To merge or not to merge – that is the question

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With so many large law firms expanding overseas, not to mention the huge cross-border mergers (or quasi-mergers) garnering attention in the news, mid-sized firms may think that they are not in a position to develop an international practice.  Even if these firms were to contemplate cross-border expansion, they are daunted by what they believe are prohibitive costs and a slew of other barriers to entry.  Add to this the conservatism of many law firms, which have historically done well in their local markets and have not seen the need to expand their practice profiles, and it is easy to see why many mid-sized firms are reluctant to contemplate diving into foreign waters.

International expansion is risky and complex.  It is not to be lightly undertaken—certainly not on a whim, or as a vanity project, or as a way to divert attention from domestic problems.  It requires a thoughtful analysis of the firm’s skill sets and aspirations, an understanding of the needs of its clients, and the ability to be rigorously goal-oriented while retaining flexibility to adapt to changing circumstances.  And yet, in today’s interconnected world, an international strategy is indispensable.

An international strategy is best viewed as simply one more weapon in the battle for market share.  It is a powerful weapon if wielded correctly.  A recent article in The Wall Street Journal, reporting on 2013 law firm revenues, said it best:  “[F]irms with a strong international presence notched the biggest revenue gains.”  It’s easy to see why this would be so.  An international practice is a kind of hedge against economic downturns.  The more varied a firm’s exposure to different markets, the more likely that one region’s slow growth will be balanced out by another region’s boom.

Does this mean your mid-sized law firm must have offices all over the world—or even a single overseas office?  Of course not. It means that you should be paying attention to what your clients are doing in overseas markets.  No serious commercial law firm in the United States—whatever its size—can afford to ignore the global market for legal services, precisely because their clients are already actively engaged in cross-border business, whether through foreign investment, overseas acquisitions, multi-jurisdictional commercial disputes, global product distribution, outsourcing, international brand protection, alternative capital markets, offshore tax vehicles, foreign logistics and R&D hubs, and a myriad of other commercial activities.

How do you get in on this important source of business?  You need to figure out where the action is, and that depends not on the latest fads, but on an understanding of what markets and regions are important to your key clients.  Hardly a corner of the world has not been somehow affected by the globalization trend begun in the 1990s, so choosing the appropriate target market is essential.

For example, China presents constantly changing opportunities.  The sizzling growth rate it has experienced over the past couple of decades has now slowed down (although some might say that “slowing down” to 7.5 percent GDP growth is still pretty enviable).  The new political leadership has made clear its intention to shift from investment-driven expansion and easy credit to a more consumer-focused economy with greater private-sector participation than before, focusing on a number of social concerns such as housing, elderly care, health care and the environment.  All this suggests new ways for foreign investors and trade partners to find opportunities.  The growth of significant cities away from the eastern coast of China, such as Chengdu, Xi’an and Chongqing, as well as the pilot Free Trade Zone planned for Shanghai, streamlining business startups and easing investment hurdles, also are strong indications of China’s continuing need for external trade and investment.

Hong Kong has traditionally been the gateway to the mainland, but it also is a significant legal market for finance, shipping, insurance, real estate and dispute resolution.  Singapore is getting close to knocking Hong Kong off its perch as an international arbitration center, and is also a vibrant market in its own right, as a finance and capital markets hub, an attractive location for multinational companies’ regional headquarters, and, importantly, as a jumping-off point for Southeast Asia.  Various Southeast Asian countries, in turn, such as Malaysia and Indonesia, have seen considerable investment, particularly in energy and infrastructure.  Some of the less-developed countries of the region, such as Vietnam and, lately, Myanmar, while presenting higher risk, are also expected to produce the relatively high returns on investment characteristic of early-stage emerging economies.

In North Asia, the U.S.-Korea Free Trade Agreement, which went into effect two years ago, has created an upswing in business between the two countries, with a concomitant opening for quite a few U.S. law firms to establish offices in South Korea.  In South Asia, India remains a huge market with still-to-be-realized potential, and, although for the time being it remains a closed market for foreign lawyers, many law firms do a thriving business through “India desks” they have established in their home jurisdictions.  (Country “desks” are basically practice groups whose members have special expertise, including language knowledge, in a particular foreign country, when establishing a physical office in that jurisdiction is not feasible or desirable.  The expertise has to be real, credible and demonstrable.  Saying you have a “French desk” when it’s just one partner who likes to travel to Paris and has a smattering of high-school French, will not do the trick.)

On the other side of the globe, the stable economies of Colombia, Chile and Peru present a de facto economic region with strong trade and investment in natural resources, energy and agricultural products, among others; Mexico is opening its energy market after some 75 years of state control, and is making strides in telecommunications and education reforms, easing foreign investment (even as the federal government continues to grapple with high rates of organized crime).  While corruption, crippling bureaucracy and a high level of political risk have colored the investment picture in Argentina, Brazil and Venezuela, much remains to attract investment in these countries, particularly in the resources sector.  Brazil especially, with $2.25 trillion in GDP, and major infrastructure investments in anticipation of the 2014 World Cup in soccer and the 2016 Summer Olympics, cannot be ignored.

Corruption and instability are also characteristic of large parts of Africa, but the continent is still expected to attract some $150 billion in foreign investment by 2015, particularly in natural resources, media, telecommunications, agriculture, infrastructure and energy. Law firms, mostly British and European ones so far, have increasingly set their sights on the continent, following opportunities for their clients.  The Middle East, while racked with upheaval in a number of areas, has also been a rising legal market; Israel remains a dynamic economy with a colossal high-tech and life sciences sector, last year chalking up some $6.6 billion in acquisitions and IPOs, with $2.3 billion in venture capital funding for startups; while the Gulf states continue to draw energy, finance, real estate development and infrastructure.  Turkey, despite political uncertainties, remains an important market on its own and as a springboard to the Gulf, as well as to the resource-rich Central Asian republics such as Kazakhstan and Azerbaijan.

The foregoing—together with some cautious optimism for economic recovery in Europe, particularly the United Kingdom—is indicative of the tremendous range of global economic activity available to U.S. companies.

What does it all mean for your practice?  It means that your clients are doing business in one or more of these regions, and if you are not part of their international team you are losing out.  Look at it as a combination of defensive and offensive strategies.  When your good, long-time client consistently needs legal representation overseas (or just across the border), and your firm cannot handle the matter, you are at risk of losing that client to a firm that can, either because the other firm has an office in that jurisdiction, or because it has developed some presence through a relationship or affiliation that makes it possible for that firm to stay involved in managing the assignment.

Without a defensive strategy, you will put more and more of your client relationships at risk.  Clients will not wait for you to catch up with competitors who can serve them where their needs are.  You must figure out how to persuade your clients to come to you in the first instance when they have a problem or project with an international dimension.

Equally important, you must put an offensive strategy into place.  This means, first, discussing with your existing clients where their global interests lie, and where and in what substantive areas they would be willing to look to you for assistance.  They will be delighted to see that you are interested in their business aspirations, and that you want to grow alongside them.

But don’t put all your eggs in the current client basket.  Following clients around the globe is not in itself an ideal strategy.  You don’t want to be tethered to the fortunes of one client, or of a small handful of them.  As a second step in your scenario planning, determine the prospective clients you would want—and, based on your firm’s practice strengths, would be able—to attract if you had an international presence.  Think ahead to what is going in the world of the types of clients you normally serve.  What is the next big thing in their fields?  Who are the up-and-coming players?  Would you be able to get their business if you had some kind of international presence?  How would you get your message out to the constituency you would like to serve?  The answers to these questions are crucial to making the right decision about international expansion, and they must be based on hard-nosed assessments of your firm’s talent base, the partners’ willingness to take the steps necessary to build a genuinely international practice, and on a reasonable understanding of international economic, commercial and even political trends.

How to acquire an international presence?  No single formula exists for successful entry into the international arena.  The obvious methods include starting greenfield operations in relevant foreign jurisdictions, whether by setting up from scratch or by merging with or acquiring a local practice group or firm.  Although the greenfield approach is by no means the exclusive domain of large law firms—a surprising number of smaller firms have one or more overseas offices—it requires the greatest commitment of management and financial resources.

A better strategy for the mid-sized firm is to enter into what we call select partnerships.  This means a focused effort to identify like-minded law firms in those foreign jurisdictions that are most important to your key clients, and to develop a close working relationship with them.  The relationship need not be exclusive, but it should be based on a solid core of common skills and interests, with a well-articulated set of milestones to measure success.  Unlike the ubiquitous law firm alliances, select partnerships are more than occasional referral services.  Member firms actively market together (based on an agreed budget and business plan) and work on identifying common projects, including seeking out new clients.  They introduce their key clients to each other to establish the clients’ comfort level in working with them and to ensure uniform standards of service (subject of course to local variations).

What if there are no clients with sufficient overseas work to justify the hard work of building these kinds of deep relationships?  Many ways are available to position your firm to attract international work, especially inbound work from foreign clients.  One way is through bar association activities.  Active participation in professional associations, especially through committee involvement, participation in programs and especially speaking engagements, is an excellent way to raise your firm’s international profile.  The ABA’s Section of International Law is an obvious choice for constructive engagement.  A number of leading state bar associations also have international sections, offering an opportunity to gain exposure to foreign legal developments, trends and colleagues.  The International Bar Association, of which this author is an officer, has a global membership of lawyers focused on every area of commercial law, and it conducts seminars and conferences on a broad range of topics throughout the year, around the world.  A number of international law firm alliances also conduct educational and networking programs, and they welcome contributions to their newsletters.  These too can be useful for exposure.  The more effort you put into these organizations, including active participation in committees, the greater likelihood of a return on your investment.

You can do a lot more.  Research incentive programs for foreign investors that may be available in your state or local region, and make your firm an expert on those programs, publicizing your knowledge through articles in trade publications.  Identify and join local chambers of commerce geared to foreign companies doing business in your area – they are all over the United States.  Participate in job fairs held by law schools with LL.M. programs for international students, and seek out promising candidates for internships or even associate positions.  Once they return to their home countries they will be a valuable source of good will toward your firm.

Most important, instill among the lawyers in your firm an awareness that the business of law is no longer local, or even national.  It is a great big, competitive world out there.  Adding an international dimension to your firm’s practice will raise your game and keep you in it for a long time to come.

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It’s a scenario that plays out with increasing frequency at small and medium-sized commercial law firms: one of your partners rushes into your office with good news and bad news. A long-standing client wants to hire the firm for a deal in a far-off jurisdiction, and now you have to find local lawyers. Being able to work on the deal and project-manage the foreign aspects would cement the firm’s relationship with the client for years to come. That’s the good news. But having no experience with overseas transactions, much less foreign law firms, you risk sending the client into the arms of rival firms with more international savvy.

You call some of your law school friends now practicing at big firms to see if they know any law firms in the relevant countries. You get your marketing coordinator or maybe a young associate with time on their hands to do some research. If you’re fairly up to date, you get on the web and see what Chambers or Legal 500 have to say about the local talent.

One way or the other, you get a few names but they mean nothing to you. How do you vet them? You call them, one by one, you struggle through the language barrier, you ask for representative transactions lists, you listen to war stories, you do your best to make a choice that would best serve your client. Then you hear about local bar rules and engagement letters and unusual fee arrangements and you think: ‘there has to be an easier way’. And in the meantime, you have a client impatient to get your partner working on the deal.

In the end, you did find a firm. Maybe your partner’s deal got done with no problems, or even with spectacular results. Or maybe it was a disaster and an embarrassment to you and it may even have cost your firm the client relationship. Whatever the outcome, you are likely to come to the realisation that you should join a network, some kind of law firm alliance that will give you quick and easy access to names and contact details, so that when that next call comes in with an overseas matter, you can say: ‘of course we can handle it – I’ll just call my people in…’.

The trouble is that at last count there were 134 law firm alliances in the world, and that’s just the most prominent ones. They are not all the same. Some have stricter requirements for membership than others. Many charge hefty admission and membership fees. Some, like Geneva Group International and Mackrell International, also include accounting firms. Others, like CMS or MWE International Tax Panel, are really just extensions of a particular law firm. Others still are specialists in relatively narrow fields, such as the Food Lawyers Network, ALEXIA (shipping and maritime) and EuroCollectNetwork (debt recovery); or geographic regions, like the Bomchil Group (Latin America), Juris East Africa and East Legal Team (five East European countries). Many are relatively informal, while others are run through professional managers, with a board of directors and extensive bylaws.

Choosing the right alliance very much depends on your firm’s needs and ambitions. Fundamentally, alliance memberships are passive: you make use of them on an as-needed basis, when you need that Lithuanian legal opinion, or a quick explanation of the Ghana Mining Sector Support Programme. They help you to respond to situations that arise perhaps once in a blue moon but when it happens, and you get the answer, your client goodwill gets a tremendous boost.

Law firm alliances can of course be proactive too. Quite a few groups have annual or quarterly meetings, often with extensive programmes for presentations and networking. These are great occasions for member firms to solidify relationships, learn about legal topics of interest and even to identify business-generating initiatives. For many firms, especially in smaller jurisdictions, these kinds of events are invaluable as means for forging links with the world beyond their borders, and also for projecting an international image. (It would be remiss of me not to mention one other, extraordinary alliance of law firms, a tremendous networking and educational organisation and highly effective referral network: the International Bar Association).

In our consultancy, what we most commonly hear – at least from our medium-sized law firm clients – is that while alliances work well, they are not a substitute for the hard work of building an international practice. These firms have clients with regular, recurring cross-border needs; and these firms want to anticipate not only where those needs will be in the future, but also who the next generation of clients will be, who in turn will require cross-border services.

For our law firm clients with international ambitions but no desire to open foreign offices or to merge with foreign firms, we strongly encourage membership in alliances that fit their needs, whether geographically, or through practice concentrations or otherwise. We also advise them, however, to identify a small handful of like-minded independent firms, in jurisdictions most relevant to their principal clients’ activities, and to create a mini-alliance – what we call a ‘select partnership’ – with those firms.

These select partnerships are designed to build on shared strengths, so that they can not only seamlessly handle cross-border assignments, but also jointly market to existing and prospective clients (with agreed budgets), share technology, engage in mutual secondments of lawyers, and in many other ways function like a multi-jurisdictional firm, without the investment and risk of full-scale law firm mergers. Select partnerships can be structured in a variety of ways, from joint venture-type arrangements to Swiss vereins; they can add on or spin off members with ease; and they can be terminated without material financial consequences.

Given the spate of mega-firm mergers we are witnessing, and will likely continue to see, select partnerships are a significant supplement to law firm alliances, allowing independent firms to project their abilities beyond their borders and to preserve and enhance their most valuable client relationships. They are also effective vehicles for identifying opportunities for new projects and new clients in our increasingly interconnected world.

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