Private firms in state of grace

Abigail Townsend reports on how the Australian legal market is being shaken by panel reviews and globalisation.

As in any legal market in the world, the driving force behind the changing fortunes of Australia’s law firms are the clients.

But unlike many other economic centres, the largest Australian companies are also demanding more and more from their professional services providers. As a result, the country is in the grip of a series of high-profile and dramatic panel reviews. Numbers of retained firms are being cut from as many as 40 to only one or two main corporate advisers.

The four main retail banks – ANZ, the Commonwealth Bank, National Australia Bank (NAB) and Westpac – are the latest and most significant to undertake such reviews.

The most recent is NAB. It uses 13 law firms but the results of its review are due any day. Although Mallesons Stephen Jaques’ position is believed to be safe – the firm has been involved with the bank since its beginnings in the last century – other practices are not so secure.

And then there is Westpac. It is one of Australia’s oldest banks with global assets of more than AU$140bn (£55bn). But four years ago, concerned at the levels of legal spending, it began a gradual reduction of its 34-strong panel. By 1999, it was in a position to ask just 24 firms to bid for its work. And out of that, only a handful have survived. Mallesons, Allens Arthur Robinson, Corrs Chambers Westgarth and Minter Ellison have been retained, but the losers include major player Clayton Utz.

And even for the firms that managed to keep a panel place, the win was slightly less than victorious. It is understood that Westpac negotiated lower fees as part of the retention package and it had already gone through a 25 per cent reduction in legal spending before it even got to the final review.

It is not just the banks which are holding panel reviews. UK company Hendersen Investors was acquired by Australian insurance giant AMP two years ago.

The group is now undergoing its first property panel review, which affects not just Australian firms but some closer to home, including Lovells, CMS Cameron McKenna and Lawrence Graham.

UK firms will also feel the pinch when NAB, which with its ownership of the Yorkshire and Clydesdale brands makes it one of the UK’s largest banks, undertakes its domestic panel review.

Regional general counsel Nuncio D’Angelo confirms that a UK review will occur on the back of the domestic one within the next few months “as a way of maximising competition between our service providers”.

But panel culling is not just occurring in the financial sector. Telstra, Australia’s largest telecommunications company, announced huge changes to its panel earlier this year.

The company, which spends an estimated AU$75m (£28.3m) annually on legal advice, sought to reduce this amount by retaining fewer firms for less money.

The winners included Mallesons and Blake Dawson Waldron but leading practice Freehill Hollingdale & Page was made a specialist

supplier in workplace relations only.

The impact for the firms goes beyond having less work. It has forced the market to question its service provision – who it is supplying, why and for how much.

Yet many senior players remain surprisingly relaxed about the changes, arguing that it is a natural economic development.

John Colvin, Blake Dawson’s CEO, says that panel slashing has been going on for some time now but he believes that the second-tier has more to fear from the latest changes.

“This is not a recent development. Most of the major companies are downsizing their panels. But it has accelerated. Virtually every one of our major clients, or potential clients, is going to reduce their legal firms. But it is mainly an issue for the second-tier who are missing out when panels reduce down from 30 to four or five,” he says.

Many also argue that however disagreeable to the status quo, the panel reviews make good business sense.

Freehill Hollingdale’s national executive chairman Peter Hay says: “Our experience is that companies always plan to spend less. We come under some fee pressure and we have to live with this, as do our competitors.”

Hay also believes that it is up to firms to start acting more commercially. He bravely argues: “The firms which provide the best solutions, add value and operate commercially have nothing to fear from reviews. It is part of good business practice.”

Firms are also seeing their clients expand beyond domestic and Asian borders. Colvin says that Blake Dawson is being forced to consider its future position as more and more clients grow. “Most of the Asian deals are driven out of New York and Japan as well as Australia. We are thinking about the whole issue. We are actually embarking on an internal process over the next three to four months of talking to partners regarding their aspirations with regard to the whole subject of globalisation,” he says.

Another senior Australian lawyer says: “The pressure will ultimately come from clients. They have significant requirements outside of Australia and significant capital raising requirements in both the New York and London markets. Clients are actually looking for a global solution.”

Companies that are stretching beyond their own domestic borders include the Southern Pacific Hotels Group – which was bought by Bass from Hyatt International earlier this year – NAB, BSkyB and AMP.

Non-Australian companies are also creating a foothold in the country which in turn will create a demand for Australian legal advice. For example, UK and US giant BP Amoco has 70,000 employees worldwide and has in-house counsel to specifically look after all interests in the Far East and Australia.

Hay says: “Many of our large Australian clients are increasingly moving into Asia and further afield and we also act for many international organisations which are moving into Australasian markets.”

As most insiders concede, the legal market is becoming more and more competitive, particularly as the country boasts such a large number of lawyers.

Most commentators expect that clients’ decisions to work internationally and reduce legal spending will force consolidation upon the market.

Put simply, there will be less work going to fewer firms.

Another senior lawyer believes it is imperative that all firms are able to offer the best possible service from secure infrastructures. He argues that you need only look at national versus federated firms as an area that companies will pick up on.

He says: “The sort of feedback we get is “you are a national structure’. We have got very well-developed processes for managing clients nationally and that seems to be important, the general quality of our national delivery.

“Technology and what we can do by linking clients into the firm’s system also seems to be important.”

The future for Australian firms and their clients can never be guaranteed. But Hays says: “The Australian market is very competitive. The firms that will survive will be those who are successful and innovative.”

Canberra is a Mecca for law firms seeking government contracts, but can the boom last? Asks Geoff Charnock.

Canberra is the seat of central government in Australia. It is important in a legal sense as it is home to parliament, which is the key law making body in Australia, and home to most federal government departments and agencies. These are responsible for the lion’s share of government spending on legal services in Australia which last year I estimate topped AU$150 million.

Not surprisingly, most of the major firms have a presence in Canberra. Mallesons Stephen Jaques, Blake Dawson Waldron, Clayton Utz, Freehill Hollingdale & Page, Minter Ellison, Phillips Fox and Deacons Graham & James each provide legal advice to key government departments and agencies, not only in Canberra but throughout Australia.

The amount of work referred to lawyers in private practice has skyrocketed since 1995 when the Australian government gave its departments and agencies “user choice”, the right to obtain outside legal advice. Prior to this, the attorney-general was, in formal terms, the sole source of legal advice to government.

Legal work tended to be done by the Australian Government Solicitor (AGS) – then an agency of the Attorney General’s Department – the Crown Solicitor and legal staff employed in the various departments and agencies. Initially, on the changeover to user choice, the AGS lost some of its commercial work to private firms. But it was not until 1999, when the government first allowed outsourcing of litigation to private firms, that the significance of the AGS in the local legal market diminished.

Notwithstanding the changes, the AGS, now a government business enterprise competing head-on with private firms, remains the main source of legal services to government.

Although most revenue growth in Canberra-based private practices can be attributed to changes in government outsourcing policy, the overall market for legal services is also growing to accommodate changes in the way Australia is governed.

Over the past two decades, there has been a push to move law making powers from the states to the federal government in Canberra. At present, the Australian federal parliament has limited law making powers. In this respect it is not unlike the European Parliament or the US Congress. Under the Australian constitution the parliament has the power to make laws only with respect to international and interstate trade, taxation, post and telecommunications, defence, financial services, intellectual property, competition, foreign affairs and a short list of other areas. The states and territories retain law making powers in relation to other matters, including local government, property and intrastate transport.

In response to the increasing demand for legal services in Canberra, many firms are bolstering their government business teams. The losers in this are often the AGS and various government departments and agencies who are finding that their most talented lawyers are being lured into private practice.

Recruitment and retention of lawyers remains one of the big problems in the local market. Lawyers are subject to poaching by firms in Sydney and Melbourne, often attracted by higher salaries or the promise of promotion, as well as the larger transactions which still tend to flow into those centres. The trend is likely to continue and local firms and branches of national practices can be expected to change the packages offered to recruits to retain their services.

There is also a small band of local firms which compete with the major national practices for commercial business in Canberra, notably Sneddon Hall & Gallop, Bradley Allen, Chamberlains and Colquhoun Murphy. None of the local firms are big players in the government sector but they all have significant practices advising Canberra-based businesses, working on local property matters and undertaking litigation in the local courts. Many of the larger local firms that existed 10 years ago have disappeared, mostly merging with national firms as those firms have tried to establish critical mass in Canberra.

In many respects, the position of lawyers in Canberra is not unlike that of lawyers in Brussels and Washington DC where their importance and future is tied to the institutions which they serve. While the public sector is buoyant at present, in the longer term firms in Canberra must be considering possible changes in government and policies.

With a general election looming in 2001 there is some uncertainty as to the future and no one in Canberra can predict with certainty where we will be in five years.

Geoff Charnock is Canberra managing partner of Deacons Graham & James.