Cover story: Taking on the world

Pressure to consolidate and expand global reach is forcing law firms to re-examine their international strategies. But many firms also fiercely stress the value of their independence. Can alliances and networks realistically extend your presence in other markets? Or is merger the best option for establishing a firm’s global footprint?

By Tina Lofthouse

The heat is on for law firms. Responding to increasing client demands and growing competition, many are looking at how they can strengthen their international proposition.

Mergers are high on the agenda, with several leading firms currently going through the process, or at least seeking potential prospects that might make a suitable partner further down the line. Their stated goals are much alike – chiefly, to expand their global presence to meet the needs of their major clients whose work is growing increasingly international in scope.

Reed Smith and Richards Butler, who are currently working through their merger process, are a prime case in point – 70 per cent of Richards Butler’s work is cross-border in nature and Reed Smith’s growth strategy is driven by the need to provide expanded capabilities to its clients. The combined entity is set to launch in January 2007 creating a firm of more than 1,300 lawyers. Many in the industry believe such strategies are essential if a firm wants to compete effectively. Anglo-American law firm Kirkpatrick & Lockhart Nicholson Graham (itself the result of a merger in January 2005) is in talks with US/Asia-based Preston Gates & Ellis about another possible merger. If the combination occurs the resulting firm will boast around 1,400 lawyers in 21 offices located in North America, Europe and Asia.

K&LNG chairman Peter Kalis says that against this backdrop of consolidating and globalising client markets, leading law firms must align their businesses with those of major clients by developing global footprints. If they don’t, Kalis explains, clients may “deposit them into regional pigeonholes and isolate them from the leading engagements of the day”.

Such megamergers are now becoming the norm, and there is a good deal of jockeying among firms to become the dominant global players. In mid-December, partners at Orrick Herrington & Sutcliffe and Dewey Ballantine will vote on a proposed merger that would create a firm of around 1,500 lawyers and, like K&LNG/Preston Gates & Ellis, would also have 21 offices across North America, Europe, and Asia.

Ralph Baxter, Orrick’s chairman, believes the dominant firms will need significant operations in all the world’s leading commercial and financial centers, as well as market-leading practice groups, with a particular strength in M&A, finance and litigation. He sees the likely merger of his firm as establishing Dewey Orrick as one of the world’s premier law firms.

However, both firms believe it is all about anticipating what the clients need in an international marketplace. “Clients will need law firms that are innovative and creative in the way they run their businesses and in the ways in which they partner with their clients,” Dewey chairman Morton A. Pierce adds.

Defensive manoeuvres

This is a continuation of the trend that prompted DLA to merge with Piper Rudnick in January 2005. Nigel Knowles, joint chief executive officer for DLA Piper, explains: “In mid-2003 we decided to get to know some US law firms early with the medium-term view of creating some kind of alliance in 2005 and 2006 after we’d sorted out our European and Asian ambitions. One of the firms we met was Piper Rudnick and it became clear that they wanted to do something much sooner. Its domestic corporate clients who were doing work around the world were saying that the law firm needed a presence outside the US.”

“We were looking opportunistically to the future; Piper Rudnick was looking more defensively. However, we both believed that in a ten-to-15 year period, there would be a shakedown, as happened in the accounting profession, and a number of global business law firms would emerge.”

As US corporates, in particular, became more international, and general counsel found it ever harder to manage separate panels in each country, they started to look to streamline the number of legal providers they worked with. They wanted fewer firms that could look after a wider geographic area.

DLA and Piper Rudnick found they were singing from the same hymn sheet. “We both saw we could do something together that would be innovative and give us a lead in the provision of legal services on a full broad business basis,” says Knowles.

He also issues a warning. “You can’t ignore the fact the US investment banks have acquired nearly every other investment bank around the world, and if they’re not already, corporates are increasingly seeking to be global. If you don’t have access to the US market you are leaving yourself out of many opportunities.”

Merger vs network

But why is there such enthusiasm for merger, when an alliance or a network, some argue, may do the
job just as well without the inherent risk? The legal industry is divided, with some firms believing a network can be more than adequate at meeting clients’ needs for global representation. Peter Kalis is not in that camp. “In the competitive market for legal services, networks and alliances of independent firms are no match for the strategic management, nimble decision-making and seamless quality of a single firm,” he claims.

On the other hand, London-based Lewis Silkin believes a network can actually offer its clients more than a merger. “To get the same kind of coverage that we have through our networks we’d have to merge with 50 firms,” says Russell Brimelow, employment partner at Lewis Silkin. “In an area such as employment law, where there is a big international element yet you need local knowledge, a network works very well.” Having a large multinational firm brings with it problems of how to manage people overseas and how to profit share with potentially less profitable firms, Brimelow explains.

The network strategy is certainly working well for the firm. Lewis Silkin is a member of ius laboris, a network of 36 independent law firms specialising in employment law. In recent months, television company MTV appointed Lewis Silkin and ius laboris to deal with its international law queries. Other clients are equally happy with the idea of the network. “They’re very pleased to be referred to a commercially-minded law firm that really knows their subject and has the local expertise,” says Brimelow.

However, he also stresses that networks need to be of a high enough quality to provide real benefits. “Some networks are essentially just talking shops with an overseas conference and possibly some referrals and there is nothing wrong with that. But the trouble is that many networks aren’t specific enough and the firms aren’t particularly well-matched.”

The firms in ius laboris all have to be top firms in employment law. “You know you have a high quality firm in each jurisdiction and when you refer work you know the client will be looked after. Interestingly, this confidence allows you to start putting packages together for clients and innovate in how you provide legal services.” Brimelow also believes it is important networks only have one member per jurisdiction to avoid internal competition and that there should be a strong management mechanism to ensure high standards are kept.

Such networks can also provide some of the benefits of critical mass. Pooling of resources can bring more clout in areas such as marketing, for example. The big disadvantage is they are not a strategy for growing a firm.

Flexible expansion approach

For some firms, networks and mergers aren’t necessarily mutually exclusive, with room for both in a global expansion strategy. DLA Piper, for example, has a number of alliances under the DLA Piper Group umbrella. The member firms want to be part of what DLA Piper is about, but don’t want full financial integration. Knowles explains: “They want to be like us and benefit from being like us but they still keep management control. We don’t have people sat on their boards, or power of veto, but we do have an agreement to be consistent in how we do things and we share the same values.”

Alliances and mergers will also both continue to form part of the international expansion strategy – although this does depend what you mean by a merger. “We’re now nearly 4,000 lawyers and nearly 1,200 partners – if you’re talking about a merger of equals then that is not going to happen. However, we will continue to take advantage of opportunities with the right strategic fit,” Knowles says.

He adds that other so-called mergers in the legal industry are actually acquisitions. “I think we’re the first genuine merger to create what is one of the few true global law firms right now,” he says. This is reflected in the value of the client base the firm has attracted and the work that has been referred. “It has been beyond our initial expectations with a good deal of work passing from office to office. There are no hubs developing where all work has to pass through London or New York. Everybody is finding the appropriate person to suit their client wherever they are in the world,” Knowles continues.

The quest for critical mass

Law firms often cite building critical mass as part of the rationale for a merger. Peter Zeughauser, law-firm merger specialist and founder of US consulting practice the Zeughauser Group, says some want to be known for particular core practice areas, and the only way to build this critical mass is through mergers. Lateral hires can’t build this critical mass fast enough to keep up with the competition.

“A merger also provides the firms involved with more resources,” Zeughauser adds. “To raise a profile in global markets needs more money than a small firm typically spends in areas such as marketing. There is a lot of pressure on keeping profits-per-partner high to retain the best lawyers and so the only way to generate resources is through mergers.”

The critical mass issue is certainly a valid reason for the smaller firm to look for a merger, but what we’re seeing today is the merging of what are already substantial firms into legal leviathans. Zeughauser believes megamergers like those proposed by the likes of Orrick Herrington & Sutcliffe and Dewey Ballantine are a sign of bigger things to come. “A few years ago this would have been seen as a massive firm but it is no longer that extraordinary and over the next decade we will see firms of 10,000 lawyers in size,” he predicts. Whether or not this will be seen as a positive step in the industry’s development remains to be seen. Certainly, it will present unprecedented challenges for the firms involved. There will be more issues, not just over conflicts of interest, but also in terms of personnel. How do you retain, attract and manage people in a 10,000-lawyer firm and how do you achieve things like camaraderie?

These were certainly challenges for DLA Piper in its merger. Although some way off 10,000 lawyers, merging two firms with 1,350+ laywers on each side was no mean feat. However, right from the very start, it avoided one of the major merger hurdles, namely merging two separate cultures, by insisting each office kept its cultural identity. “You have to acknowledge and embrace multiculturalism, while sharing the same vision and core values,” says Knowles.

He also points out that as hourly rates, rents and leverage between partners and associates are different all around the world, DLA Piper has no single, or standard, business model. The key is to agree on vision, plan and core values but allow various business units to embrace their local culture so the firm can be strong locally while also establishing a significant position globally. “At the end of the day our clients are local, whether or not they are global in size, and wherever we’re acting for them is in relation to a local matter,” he explains.

Choosing the right path

Whether it is to create critical mass, tap into new markets, or expand capabilities, there is an overriding feeling in the legal industry that bigger is better, and no one is standing still. In August, it was reported that magic circle firms Freshfields Bruckhaus Deringer and Allen & Overy had been stepping up efforts to find a US merger partner. Guy Beringer, senior partner at Allen & Overy, told Managing Partner that the firm is indeed committed to growing its US practice “either through merger or through organic and lateral growth”.

“At present there are no suitable merger opportunities so we will continue to grow by monitoring the market carefully, and seeking out appropriate opportunities,” he explained. This illustrates one of the great difficulties that law firms face. While mergers are heralded as the panacea for achieving global glory, the reality is that it’s hard to find a partner who shares the fundamental aspects crucial to merger success. Issues such as vastly different cultures can be resolved, even if that solution is to leave things as they are, as in the case of DLA Piper. Many US/UK firms have also managed to get round the thorny issue of integrating disparate compensation systems, and conflicts of interest can usually be sorted out. But it still takes a good deal of time, effort and commitment from both parties to get a merger right. The rationale behind the merger needs to be strong enough, and the firms involved must share the vision if it is to help them realise their international ambitions.

If a firm instead chooses to go the route of alliances and networks, this too has to be carefully planned as part of an overriding strategy. It must also be executed with diligence, as belonging to a network that has little credibility could be worse than not joining one at all.

Above all, a global expansion strategy needs to be client-driven and firms must look at what their clients expect from them now and anticipate what they will need in the future. Whether they choose mergers, networks or alliances, the ultimate aim for any firm must be to make themselves more attractive to new and existing clients.