Australia’s largest law firms are peddling very different strategies on how to expand a firm’s reach on foreign shores. Stephanie Quine reports.

For 30 years, Sydney, Melbourne and Perth law firms have been busy strengthening national partnerships. Now, their eyes are turning in the same direction as their client’s: across the seas, to Asia and the rest of the world.

From Herbert Smith Freehills’ (HSF) full equity merger, to King & Wood Mallesons’ (KWM) and Norton Rose’s Swiss Verein; Allen & Overy’s (A&O) team poaching and Clifford Chance’s merger with boutique firms, to the toe-dipping alliance between Linklaters and Allens – it is intriguing to see the many ways international law firms have found to skin a cat.

Eye on the ball

Stuart Fuller, the global managing partner of KWM based in Hong Kong, says each expansion strategy is ultimately dictated by the firm’s philosophy.

“Do you pick a structure that you think will drive a deeper and better client experience, or a structure that you think will deliver better financial results for your partners?” he asks.

Of course, Fuller claims it’s the former that drove the KWM merger, the first merger between a Chinese and a western law firm, on 1 March 2012.

The reality is that there are many issues that international firms have to contemplate when expanding into new markets.

KWM is banned from a full merger by Chinese regulations. Disparities in regulatory requirements, tax regimes, average fee rates, risk profiles, overheads and equity structures are all challenges faced by firms opting for a full financial merger with a firm in another country.

Money, money, money

Disparity in profitability between firms can also make integration a sensitive and tricky topic.

According to Michael Lishman, managing partner of Clifford Chance’s Perth office, the strong Aussie dollar has made the profitability gap between UK and top Australian firms narrower than ever.

A report released by Beaton Capital showed that, for the 2010 calendar year, Herbert Smith pulled in $US719 million in revenue, while Freehills brought in $US439 million during the same period. Freehills’ average profit per equity partner was estimated at around £618,000 earlier this year, while Herbert Smith’s sat at £840,000.

HSF’s new managing partner (clients and industries), Mark Rigotti, admits he never thought the profitability gap between UK and Australian firms would narrow.

“I thought [global law firm mergers] would come, but not in my lifetime. I thought Australian lawyers were too comfortable and, to be honest, our clients won’t like this, but our rates are so low relative to the rest of the world for what we do,” he says.

He remembers working on a matter at Freehills with Linklaters on the other side and says “their partner rates were triple ours”.

For Rigotti though, the biggest challenge is not profitability differences but keeping lawyers’ eyes on what made them successful in the first place.

The fuss over integration, internal issues and all the special projects that are going on to make internationalisation a reality, he says, are mitigated by the structure that HSF adopted (though we now know that ‘full financial integration from day one’, for HSF, simply means a single shared profit pool, rather than a single system of distributing the profits).

“It [means] you just take out a degree of complexity and distraction and internal tension and you put in place strategies,” he says. One of those strategies was Project Sprint; a weekly report HSF ran through the merger period to refocus staff on things like getting out to clients, asking for reviews and actioning feedback.

Clients needn’t worry in any case; says Rigotti. HSF will set rates locally, not centrally.

“I can understand; if I was a client I’d be thinking ‘Freehills’ rates are going to be reset all of a sudden because they’ve got all this global overhead and they’ve got to report into a functional currency that is not Aussie dollars so, therefore, it’s going to have an impact on me through a higher rate’ but the reality is your competing in a local marketplace,” he says.

Swiss-swoo

Clients think lawyers are incredibly fascinated by their own structures, says Fuller, but clients don’t really care about firm structures as long as they deliver a product at the price they want.

Favoured for their decentralised structure, which means offices are only bound by regulators in their own country, Swiss Verein structures offer greater flexibility and an ability to move quickly.

According to Fuller, this allows firms to recruit partners locally and quickly, to more rapidly create a network of deep local capability, “without the need to come back to 400, 800, 1200 partners”.

“I think there’s an inherent limitation on the size of just one fully-integrated partnership,” he says. “When you look at the differences of markets through pricing, profitability, rates and exchange rates, fully integrated structures can create some tensions that are difficult to manage,” he says.

Despite the benefits of Swiss Verein firms, a question mark remains over the incentives for a partner in one law firm office to refer work to a partner in another office who doesn’t share either profitability or liability. Are ideals of collaboration, cross-selling and client-sharing enough?

When Clayton Utz’s former head of private equity left the firm in August he told Lawyers Weekly that global law firms “just don’t work”.

Phillip Kapp was speaking in the context of his experience as managing partner of Andersen Legal, the global legal practice of now-defunct accounting firm Arthur Andersen. His departure from Clayton Utz, he said, was partly due to competition between his US clients and those held by the firm’s Hong Kong office.

“I spent six or seven years travelling around the world trying to create a global law firm and I know [they’re] flawed,” he said.

“We got zero work through connections. Part of it is clients see their lawyers as their advocates and they choose individual lawyers, not global law firms,” he said, adding that the overseas offices of merging firms would end up merely as “colonial outposts”.

Fuller says Kapp’s argument has some credibility if there’s no contact between the people in the firm.

“At one stage we had so many partners travelling [between KWM’s Asian and Australian offices] I called it a form of creative chaos,” he says.

“China outbound financial markets, ... securitisation in China, international arbitration through the whole region; these are some fairly binding forces between the firms that automatically energise the partners.”

New world order

“There’s a real battle of structures going on at the moment … and only the next five to 10 years will tell what the winning structure is,” says Fuller.

HSF’s merger turned out to be not so different from Blake Dawson’s arrangement with Ashurst. The Ashurst tie-up will evolve towards a true merger; the firm is expected to vote on a full financial merger in 2014. Similarly, KWM plans to fully integrate over a period of three to five years.

Linklaters’ energy and resources-focused alliance with Allens has been described as two firms dipping a toe in the water; holding hands but not getting hitched. Some argue it’s the least effective structure for creating value for the firms and their clients, but Allens’ managing partner Michael Rose says it does what clients want: creates execution points in more places around the globe.

Locally, mid-tier firms are merging too, building their capacity to snatch work as it trickles down from the traditional top-tier space.

Tresscox Lawyers merged with Brisbane commercial law firm Macrossans on 1 October, a day overshadowed by the official HSF tie-up. The smaller, full financial integration saw five Macrossans partners, including current chairman of partners Bill Hickey, join TressCox’s existing three partners based in Brisbane, creating a total partnership of eight in Brisbane and an overall team of around 50.

Hickey says Macrossans got to a point where it was looking ahead to the next 10 years, considering how to maintain and strengthen its client base while providing opportunities for its younger practitioners.

“I think firms of Macrossans’ size always have to deal with the issue that, as their client grows, there’s a possibility that those clients will graduate to a bigger firm,” says Hickey, adding that the volatility
in the legal market is increasing competitiveness.

Rigotti sees this movement at the top as a real opportunity for mid-tier firms to take work historically seen as the domain of the traditional top-tier firms.

“It’s already happening; [top tiers] are losing Australian local clients as the upper-mid tier is pushing into that bottom section,” he says.

“Long term you will see the upper-mid tier take some of that [traditional] work, as they should; they’re more efficient providers of those services to clients … where you see it at the moment is in the bank panels.”

Newly-merged Australian firms are competing aggressively for all of the work that their clients generate, especially in strained equity and debt capital markets. As America refocuses after the presidential election and the shaky

European economy vaguely settles, work may begin to flow more readily to law firms.

Until then, Fuller says the market will be challenging for the mid-tier firms as major international firms capitalise on their cross-border connections.