A matter of David or Goliath

In Sweden, the debate surrounding whether size matters has never been more important, writes Patrick Stewart. Patrick Stewart is a freelance journalist.

Swedish law firms are in the midst of a personality crisis, according to Peter Ferguson, a lawyer with the Stockholm firm Hokerberg & Soderqvist. On the one hand, the question of the size of the firm has been put squarely back on the agenda at partnership meetings since the mergers last year of Advokatfirman Lindahl and Advokatfirman Chrysander, and Advokatfirman Landahl and Wistrand & Hedborg.

But the recent defection of 15 lawyers from leading practice Lagerlof & Leman to set up a new firm, Hammarskiold & Partners, suggests that the traditional resistance of Swedish lawyers to large firm structures is as strong as ever.

As Ferguson notes: 'Swedish firms can't decide whether they want to be big and beautiful or whether they want to be small and focus on a niche area.'

The opposing trends of merger and demerger point to a legal market in transition, but the growth imperative appears to be gaining the upper hand.

Clas Romander, a partner at the Stockholm office of US firm White & Case, notes that a shift has taken place from a legal profession dominated by small practices operating largely as a collection of individuals on a cost-sharing basis to larger, modern practices: 'More and more firms are becoming true partnerships.'

He believes that the trend is being driven by a desire to provide clients with a better service, including the ability to provide specialisations in a market which has become increasingly competitive.

As in the UK and the US, he says, corporate clients want more information on fees and are asking firms to account for how their time is used.

Although not the norm, beauty parades have become more common. 'The environment for lawyers has become more business-like,' says Hans Bagner, Vinge's London resident partner. 'Firms have become more interested in planning for the future.'

In reality, this reshaping of the marketplace started six years ago when a series of mergers brought into existence Sweden's Big Three Mannheimer Swartling, Vinge and Lagerlof & Leman whose 100-plus lawyers dwarfed the country's other practices which numbered fewer than 30.

The mergers were partly prompted by the belief that strong full-service Swedish practices would stop foreign firms setting up in the country.

The fear of foreigners, a constant theme in the Swedish legal market, was not without basis. White & Case had built up a successful Swedish law corporate practice since it was established in 1983, while Baker & McKenzie poached a number of lawyers from an established local practice to set up its Stockholm office five years ago.

But whether the concerns were justified was never fully tested because the recession intervened, effectively extinguishing any interest that international firms may have had in setting up in Scandinavia.

Now that the market has recovered the large commercial practices being the main beneficiaries and capturing the lion's share of a revitalised mergers and acquisitions market the spectre of foreign invasion has been revived.

This has created a dilemma for the country's medium-sized commercial firms, many of which relied on bankruptcy work during the recession to feed their practices.

They needed to diversify after the decline of the bankruptcy work and have been looking for ways to grab more of the big-ticket commercial transactions.

'We are seeing larger and larger firms,' says White & Case's Romander, adding that some firms are viewing merger as the quickest way to reap the benefits.

Claes Sjolin, managing partner of Lindahl, one of the recently merged firms, argues that size is important: 'The top three are the firms that clients go to first, particularly international clients.'

He claims that, as a result of the merger and recent staff growth, his firm now has close to 100 lawyers putting it ahead of Lagerlof, which he says was the previous number three.

The flip-side of the growth equation is the tendency for lawyers to strike out on their own, believing that they can fare better as smaller units.

The trend has a long history in Sweden. Defectors from Lagerlof, for example, have started up a number of firms in recent years: Gernandt & Danielsson, Danowsky & Partners, Wahlin AdvokatbyrA, and the latest arrival, Hammarskiold & Partners.

That new firms can make a go of it is clear given the success of some firms such as Gernandt & Danielsson, which has established a good reputation in banking and finance work. Hokerberg & Soderqvist's Ferguson thinks a firm can succeed if it carves out the right niche.

Whether such practices can survive in a market increasingly dominated by larger firms remains to be seen. But their emergence provides a warning for firms as they pursue growth strategies which often go hand-in-hand with a greater focus on international issues.

The lawyers who recently left Lagerlof identified the firm's membership of the Alliance of European Lawyers as a factor in their departure.

'We wanted to be free and independent of alliances,' says Jacob Melander, one of the departing lawyers. Talks between UK firm Linklaters and the Alliance are believed to have been a key factor in their decision to leave.

Lagerlof managing partner Ingvar Zander, however, attributes the departures to a September reorganisation which saw changes in the firm's profit-sharing arrangements and the creation of new practice groups. The restructuring was made to put the firm in line with other Alliance members.

Whatever the case, the defections highlight the risks involved in reshaping accepted partnership structures as well as a traditional suspicion of link-ups with foreign firms.

For the moment, Lagerlof is the only major Swedish practice to have linked formally with continental firms, although Vinge is part of a Scandinavian alliance and the smaller Stockholm firm, Tisell & Co, is part of UK firm Cameron McKenna's European network.

Most firms still have little appetite for formal links and the impact they may have on referrals. But this could change and firms are looking carefully at developments in the international market. Bagner says that Vinge is 'viewing with keen interest the international and European scene and how it will affect us'. A 'breakthrough' development, he adds, would be if Linklaters joins the Alliance of European Lawyers.

Ferguson believes that one of the big international financial law firms, such as Clifford Chance, will eventually establish in Stockholm. He notes that the moves to create a Scandinavian financial market centred in the Swedish capital, underlined by recent merger talks between the Stockholm and Copenhagen Stock Exchanges, would be an incentive for a foreign firm to set up.

The movement of the large accountancy firms is also viewed with mounting concern. When five lawyers defected from Lagerlof last year to set up KPMG's affiliated law firm in Sweden, the Swedish legal community was whipped up into an uncharacteristic frenzy. First, the Swedish Bar Association forced the lawyers to change the firm's name KPMG Wahlin to remove any reference to KPMG. And when pressure grew on the professional body to take sterner action in December last year, the renamed Wahlin AdvokatbyrA was given an ultimatum to scrap its agreements with the accountancy giant or face sanctions. The lawyers capitulated and withdrew from the agreement.

Less formal links still exist between Wahlin and KPMG, and partner Tryggve Wahlin has indicated that he intends engaging the Bar in 'constructive dialogue' to extend the relationship.

Wahlin is the second Swedish practice to attempt a link with an accountancy firm Danowsky & Partners was the first with Arthur Andersen and most lawyers believe that other links will happen in time.

With accountants stepping up plans to move into Swedish legal services and with foreign law firms assessing the market, the next few years are likely to be very eventful indeed.