Local nous will power the future

Merging international firms must find a model that suits their clients rather than their management

Stuart Fuller

If it was anatomically possible, international firms that have merged or combined should pat themselves on the back – it’s not easy.

Mergers or combinations mirror the changing dynamics of the business world. To be clear, the decision to undertake such a change must be driven by markets and clients, and their needs and expectations and not head-office aspirations.

A firm must have a strategy, even if this is to remain on its current trajectory. The key is execution. Firms’ recent announcements of international links reflect their differing aspirations, but, no matter what is said, most of these are either defensive – plays between competing ‘old world’ firms – or offensive plays by ‘new world’ firms.

None of this is surprising, given the long-term trends in the European and US markets and the potential client base, transaction and capital flows from growth or developing markets.

In Australia, the market has been revalued by the boom in energy and resources, and its perceived proximity to Asia. However, booms rarely last and the relevance and depth of a firm in its local markets, coupled with international capability, will be a key differentiating factor.

In a global play, the synergies of combining a substantially European-weighted international firm with a similar-sized Australian firm without any significant impact on regional or developing markets are puzzling. We all know the real play is China and the region; this is where clients are looking and firms need to follow.

Another observation is that the model used for the link is often given more weight than the benefit it delivers to clients. Some firms have chosen a fully integrated financial merger on the basis it will align incentives and accelerate integration.

This is interesting, as that model inherently limits the footprint of the firm at a time when clients are expecting their advisers to have real depth in more of the locations in which they operate, because of the difficulty of creating consistent profitability in each location and the amount of management time it takes to make it work. Such a structure loses the nimbleness clients expect.

It is also interesting as it suggests a priority on the growth of partner profits and how those profits are shared, rather than on the value and capabilities the firm is focused on delivering. I am not suggesting that profit is not important, but once a firm’s structure is driven by profits and not clients and capabilities we have reached a turning point.
Other alliance models seem to rely on a wait-and-see approach to integration. Where there are no barriers to integration, this seems like a ‘Goldilocks’ approach – neither hot nor cold, but lukewarm.

Firms must convince clients they can cover key markets. Local depth and expertise with international capability is increasingly essential as the weight of the global economy moves from west to east.

The days of ex-pats with no local connections and firms with no depth in local markets is over. The era of local-born, Western-educated advisers in firms with local market depth and international capability is upon us. That is the new force to be harnessed and what will underpin the creation of the next generation of law firms.