Going it alone

The top-tier Australian firms have the domestic market tied up. But, when it comes to international expansion, writes Felicity Clarke, they seem to have hit a strategic impasse

In 1988 both Allen & Overy (A&O) and Malleson Stephen Jaques set up offices in Hong Kong. They moved into the same building, started out with the same number of partners – three each – and even ferried clients across the harbour in the same junk.
But 13 years later, A&O’s Hong Kong operation is now staffed by 18 partners, five resident consultants and a total of more than 100 lawyers. Mallesons, meanwhile, has grown to just seven partners, a consultant and a total of 16 lawyers.
This comparison illustrates the difficulty top-tier Australian firms have had in making their mark on the international legal scene. Their domestic market is securely sewn up – they hold a tighter monopoly than their UK magic circle colleagues do – but the favourable comparison ends there, because when it comes to venturing outside the local market, the results speak for themselves.
The Australian legal market is limited and already bulging at the seams with lawyers. Top-tier firms Mallesons, Clayton Utz, Minter Ellison, Allen Arthur Robinson, Blake Dawson Waldron and Freehills have huge national partnerships that extend across the vast continent and more than cater for legal demand. So as the domestic market reaches saturation point, and as legal services across the world head towards globalisation, Australian firms will need to expand into regional and international markets if their profits are to continue rolling in.
For some time now, Australia has promoted itself as the western gateway to Asia and efforts are on-going to develop Sydney as the hub for work in the region, just as London is the hub for Europe. In the other direction, law firms’ expansion into Asia began in the late 1980s and early ’90s and now most of the big firms are represented in Hong Kong, Singapore and Indonesia. But representation is one thing, consolidation is another.
While the expansion of UK firms into Asia has been aggressive and has seen extensive networks laid down in all the major centres, Australian expansion has been timid and has managed satellite offices at most.
“They are nowhere near as committed as the UK and US firms,” says Anita Simmonds of legal recruitment company, Warnecke Consulting. “And they do not seem to be making a proactive push into gaining a market share over those firms. For example, they never seem to be interested in recruiting lawyers with Asian language skills.”
If Asian expansion is an integral part of Australian firms’ strategy to get a competitive advantage over each other and compete more ably on the international scene, then why is it that they appear to be just fiddling around?
A lot is explained by the comparative lack of resources that Australian firms have at their disposal. But they do not, at least, seem to have given up yet. Ewen Crouch, executive partner of Allens’ Asia-Pacific offices, says that successful expansion into Asia depends on getting the model right first off.
“The strength and depth of the London and New York capital markets and the strength of the US dollar starts UK and US firms from a higher base and allows for big growth. For Australian firms to establish themselves internationally, they have to be much more careful in expanding,” Crouch says.
Allens avoided the initial rush into Asia to open what were, in effect, ‘postbox’ offices in as many destinations as possible, and instead has focused on replicating its successful practice areas from home where there is a demand in Asia. “The Australian resources sector provides our lawyers with the opportunity to develop international skills,” says Crouch.
“[Our energy and resources expertise] has been drawn upon to beef up our presence in Cambodia where we are advising the Cambodian Government on the appropriate regime for offshore gas exploration. It also forms a main part of our Shanghai practice.”
Clayton Utz is also treading carefully in Asia, but unlike Allens, which has offices in Hong Kong, Singapore, Bangkok, Shanghai and Port Moresby (Papua New Guinea), Clayton Utz has none. Its favoured strategy is expansion by way of a ‘best friends’ network.
“We are being very selective about where we are committing our resources,” says Clayton Utz’s CEO, David Fagan. “The UK firms already have a good coverage of the Asia-Pacific region and we are not looking to open offices there. We are looking more at joint ventures and formalising relationships where synergies already exist. Like Slaughter and May, we are interested in developing a best friends network and having teams of our people in different cities.”
These Clayton Utz teams are already in Singapore doing international construction arbitration and in Hong Kong doing construction work, but Fagan says the firm is looking for more. “We are actively looking for a joint venture or some form of affiliation in Singapore or Hong Kong,” he says.
Like Clayton Utz, Blakes’ strategy focuses on forming alliances to boost its Asian network, which currently consists of an office in Shanghai and close associations in Jakarta and Singapore.
“We consider it very important to expand further into Asia and we are working through a number of options to get there,” says Blakes’ chairman Richard Fisher. “A point of difference for Australian firms in Asia is their ability to give UK or US opinions which are very important for cross-border work and major financings. If we are to compete more completely there, an alliance with a UK or US firm is one option. A second option is linking up with a local network and focusing on domestic work.”
Fisher says that the comparative affordability of Australian lawyers is in Blakes’ favour in achieving the second option.
“There are serious opportunities for Australian firms to participate in Asia simply because we have lawyers who are top class by world standards and much cheaper than UK or US lawyers.”
Australian firms seem to know their place on the Asia-Pacific regional scene, and competing with UK and US firms for a share of the high profile work is not part of their plan. Although they are committed to expansion throughout the region, their strategies remain timid. By contrast, the UK firms are waging war on Australian firms, as evidenced by recent poachings of star partners such as Clayton Utz’s Grant Fuzi and Andrew Trahair by A&O, and Patrick St John by Freshfields Bruckhaus Deringer. And then there are the recruitment drives for young Australian lawyers and now, law graduates.
“It is rumoured that Linklaters is going to start recruiting the 10 superstar graduates from the best of the Australian universities,” says Warnecke Consulting’s Simmonds. “This is likely to be copied by other magic circle rivals.”
But the Australians are careful not to take on the big boys and Minter Ellison is another example of this.
“We are not competing head on with UK and US firms for capital markets and high level M&A work,” says Minter Ellison’s executive managing partner Stephen Macliver. “Our Asian strategy is to develop as a strong regional firm which is not a UK or a US firm. But we are competing in focused areas of expertise such as major projects, privatisation, construction, technology, communications and employment.”
The pay off for keeping out of the way is that a main source of Minter Ellison’s work in Asia is referred from the big players who prefer to send it their way than to a rival. And this is a strategy that seems to be working – the Minter Ellison Hong Kong office has expanded from three x to 12 lawyers in nine months and is expected to double again over the next year.
Unlike their British and US competitors, Australian firms have not had the same opportunities to infiltrate overseas legal markets on the backs of international clients, investment banks in particular. This, however, is changing, as the home grown clients, such as insurance company AMP and mining giant BHP Billiton go global and expect the same from their legal advisers.
“Australian corporates and institutions are increasingly operating and generating revenue offshore and their legal advisers need to be able to service their development,” Macliver says.
This change contributes to the renewed commitment of Australian firms to expand their Asian practices.
So far, the best opportunity an Australian firm has had to make its mark in Asia was Mallesons’, with the joint venture offer from Clifford Chance. But the chance fell by the wayside when Mallesons asked for too much.
“Clifford Chance wanted a joint venture in Asia but Mallesons wanted a merger and it was not in our interest to give them that,” says a Clifford Chance source. “Mallesons had a lot to offer – they have an army of first class partners and quality assistants, they operate from a low cost centre and are in a closer time zone.
“Their clients include Telstra whose raison d’etre is to become the number one telecommunications company in Asia, and other first class corporates that were looking to raise debt in New York. [Those clients], in addition, would have boosted our New York practice.”
Merging with a top-tier UK or US firm would solve everything for the big Australian firms battling it out on the home front and now in Asia. But no one, except for maybe Mallesons, is hopeful of that happening in the foreseeable future. The firms are too big and their profits too small, their domestic market is finite and their regional influence is only beginning to take shape. For the time being, the top-tier Australian firms do not have much to offer.
“A UK or US merger is extremely unlikely,” Macliver says. “Australia is a nice place to visit, but is irrelevant in the global context of doing business.”
So in the unlikely event of a legal merger, is a merger of the accounting kind an option?
“Most Australian law firms have been approached by accounting firms,” Macliver says. “However, no merger with a top-tier firm has taken place because there are real impediments which do not make it that attractive an option.”
The main impediment is the cultural difference between the legal and accounting professions. “From the perspective of an outsider, there is much more rigorous central control in accounting firms,” says Blakes’ Fisher. “This does not sit well with the fact that lawyers tend to have a greater streak of independence and are less easily managed – and less prepared to be managed.”
But even if cultural differences were resolved, the top tier firms do not seem all that enamoured with the MDP concept anyway.
“MDPs might work at the bottom end of the legal market, or in areas of convergence like tax, but when top companies look for lawyers, they look for the best and they do not necessarily want to be locked in to a one-stop shop,” says one Sydney lawyer.
“They may also have good reasons to require their lawyers and accountants to be independent. Clients seek out top-tier firms because they are known as the best lawyers, not because you can ‘buy 10 accountants and get two lawyers free’.”
But can Australian law firms afford to dismiss this option so flippantly? The accountants are ready and waiting with their global networks in place and on offer. Blakes is aware of this – it lost its Hong Kong association when its ally, Kwok Yih, merged with Andersen Legal.
“We do not underestimate the competition that accounting firms pose in due course,” Fisher says. “As we move towards a more global legal market, it would be foolish not to recognise the serious possibility that accounting firms would form part of that.”