A sea change in global economic power promises to shrink the mid-tier UK market
They say everything is bigger in America. And for years, they’ve been right. However, changes in the world economic league table are causing a dramatic sea change in the global market. As economic power slips away from North America and Western Europe, how will law firms adapt to the new world order?
The US, China and Japan currently take podium positions in the global league table by gross domestic product (GDP). They’ll still be holding these positions tight come 2022. However, beneath them the world’s great nations are playing musical chairs. Germany, France, the UK and Italy are dropping down the table rapidly. The BRIC nations are creeping their way up the top 10, with the likes of Indonesia, Korea and Turkey hot on their heels.
North America and Western Europe together currently hold 69 per cent of the global share of total GDP. By 2017 this will have dropped to 61 per cent, and will continue falling in the following years. Asia Pacific, on the other hand, is seeing its market share increase from 13 per cent to 19 per cent during the same period.
Hong Kong is destined to become the world’s biggest market in the next five years, which means fewer deals will come out of London. Law firm consultant Alan Hodgart says there are three ways firms can respond to the changes: “Do nothing, change and compete somewhere else, or say ‘let’s get better at what we’re doing’.” The first of these is not an option. He warns: “Those firms who sit and wait and see what happens will see further decline until they go into crisis.”
Firms who do opt to expand must do so with caution, rather than take a “follow the leader” approach, as Hodgart argues has occurred in the Middle East. “You don’t need a lot of lawyers in the Middle East,” he says. “It’s a very small market. You need a small team who can build relationships with sovereign firms and be on hand to be contacted at any time. Firms are going there to do local work and finding there’s not a lot to do.” The same goes for litigation hub Singapore. “A lot of firms with no strengths in those areas are going in. What are they doing there?”
Firms may have more luck getting off the beaten track. Latin America, for example, is a largely untapped market which will increase its market share from 13 per cent to 15 per cent by 2017. “As people wake up to its size and growth, we will see more international firms going into Latin America. If you’re a firm with a focus on mining, Chile and Peru are very interesting.”
In fact, the Asia Pacific and Latin American markets combined will total $383bn ($248bn) by 2015 – or over a third (34 per cent) of the global marketplace. There will be an enormous amount of demand flowing out of both regions, ripe for the picking by global law firms. Hodgart says: “A strong presence in these markets will be an essential requirement for firms seeking to compete as a higher value business law firm.”
US firms are also competing for their slice of the global pie. The 40th largest US firm currently has a revenue figure higher than the 12th largest UK firm, and increasing competition at home is leading these giants to seek out work overseas, primarily in Western Europe and Asia. Bracewell & Giuliani and Locke Lord are among the most recent US firms to cross the pond and embrace the City.
UK firms, and mid-size firms in particular, will find the market increasingly squeezed. Hodgart concludes: “It will be a much more segmented market, with a smaller number of firms playing a high value game.”