same way as government departments do)? Why is that I wonder?
what are your competition currently doing/likely to do in the near future in the region? Importantly, do they have a chequebook that is likely to cause me considerable pain?

These are just some of the issues your firm should be thinking through if it wants to get involved in the potentially lucrative Asian market.

And the pot of gold at the end of the rainbow?

The Asia-Pacific legal services market had total revenues of $80.4bn in 2013
The Asia-Pacific legal services market enjoyed compound annual growth rate (CAGR) of 5.9% between 2009 and 2013
The Asia-Pacific legal services market is forecast to enjoy an compound annual growth rate (CAGR) of 7% for the five-year period 2013 – 2018
The monetary value of the Asia-Pacific legal services market is forecast to be $112.9bn by the end of 2018

Unsurprisingly then, you won’t be alone. There were approximately half a million active lawyers in the Asia-Pacific legal services market 2013.

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* It is critical, when looking at your “Asian” strategy, that you think of the whole of Asia – Indonesia; Korea; Myanmar; Malaysia; Philippines; Singapore; Thailand; Taiwan; Vietnam; as well as China. In other words, Asia is more than just China. If China is your market strategy, that’s fine but don’t call it an “Asian” strategy, call it a “China” strategy. Likewise, if ASEAN is your target market, call it an ASEAN strategy, not Asian.

What are Asia regional in-house lawyers looking for from their outside counsel?

The end of November saw Legal Week (legalweek.com) putting on the second of its Asia regional ‘Corporate Counsel Forum’ events in the Gallery Room of Singapore’s Grand Hyatt hotel. Judging by the impressive collection of 220 regional in-house lawyers who attended, this event is likely now a firm fixture in the diaries of many in the industry. And rightly so. Events of this calibre are few and far between and should not only be welcomed, but encouraged.

Legal Week’s Elizabeth Broomhall wrote up a very succinct account of what took place at the Forum in a post on the Legal Week website on 5 December [2014].

In summarising the day’s events, and following subsequent discussions with Lucy Siebert, international counsel at Australia’s Telstra, and Julia Shtepa, managing director of legal for South Asia at Accenture, Elizabeth’s article highlights the following 5 issues (among more) as issues in-house team in the region have identified as being important to them when selecting outside counsel.

1. Local or International?

It would appear that in-house counsel in Asia are not immune to a discussion that is taking place on a more global level; namely:- should we be hiring local or international law firms?

On the one hand, there are many benefits to hiring an international law firm to act on your matters. On the other, particularly in the mixed legal landscape of Asia (where common and civil law sit side-by-side), there really is no substitute for – as Siebert calls it – “on the ground knowledge”.

I would wholeheartedly agree that there are complex issues in play here, as it is indisputable that there are very clever lawyers working with leading country and regional law firms. That’s why I was particularly drawn to Shtepa’s comment that:

“Sometimes Accenture will engage an international firm to play a ‘deal coaching’ role, she said. “Depending on the regulatory environment and the language constraints, it may be that the deal is led by an international firm and supported by a local firm”.”

If you can afford it, then this seems to me to be a very clever approach to take.

Alternatively, a case could be made that in-house counsel in Asia, as is the case in other parts of the world, look to instruct the lawyer and not the law firm.

2. Panel or no panel?

Client legal panel arrangements are the bane of many a private practice lawyer and their marketing team. Many an hour is spent responding to these and Australia, the home of Telstra, has undoubtedly played a major role in the development of this arrangement. Indeed, many of the ASX 200 have both Australia and Asia legal panels in place. So I was surprised to see Broomhall write that:

“many regional counsel believe these [panels] remain difficult in Asia given the limited capacity foreign law firms have compared with in their home markets, the different practice restrictions on foreign law firms across jurisdictions, the high turnover of partners in the region and the fluidity of the markets.”

While each of these is valid in their own right, none are unique to the region – and certainly would not seem to me to be an impediment to implementing a panel arrangement if the desire was there to do so. No, I would contend that there are two additional factors that mean panel arrangements are not, yet, as prevalent in Asia, which are: (1) relationships still trump all when assigning work; and (2) the rise of procurement is still to come.

That said, as Broomhall herself says: “An increasing number of companies, including Chinese state-owned organisations, have been moving in this direction in a bid to control costs” – and given the number of tender writing jobs that require local/regional language skills (notably Mandarin) that I have seen advertised in the last 3 months, my guess is that this [implementing panel arrangements] will be one of the major growth areas in 2015. Indeed, I will be interested to see what the position on this issue is at the Forum in 2015!

3. Where are all the Alternative Fee Arrangements (AFAs)?

Throughout my time in Asia, law firms have had to be very conscious of their cost-base as clients have always been value drivers. And with annual ROI profit margins of around 20% (which translates to probably the lowest ROI returns in the industry globally), many would say rightly so.

Leaving this aside however, I found myself in total agreement with the comment that when it comes to innovative fee arrangements, Asia lags behind the West.

Actually, with my interest having been spiked in this issue I went online to try and see how many firms had ‘on the ground’ regional Pricing Directors (a role that has seen phenomenal growth in both Europe and America, and less so here in Australia) and I couldn’t find one law firm that had an on the ground head of pricing present in the region.

All of which screams: law firms who can create opportunities to genuinely discuss the value exchange and AFAs with their clients have a massive opportunity to differentiate themselves in what is currently an extremely tight market.

4. Secondments and other value adds

It was interesting to note that both Siebert and Shtepa agreed that “secondments are also an opportunity to add value”.

In my experience, the staffing structure of law firms in Asia – which need to necessarily be tight because of the control on costs – has, historically, not leant itself to law firms offering secondments to corporate clients (historically, as part of a global offering, financial institutions have tended to fair better here).

Clearly, going forward, one of two things will happen: either law firms will need to revisit this discussion, or New Law providers –such as Lawyers on Demand and Riverview Law – are going to find a very nice gap in the market – indeed, many may argue that Advent is already taking advantage of this exact situation.

And law firms who doubt this should note Siebert and Shtepa’s comment that:

“secondments help lawyers in private practice gain a better understanding of their businesses. Indeed, they believe this is the key overall message to get out to firms: get to know our business; understand our drivers.”

and one of the best ways to do that – a secondment.

5. A more diverse profession

I wanted to finish this post on what I consider to be an important note of hope from Siebert’s comment that:

“We [Telstra] specifically look to see that they’re ensuring the best possible talent pool for us – not just white Anglo-Saxon males. We’ve got a very strong diversity policy and so we expect that to be something that is also important to our panel firms.”

If you haven’t already read Elizabeth’s article, I would like to strongly recommend that you wander on over there now…

Foreign exchange woes hurt Australian arm of K&L Gates

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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