Capitalising on shoddy legal service in Europe
22 February 1999
SUCH IS the renewed expansion of British firms into Europe, the impression is that all you need to do to succeed is see a partner and a few assistants off with a phrasebook at the airport and sit back and wait for the euros to roll in.
In the past few weeks, The Lawyer has revealed that SJ Berwin is looking for a second merger partner in Paris to complement its relationship with German firm Knopf Tullock & Partners, that Herbert Smith is due to open a Moscow office and that Eversheds has taken on four partners in Paris.
Meanwhile, Travers Smith Braithwaite is due to announce a Paris link-up in the next few weeks, and media specialist Olswang recently opened its first European office in Brussels.
The universal reason given for this expansion abroad is client demand.
When businesses are making foreign deals every day, they expect their lawyers to be able to offer a seamless service regardless of the jurisdiction they are working under. Yet the mantra of "client needs" does not offer a full explanation for this ongoing expansion.
While firms such as Walker Morris insist they are able to service substantial international clients' needs from Leeds, next door, Hammond Suddards is equally adamant that it wants to conquer the world.
The truth is that while some British firms are looking to serve genuine client needs, many more have peered into the European legal market and seen that the standards, service and firms are often abysmal. In short, Europe is ripe for the picking.
Osborne Clark managing partner Leslie Perrin says: "In some cases, the standard of service with continental firms is dreadful. They don't always appreciate that Anglo-US clients don't want to know what the law is, they want to know how to use it."
Even the Europeans agree. Punder Group partner Peter Nagele says German firms have a long way to go to catch up on the service ethic of their Anglo-Saxon competitors. "This difference is due to the different development of the German legal market. Until 1990, it was not possible for German lawyers to have offices in more than one city, so the markets were very protected.
"Most lawyers thought they were mere dispensers of answers to questions, and not business advisers. This attitude among the second tier is only gradually changing."
Many second-tier firms increasingly see US and big British firms reaping the benefits of earlier investment in European offices, and fear being left behind. While SJ Berwin is a relative newcomer to the European scene, Travers Smith Braithwaite is looking for a low-key alliance in Paris to test the water. The success of similar sized firms in Europe is encouraging.
Although it is a big player in its specialist market of venture capital deals, Bristol-based Osborne Clarke is not one of the big boys. Nevertheless, it has been successful in Europe, having had a presence for the best part of 10 years.
The firm's European cornerstone is a strategic alliance dating from April last year with German outfit Graf von Westphalen Fritze & Modest. Perrin hopes it will lead to a full merger. The relationship stems from the firm having set up an office in Frankfurt in 1994. "Ultimately, for us to retain just an office there was not a credible way of serving the local law market," says Perrin.
"While it is very well for Clifford Chance to directly employ German lawyers, it would not be a sensible use of our resources, given that we turn over u30m."
Perrin stresses that smaller firms need to ensure they stick to what they are good at in their home market.
There are substantial pitfalls. Firms need to decide the best way to make their move: merger, alliance, own office or simply building up good informal contacts with European outfits.
Alan Jenkins, head of Eversheds' Continental European practice, says the barriers to setting up European offices are much higher than they once were. The days of merely renting an office for one assistant and a secretary are gone.
"We just can't parachute someone in these days. It might have worked 30 years ago in a place like Brussels and, to some extent, it may have worked in Paris, but not now - there's too much competition," says Jenkins.
Eversheds' next destination is Frankfurt, where it is seeking an alliance, rather than setting up a solely Eversheds office.
"The costs of setting up an office has also gone up - even taking into account inflation. And the allure of working abroad is not, perhaps, what it was," says Jenkins.
When Jenkins was asked to work in the firm's Paris office during the 1970s, it was seen as a glamorous job. Demanding added incentives was not an issue.
While the French capital is still one of the most popular destinations for ex-pat lawyers, trying to put together a suitable package to entice someone to work, for example, in Moscow is a lot more difficult, says Jenkins.
"They need to have a good business reason for going, both for the firm and on a personal level - unless they are particularly interested in the Russian culture and way of life."
Second-tier firms looking to enter Europe or expanding existing operations will find local lawyers are waking up to the threat and preparing to take them on.
Traditionally, with the exception of some Dutch firms, continental practices tend to be much smaller than Anglo-Saxon ones. But with increasing globalisation and the perceived threat from invading US and UK mega-firms, regulations and cultures have changed to allow European firms to expand.
Clifford Chance's Pierre Verkhovskoy, a partner at the firm's Paris office, says the change has been remarkable.
"Ten years ago, most German firms worked in just one city, but now they are looking over their shoulders at the Anglo-American firms and realising they have to change to compete.
The situation is different in France. "In Paris, business law is still in the minority. There are 13,000 lawyers, only 2,000 of whom are doing business law. But everybody realises that globalisation in on its way.
While it is still possible for certain French firms to remain niche firms, they have to have a strongly defined area. There are still successful firms here with only one partner and 30 lawyers," says Verkovsky.
While Paris may still be a difficult market for English firms to break into, in Germany many of the larger players are shopping around for national and international merger partners in an effort to retain national clients.
SJ Berwin's alliance last year with Knopf Tullock & Partners came about because the German firm needed a presence in London to take advantage of the growing pan-European funds market.
In Spain, the same survival instinct is coming into play as splits, mergers and closures change the playing field of larger firms almost every week.
However, not all firms think alike. One notable absence from the European merger scene is London-based heavyweight Slaughter and May. The firm maintains that informal ties with independent foreign firms offer clients the best choice.
Senior partner Giles Henderson says: "There are advantages to being an independent firm in one jurisdiction but having efficient working relationships in that the client has the best of all worlds.
"The clients have a choice, but they also have access to tip-top lawyers with their ear close to the ground in their particular jurisdiction."
"But at the same time we are not involved in cumbersome, heavy and difficult relationships that come from large mergers. And the feedback from clients shows that this is what they want," says Henderson.
This is good news for the bank accounts of Slaughters' partners. Profits from the London office do not go into supporting less profitable overseas operations. Estimated profits per partner in the year 1997-98 were £630,000 - about one-and-a-half times those of Clifford Chance.
In complete contrast, Linklaters seems set on European domination with its alliance set-up and recently-opened Madrid office. Although it has a Paris office with around 80 lawyers that is due to move to bigger premises, and the Madrid office is not linked to any Spanish firm, managing partner Tony Angel says the ideal situation is to merge with local firms.
"That way, Linklaters & Alliance has both an international face and a local face. We have our lawyers in the foreign offices, and around 20 to 30 lawyers from the alliance partners are cheek by jowl with our lawyers in the London office."
Angel admits the firm will have to work hard to make the Madrid office a success unless it can find a suitable marriage partner. For other second-tier firms just entering Europe, the job of locating suitable partners has only just begun.
See leader, page 17