Australia’s mid-tier is going through a period of evolution as the country’s larger outfits merge with international players
International merger-mania has swept the top tier as Aussie big hitters look to the world stage, which means smaller law firms are having to find ways to survive and thrive in the changed environment
The magnitude of the changes taking place in Australia’s legal services sector is as staggering as the speed of change. Six of the nation’s 10 largest law firms have either merged with a foreign firm or joined a global network in the past few years.
The changes at the top end of the league are high profile and have dominated headlines in the past few years, but, in a more subtle way, the middle segment of the market is also evolving.
Melbourne-headquartered HWL Ebsworth is a case in point. The firm, which used to be categorised as a mid-tier player, has grown its size, national coverage and revenue significantly. In July 2010 the firm had 111 partners and its turnover for the 2009-2010 financial year was A$108m ($70m). Two years on, its partnership has increased to 146 partners while turnover has jumped by 30 per cent, to A$140m.
“Most of the large Australian national firms have linked up with global firms,” says HWL Ebsworth managing partner Juan Martinez. “In that process these firms have made strategic decisions to vacate certain areas of practice – mainly domestically focused. We’ve seen a lot of space vacated by those who used to be known as tier-one Australian firms.”
The firm has experienced strong growth in property and planning, construction, insurance, and domestic banking and commercial transactions, but has also recruited heavily. A number of new partners were lateral hires from the former tier-one national firms such as government practice partner Angela Summersby from Ashurst Australia (formerly Blake Dawson), corporate partner Robert Gibson from King & Wood Mallesons (formerly Mallesons Stephen Jaques) and banking and finance partner Mark Russell from Allens (formerly Allens Arthur Robinson).
In May 2011 six of DLA Piper’s eight Canberra partners left the firm, following its merger with DLA Philips Fox. They helped launched the new Canberra office for HWL Ebsworth.
“Some practitioners are leaving global firms because their practices are negatively affected by conflicts,” Martinez elaborates. “Others may leave because global firms mainly emphasise large transactions with international leverages and links, and they don’t feel their practices are properly valued.
“Another big pressure point is the rising fee rate among global law firms. This has become a real sensitivity in certain practice areas. Clients are asking for value and firms that can offer lower-cost services have an advantage.”
Along with HWL Ebsworth, other high-growth firms include Hall & Wilcox, Thomsons Lawyers and Maddocks, which achieved year-on-year revenue growth of 30, 23 and 13 per cent respectively in 2011-12. They are also beneficiaries of the partner exodus from traditional market leaders.
“There’s been a lot of personnel movement between law firms and we’re picking up lawyers and partners from national and international firms,” says Maddocks chief executive officer David Rennick. “At the same time we know that we are taking some market share from our large competitors.”
Maddocks’ core focuses are the government, infrastructure and finance and services sectors, and the firm’s partner hires reflect this. Most recently, it hired healthcare industry-focused partner Lucille Scomazzon from Ashurst’s Sydney office and strengthened its banking and finance team with the addition of former Allens Melbourne partner Stuart Weir.
“Given that so many changes are happening in Australian law firms in terms of people and brand, client focus is turning to the value proposition, relationship, expertise and industry knowledge of the lawyers in firms,” says Rennick. “Brands and the traditional tiering system don’t have the same significance any more and it’s no longer the case that a large client will go to one big firm for all their legal work,”
To be or not to be
Firms in the middle segment of the legal market are facing the same dilemma as their larger competitors. Several market participants expect to see a mid-tier firms join forces with international ones, as well as more mergers between smaller local players. Tresscox Lawyers’ recent merger with Brisbane-based boutique Macrossans is the latest example of mid-tier firms trying to reach critical mass through merger.
For a handful of firms, such as HWL Ebsworth, the answer is clear.
“I feel confident about the outcome our business strategy is producing, as the firm is in a good position to have relationships with foreign firms for inbound work – we’ll maintain our independence,” Martinez confirms. “We don’t want to restrict ourselves to the proposition, strategy and brand of another firm. Plus there’s a huge problem of conflicts in every international tie-up.”
While many firms are busy linking up with international firms, HWL Ebsworth reports a 15 per cent increase in inbound referrals in the past 12 months.
For firms such as Maddocks the immediate priority is expanding their national network. Currently, Brisbane and Perth are two important locations where Maddocks is yet to have a presence.
“Domestic firms will remain good businesses,” Rennick says. “The challenge is deciding on which category you want to be in. It’s a critical moment for firms about the same size as us. We’re all looking seriously at the changes, issues and opportunities in the market, and determining our own fate.
“We take a simple view – we will be there if our clients want us to be.”