On the up and up down under

Over the last year the Australian corporate sector has turned the corner. Inward investment, company flotations and takeover activity are all rising, which is good news at last for the country's recession-weary commercial law firms.

John Shirbin, acting managing partner of Clayton Utz, says the recovery has been spurred by reforms initiated by the right-wing coalition government that came to power earlier this year, including an overhaul of industrial relations.

Privatisation is earmarked as a major area of activity for the future. The state government in Victoria paved the way with the huge Loy Yang power station sell-off, which has benefited firms in Melbourne in particular.

At the national level, the sale of shares in state-owned businesses such as the national airline Qantas was initiated by the previous Labour government. But the new government is keen to accelerate the programme, tackling controversial sales such as Telstra, the national telecoms operator, and law firms are already staking their claims. Allen Allen & Hemsley and Arthur Robinson & Hedderwicks, for example, have been retained to advise on the legal framework for the Telstra privatisation.

Other areas, such as infrastructure financing and healthcare, are also creating new work. Yet although firms are busier, few predict a return to the late 1980s, the mergers and acquisitions boom years, when some partnerships grew at the rate of 10 per cent a year.

Driven by the need for economies of scale, law firms in Sydney and Melbourne, the two main commercial centres, fell over themselves to merge with eachother in the late 1980s. The relationship between the two cities is one of intense rivalry. Melbourne firms were considered conservative in contrast to Sydney's aggressive and go-getting practices. And their client bases were different: Melbourne served an industrial clientele, while Sydney catered increasingly for banking and financial services; its firms were more profitable.

In spite of rumours that some of the merged firms have had problems, the fact that they survived the recession is testament to the arrangements. Today the talk is of consolidation. "Things have settled down in contrast to the 1980s, which was a period of great change," says Tom Poulton, acting managing partner of Arthur Robinson.

The upside of the downturn is that firms have emerged fitter, leaner, and more sensitive to competitive pressures. The recession years were a watershed that saw a shift in favour of client service. Clients became more conscious of the cost of the law, and there was a breakdown of client loyalty as tendering for major projects, became commonplace.

"Business will not be taken for a ride by lawyers any more," says Shirbin. The result has been that the traditional stranglehold on commercial work by a handful of well-known firms has been gradually eroded, providing opportunities for some ambitious firms. Clayton Utz, known for its aggressive approach, has doubled in size over the last five years and now has 600 lawyers in six offices.

Minter Ellison is another firm many identify as having improved its position. Michael Whalley, resident partner in the firm's London office, says that the key to the firm's strategy was to be "very focused on building expertise in key areas such as securities, corporate finance and project finance".

But the effect of the increased competition was to lift everybody's game. Shirbin says: "You can't afford to drop the ball, otherwise you could find that the next major project passes you by."

The signs are that competition will become even fiercer. Raising the stakes recently has been the emergence of boutique practices, many of which splintered from large firms, and the entrance of accountancy firms into the market.

Most of the major accountancy firms in the country are believed to have drawn up plans to move into legal services. Shirbin says: "While not all of them will practise across the board, over the next decade they will drive into law."

Arthur Andersen was the first to strike. Last year, it took on a team of lawyers from Blake Dawson Waldron, one of the country's premier law firms, and set them up in Sydney as Sharwood Eyres & Willkie. This year it established a Melbourne branch.

The jury is still out on whether the firm will be successful in capturing quality commercial work from more established names in the market. But the move has shifted attention to players with the potential to dramatically reshape the local market. "We are watching developments very closely", says Poulton.

"Accountants doing full-scale legal work is just as much a threat to us as any other law firm," comments Whalley. "We can't compete on price, but we will continue to compete on quality and specialisation."

With accountants buying-in both quality and specialisation, law firms could be in for a tough battle. But after the recession they are more than ever able to hold their own.