Ozmosis

With the economic downturn looming, can Australian law firms keep their foothold in the top-end Asian market? Nicole Maley reports

This has been a vital year for the Australian legal profession. With a worldwide recession on the horizon and US and UK law firms continually pushing back the boundaries within which they practice, Australian lawyers have finally begun to focus clearly on the issue of globalisation.
In September, we witnessed the signing of a new best friends agreement between Allens Arthur Robinson (AAR) and UK magic circle firm Slaughter and May; and right now, Minter Ellison partners are devising an international strategy which they hope will combat the onslaught of the economic downturn. But while these two Australian firms are making notable advances into the global arena, isn't it time for their competitors to wake up and smell the coffee?
There is no denying the fact that foreign firms have stolen the march into the international marketplace – UK and US practices are going great guns in Europe, and English lawyers in particular are dominating the Asian legal scene. But instead of sitting back and watching the world pass them by, Australian law firms need to recognise that Asia is their own back yard and grab hold of the opportunities that await them.
Minter Ellison managing partner Phil Clark admits that despite a bumper 12 months in which each of Australia's top 20 firms increased its revenue, the country's lawyers remain cautious about their prospects for the coming years. Behind their concern is the fact that the domestic market is contracting, globalisation is upon us and competition is fiercer than ever before. Surely, then, the most obvious way to deal with this is by going global oneself – a move which Clark clearly supports.
Clark, who is leading Minters in its expansion into Asia, argues that internationalisation – either through merger, organic growth or an AAR-style best friends alliance – offers firms a strong armoury against foreign competitors.
“As top deal numbers decline, a significant proportion of growth for all Australian firms will have to come from new markets, in particular from rising domestic companies and the international market,” says Clark.
Historically, Australia has enjoyed a flourishing domestic client base, which has provided a more than adequate income for premier league practices. But times have changed, and one of the toughest jobs for those now at the helm is convincing their colleagues that complacency must give way to creativity if success is to continue. Cross-border mergers and alliances are on the agenda, lawyers are being deployed to, or employed in, other countries and firms are preparing to go into battle for their slice of the global client pie.
“Everybody now recognises that there's going to be a recession through 2002,” says Clark. “In addition, the volume of premium corporate work will reduce as leading Australian corporates are taken over by multinationals, move offshore, dual list or internationalise their operations, and Australian firms are going to have to look for work outside the traditional areas.”
Now the most oft-used word in the legal vocabulary, 'globalisation' is drumming home the fact that if Australia does not act now, it is at risk of joining New Zealand in becoming little more than a branch office economy.
Peter Caillard, president of the Victorian branch of the Australian Corporate Lawyers Association (ACLA), believes that the internationalisation of business could well be a positive trend for those Australian lawyers who grasp the nettle. He says companies are keen to instruct firms that can act in more than one jurisdiction, particularly if the close relationship between offices facilitates a ready exchange of information and experience.
This means that firms such as AAR, Minters and Deacons – the latter having had an on-off courtship with the Asian market for some time – will surely be ahead of home side peers in the future.
“An effect of globalisation is that Australian companies will increasingly become multinational, whether they expand their means of distribution or become part of a larger entity which operates in more than one country,” says Caillard. “Accordingly, the service requirements of Australian companies will increasingly extend beyond state or national boundaries. Large law firms are no exception to this and I suspect that they'll continue to strengthen and formalise their relationships with overseas firms.
“If I had a crystal ball, I'd predict that Australian companies will be attracted to these law firms, as they offer something that strictly local firms cannot. Furthermore, a recognisable and respected name in an overseas jurisdiction may give the client additional confidence that they've selected an appropriate firm to perform their work.”
Freehills executive chairman Peter Hay says it will be interesting to see how firms deal with globalisation, and he predicts that Australian practices are likely to follow one of two routes.
“While everyone's bracing themselves for a downturn, there's a fair degree of optimism that Australia is a robust economy,” says Hay. “On the other hand, businesses are wary, and when that occurs a future downturn may in fact be triggered by everybody being cautious. It can be self-fulfilling.
“The Australian market is a very solid market for legal services, but it's very mature, so it's not growing at a great rate. Therefore, firms can either adapt their aspirations to an economy that's growing more slowly, or they can seek to open up new markets. I think there'll be firms which decide that their best interests lie in global alliances or partnerships of some sort, and there'll be firms which don't accept that, at least initially, and seek to maintain their independence.”
Talk of foreign shores will be alien to many Australian lawyers, who along with other members of the country's business community have long been accused of parochialism. This could be proved correct, as it now appears that top-end firms have focused hard on winning work away from local opposition, while at times neglecting to recognise and act against the looming shadow of global competitors.
The issue has been thrown directly into the spotlight by recent transnational mergers and acquisitions involving iconic Australian entities such as BHP. While such deals pad out the impressive CVs of those firms that handle them, they inevitably result in a contraction of the client market.
In addition, Australia's stringent tax legislation has already driven a handful of local businesses to relocate to foreign shores (and potentially into the arms of global law firm suitors); and the iron rod with which the Australian Competition and Consumer Commission rules is also cited as a deterrent to potential clients.
As if this were not evidence enough of the need for practices to rewrite their revenue-raising plans, the final nail in the coffin has been hammered in by the Australian offices of foreign and accountancy-tied firms, which despite protestations from some quarters are showing definite signs of encroaching on sacred domestic ground. Baker & McKenzie has been present in Australia for so long now that few legal professionals, let alone clients, regard it as anything other than a home-grown law firm, and Andersen Legal is beginning to show its strength, winning substantial instructions from the likes of the Ansett administrators.
“The Australian economy is losing some momentum, and therefore lawyers' business will be adversely impacted as corporates review their legal spend,” says Andersen Legal managing partner Adrian Ahern. “The large firms must therefore look elsewhere, but there are few options for them unless they're truly part of a global firm.
“Traditional law firms in Australia remain concerned that, while the multidisciplinary firms here are still reasonably small compared with the top tier, they've won significant work – in particular by providing integrated services in conjunction with the big five firms with which they're related.
“About 40 per cent of our work is won in conjunction with Andersens. Otherwise, with 25 partners and a fee base of A$32m (£11.1m), Andersens attracts significant work in its own right.”
So, what of the Anglo-Australasian link-up between AAR and Slaughters? Could the move redefine the way that Australian firms view and are viewed by the international market?
Ian McGill, AAR's senior executive partner for client services and one of the lead partners behind his firm's recent move, believes that the tie-in will take AAR to a new level in the global marketplace. He says the relationship, which has already proved fruitful with a succession of client wins, offers Slaughters an extended network of lawyers in Asia while providing AAR with much-sought-after UK law capability in the region.
“We went into the alliance with Slaughter and May primarily to get English law capability and to give us the ability to service clients – some of whom are mutual clients – in a much more effective manner,” says McGill. “We're only qualified to practise Australian law, and not too many deals of an international or transnational scope are done under Australian law.
“This relationship gives us a greater depth of expertise; and that, coupled with the increased brand recognition which we expect, was a great reason to do it.”
McGill, however, is clearly aware of the dangers of neglecting one's home franchise, warning that continued client wins both at home and abroad is essential to ensuring longevity.
“I think there's still plenty of opportunity for growth in certain sectors of the Australian economy and the Australian market, and we've also got to identify and work at them,” he says. “If people are thinking that the lemon is squeezed dry in Australia, that's a mistake. It's a matter for each firm to play to its strengths because the work is still around; you just have to have the skills and track record to pursue it.”
McGill's view is supported by Mallesons Stephen Jaques chief executive Tony D'Aloisio, who believes that the domestic market is still buoyant.
D'Aloisio, whose firm was reported to have held merger talks earlier this year with UK giants Clifford Chance and Linklaters & Alliance, says the Australian economy is holding up “very well” compared with others. Indeed, he reports that Mallesons' budget and returns show no signs of a downturn.
“The market in Australia is extremely competitive, but markets for legal services are competitive everywhere,” he says. “I don't think the Australian market is any different to what's happening to the markets in New York, London and Hong Kong. They're all very competitive and mature.
“The Australian legal market's been achieving healthy growth rates over the past five years. It's a big call to now say that there'll be negative growth. While I think the rates of growth of premium legal work will be slower in Australia than the historical growth, as will be the case in other mature markets, I nevertheless think they'll remain healthy.”
To ensure such predictions are proven correct, most firms believe it is essential to combine their international efforts with active client care programmes and a strong push into developing markets at home.
Recent behaviour implies that Australian corporates are examining expenditure, and the collapses of high-profile companies such as One.Tel, HIH and Ansett can only result in a further tightening of the screws.
And, with a volatile blue chip market and the portfolio of second and third-tier practices already cherry-picked, firms will now be looking for joy offshore and among the client list of Australia's niche or boutique players.
“There's no way that the top tier can rely on pinching market share from second-string firms, because they haven't got any left,” says Clark at Minters. “That process is so well advanced that there isn't enough left to take.
“We need to be looking for work outside Australia and also among rising companies in the domestic market, as well as focusing on the blue chip clients. They tend to be the ones that are moving work out of Australia. We need to follow them.
“Firms will either have to pick up market share locally, which is going to be very difficult in a contracting market, or contract themselves. Otherwise, they'll have to suffer the consequences.”