For law firms around the world, it is been a tumultuous and transformative year – one in which growth and decline have come hand in hand. On one hand, the global legal services industry has experienced what has been considered the worst financial crisis since the depression, forcing law firms to downsize and scrap growth plans. On the other, some firms have ploughed on and opened new offices, continued at normal recruitment levels or forged alliances. Meanwhile, a broader debate circulates in the industry – whether law firms must drastically change the way they operate. Whether firms that have adopted alternative business models will be able to continue their growth as the downturn really bites is yet to be seen. More certain is that an impressive number of firms, especially domestic firms just outside the very top tier, have managed an equally impressive rate of growth over the past 12 months.

Supply & demand

As the effects of the financial crisis began to be felt in the latter half of 2008, many predicted the big international firms would be re-analysing their level of investment in the Asian region. Some firms saw dramatic about-turns from high recruitment levels, and those with lower leverage ratios were hit by declining PEPs. Associates were shed at unprecedented levels. The redundancies began as early as October, and for some firms extended into second rounds of cuts. Redundancy payouts further contributed to profit downgrades. Clifford Chance, for example, with 292 lawyers based in Asia, recorded a 37% drop in firm-wide PEP and lost its world number-one revenue rank; the firm’s high exposure to the financial services sector, along with redundancy costs, was blamed.

But in much the same way that Clifford Chance sought out more offsetting growth opportunities with its AZB Indian alliance, other firms have been busy jockeying for position for when the good times return. A range of firms have announced mergers, alliances, and office openings. Deacons Australia have merged with Norton Rose, Appleby with Dickinson Cruikshank, and J Sagar with M&C Partners, while Clyde & Co have formed an alliance with ALMT Legal, Salans with Pinsent Masons, and Eversheds with Hani Qurashi. Some of the focus has shifted recruitment drives to business consolidation, it seems. The merger between Norton Rose and Deacons, for example, was born in response to what Deacons’ chief, Don Boyd terms “an evolution of sorts” occurring in the legal industry. “Our [Norton Rose and Deacons] joint vision is that there will inevitably be a limited number of true international firms, as the cost of establishing, operating and maintaining offices and good knowledge systems is getting higher and higher,” said Boyd. “So our view is that in 10 or 15 years’ time, there may be only 20 or 25 major international firms.”

Asia is probably the key battle in that war, and as the door opens for foreign firms in the previously closed legal services markets of Korea, Malaysia and, at some point, India (witness the high-profile alliance also between Clyde & Co and ALMT Legal), international firms will intensify their gazes eastwards. This trend, in fact, provoked president of the Society of Indian Law Firms, Lalit Bhasin, to say: “The demand for opening legal services sector in India does not come from Indian businesses or professionals or even foreign multinational companies,” he said. “Strangely, the demand comes from foreign lawyers and particularly those from the UK. It is obvious that the UK is witnessing a negative growth so far as legal profession is concerned.”

Growing, but for how long?

Domestic Asian firms, with their broader and often more anti-cyclical bases of work and clients, have either held on to their rankings or have registered impressive growth – sometimes through acquisitions of smaller firms and boutiques (in Korea, Hwang Mok Park recently merged with Hanseung), sometimes through aggressive programs of office openings (such as in the case of new top-ranked firm Dacheng in China). The performance of Korea’s chasing pack of firms has been particularly impressive.
But with the GFC comes the spectre of slashed external legal spending by clients strapped for cash. As these companies search for efficiencies, one wonders whether more will follow the lead of mining giant Rio Tinto, which recently chose to outsource low-end work to 12 lawyers in India through the partnership with outsourcing firm CPA Global. “We’ve seen a number of different shifts in work around the world,” says Joanne Hon, CPA’s Hong Kong manager. “A lot of clients have been very receptive to moving work to lower cost centres with good human resources such as India, so the next trend will definitely be LPO.” The deal is said to save Rio Tinto around 20% in its estimated external legal spend of around US$100m. What we’re seeing here is shrinkage in the pie itself, not just how big each firms’ slice is.
However, no-one can argue with the numbers. And nowehere are the numbers bigger than in China.
As China’s prominence in the global economy grows, so too it seem, its law firms have followed. This year, the ALB 50 list includes as many as 16 firms from the PRC. Chinese firms have shown that they are emerging as serious contenders against the longer-established industry heavyweights, and some are even launching offices in regions more often targeted by international firms: Zhonglun W & D has just announced plans to launch a branch office in Riyadh, making it the first PRC firm in the Middle East.

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