06 Jun 2012

Law down under is being turned upside down

The re-engineering of Australian law firms continues. But where will it end, asks Dr George Beaton.

Now it’s Australia’s turn. Not to win the Ashes. But to feel the full impact of globalisation, external investment in legal services, outsourcing and more.Few in Australia have woken up to the deep implications of ABS in the UK. It’s ironic that Australia led the world in allowing law firms to take external investment more than 5 years ago, and now it seems as though most Australian law firm leaders think that ABS is mainly about Slater & Gordon, the world’s first listed law firm and its acquisitions–and not about their clients, their talent and their firm.

Globalising the Australian legal profession

Even more ironically, it was End of Fashion–a Perth band–adapted the lyrics Don’t Delay, Lock Up Your Daughters from the 18th century London comedy in its hit song. These lyrics are apt in the unfolding of the globalisation of the Australian legal profession, as top Australian firms fear more Allen & Overy-style raids and predation on their clients. Of course this is not all recent, Baker & McKenzie the world’s first and arguably leading law firm has been in Australia since 1964, followed in the 1980s by Sullivan & Cromwell and Skaddens, also American firms. But it took UK firms Norton Rose, Allen & Overy and Clifford Chance in short order to really stir the pot, preceded in a more sotto voce way by DLA Piper. Now, by latest count by country of origin there are eight American firms, seven UK and one each from Malaysia and Canada. And don’t forget the game-changing Mallesons–King&Wood tie-up. When the trend will plateau or end is not all clear.

A most favourable destination

The appeal of Australia to globalising firms is several-fold, but mainly based on resources and the associated infrastructure and financing. Harvard Business Review has rated Australia as the most favourable destination for foreign direct investment in the eastern hemisphere and according to The Heritage Foundation Australia is the largest single beneficiary of Chinese investment, with $34b over five years. No wonder law firms are in hot pursuit of the fees that follow these massive projects and the spin-offs. Further, many now regard Australia as being the southern part of greater Asia, increasingly linked to the fortunes of the great economic powerhouses and many countries to the north and in the same time zone.

The reasons for the interest and, most recently, the avid willingness of whole firms, offices and groups of partners to jump ship and join global firms, particularly in Sydney, which has 17 offices, linked to foreign firms, are not hard to find. The attractions are the promise of more consistent flows of top quality clients and work, being part of a globalising firm, expectations of greater security, global mobility and, in some cases, lure of much larger incomes. The givens of being a partner or solicitor in a law firm remain the same, whether it’s Allens or Allen & Overy –pressure to perform and conform, nobody expects otherwise.

Accelerating the divide

These rapidly emerging trends are accelerating the divide between winning and losing local law firms. The very largest firms with turnovers in the AUD400-500million range face a novel dilemma. They now are the hunted–by both the globalising firms and the mid-size firms–for clients and talent. These predators are being aided and abetted by the clients. In the post-GFC world clients’ buying behaviour has changed substantially and probably irreversibly as the studies into client buying behaviour conducted by Beaton since 2003 indicate. Clients now enjoy much more of the upper hand. They are exercising their power in a range of ways with a willingness to use mid-size firms more readily (and not just because of price) and to buy ‘brands’ i.e. the globalising firms, rather the expertise of specific partners.

The new normal

The recently announced merger of Advent Lawyers and Balance Law cements the place of the Axiom business model in Australia. And now we are about to see another form of disaggregation, this time adversely affecting the advisory crown jewels of the large law firms, not just recruiting a few of their partners. Specialist boutiques ranging in size from a handful of partners to maybe 20 or 30 will form de novo or by breakaway from large firms. This is not new; there are already dozens of small specialist law firms with strong and growing niches as diverse as inbound Chinese investment, IP, complex litigation, and hotels. What will be new is the size, sheer quality, business model and global network of these firms. Many will be high-end corporate advisory firms. And in many ways they will be virtual. They will outsource their back offices entirely. They will compete with the top tier pure domestic and global firms and they will be exclusive members of a network of like firms in key countries. 

Perfect competition

Will they be able to compete successfully for all the ‘bet-the-company’ work done by large firms? No, but they will take large chunks and make eye-watering profit margins in the process. The value-add of these firms will come, not from the quality of their legal advice, but from the capacity of all the partners to act as true c-suite and board confidants and advisers while technology takes care of most of the routine, but not unimportant, front and back office functions.
And to add to all this, Australia’s best law firms are running the risk of their ‘daughters’ eloping. The next few years will tell if most firms have delayed their reshaping, repositioning and re-engineering too long.

Dr George Beaton is an Australian partner in Beaton Capital, advisers to law and other professional services firms. He comments regularly at  http://www.beatoncapital.com/blog/

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