9 December 2002
In recent years, a number of UK practices have set up offices in Europe or merged with Continental law firms and this trend is likely to continue. However, in these uncertain economic times some firms may be reviewing their European branches.
UK firms with successful European offices invariably created them to satisfy clients or to fill a perceived weakness in client service provision. However, where expansion has not been substantially client-driven, the ongoing viability of European offices may, in the current climate, look more doubtful.
Economic uncertainty has highlighted the need for such offices to contribute to the bottom line. The running of a multi-site law practice also requires considerable management time. So when firms are under economic pressure, they rightly look at the profit contribution of each office, the opportunities for increased profitability and the cost of running such offices (not only local costs, but also the demands on management).
Certainly, where there is a strong business case, expansion into Europe can produce material benefits to a firm. So if considering a European office, do your groundwork to ensure that the expansion will benefit the firm and existing clients, and is not just a means to grow in size. Assess carefully the client and business case for the new office.
In recent years, many German firms have been taken over by UK or US practices. All parties have been keen to seek merger opportunities. The managing partner of a substantial German firm once said to me that the future for German firms was entirely dependant upon mergers with UK or US firms. In his view, UK and US law dominated the business world. Not surprisingly, this managing partner is now a partner in a UK-US law firm. Similarly, a large number of German firms have now joined a UK or US law practice, and so the opportunities in Germany for mergers are now quite limited.
It can be more difficult to organise a suitable merger in other EU countries. This is partly due to a greater perceived need for independence and, perhaps, a head-in-the-sand attitude to expansion, which seems to prevail in much of Europe. These attitudes have also been encouraged by the lack of enthusiasm to adopt EU rules regarding professional practices operating throughout Europe, but things are now slowly changing. In fact, the situation has enabled the more aggressive and acquisitive accountancy firms to seize the opportunity to develop their European law practices, resulting in such firms being among the top 10 legal practices in most European countries.
So where are today's golden opportunities? In my view, firms with a clear business case for European expansion may find the current business and economic climate a good time to progress their ambitions. Many practices, both in the UK and Europe, are reviewing the pressures on their businesses and the challenges ahead within the context of the current economic climate and the pressures to maintain partner profits.
In a number of firms, this will mean the size of the organisation is reduced, but such a review also needs to consider future client needs and areas for additional profitable professional services. Most large UK firms have already considered European expansion, and with the changed economic environment some European firms may be more amenable to an approach from a UK firm. A potential tie-up may be through merger, some form of association or a best friends arrangement. In cases where a full merger is not appropriate, firms need to ensure that arrangements do not damage ongoing business. If the aim is to establish good client relations locally, consider the impact of people within the 'associate' firm leaving to join a competitor.
Preliminary results from Smith & Williamson's annual survey of law firms indicate that UK firms continue to see Europe as the primary market for foreign expansion and, with greater EU integration, this trend is set to continue. There are opportunities - it is up to UK law firms to seize them. If this can be done, the reputation of UK legal practices will be enhanced and the high standing of UK law will be preserved around the world.