Since the late 1990s it has become almost an article of faith that commercial law firms beyond a certain critical mass require an international, if not global, strategy and presence. In this article Dustin Foo, SSQ’s head of research, analyses international law firms’ strategies in the global legal marketplace, and how these may develop in the future.

UK law firms were amongst the first to embrace a global strategy and have been amongst the most successful. Although the international aims and strategies of both US and UK firms have inevitably undergone significant adjustment over the last few decades, targeting international work and establishing or maintaining successful operations in leading international legal markets around the world, remain key priorities for the great majority of larger law firms today.

Key recent influences on law firm international strategy


The most important factors that have affected, and will likely continue to affect, international strategy over the short to medium term are:

1. Energy markets – Energy/oil and gas have been key drivers for many law firm office launches over the years; from well known oil producing areas of the Gulf and Middle East to remoter areas such as the Caspian region and US markets such as Houston that in the past had largely been left to local and regional firms. The collapse in oil prices that took place in 2014 has significantly changed the outlook for regional economies from Texas and Canada to Russia and Saudi Arabia. In some countries, most notably Saudi Arabia, attempts to bring about a more diversified economy are likely to have major socioeconomic and political effects. With low oil prices expected to persist until at least late 2016 or 2017, UK and US law firms with offices in the Gulf and Middle East will come under significant pressure, although the outlook for projects and infrastructure work, another mainstay of law firm activity in the region, is expected to remain strong over the short to medium term. Exploiting opportunities arising from diversification will likely become key to long-term success in the Gulf and Middle East.

2. Shifts in key emerging markets – Contemporaneous with falling oil prices has been the eclipse of the BRIC (Brazil, Russia, India and China) group of countries as key emerging markets by a grouping dubbed by the Financial Times commentator, Steve Johnson, as TICKs (Taiwan, India, China and South Korea).

China is central to both these groupings. With domestic legal markets in India and Brazil (currently in the throes of recession) heavily restricted or outright out of bounds thanks to local bar regulations, and activity in Russia slowed by low oil prices and hampered by Western sanctions, the PRC remains the emerging legal market of greatest interest to most international law firms. The desire to tap into the PRC economy is, of course, long standing and has arguably been the single most important factor driving international expansion by UK and US law firms. It has however become abundantly clear over the last decade or so that operating in the PRC has considerable challenges. The very considerable number of international law firms now in China are under unprecedented levels of pressure from not only intense competition amongst themselves but the PRC’s economic slowdown and increasingly competitive elite PRC firms.

Although the PRC has often been considered such an important market that law firm decision-makers have been willing to subsidise loss-making offices in the country, the costs and benefits of entering, investing or even remaining in the PRC market will be weighed up ever more carefully in the future. The withdrawal of Fried Frank from both Hong Kong and the PRC in January 2015 is indicative that the Far East may not be a sufficiently profitable proposition for all the elite law firms present there.

Taiwan and South Korea are the two Asia-Pacific markets most widely regarded as being on the up, and the latter has attracted significant interest from both UK and US firms in recent years, with genuine big hitters such as Allen & Overy, White & Case and Milbank opening Seoul offices in 2015. Global giant Latham & Watkins announced an application to open a Seoul office in February 2016 (an official opening date has yet to be announced). The South Korean services industry has traditionally been more protectionist than the country’s manufacturing sector, but a programme of liberalisation of the South Korean legal market is likely to spur more UK and US firms to enter this jurisdiction.

Taiwan, despite its highly successful tech industry having attracted considerable interest from funds and other investors, has so far seen less interest from Western law firms. The entry of one of the PRC’s major law firms, Yingke, in Taipei in late 2014, may foreshadow that this jurisdiction might ultimately be a happier hunting ground for PRC than Western firms.

3. Brexit. The full ramifications of the UK’s June 2016 referendum on EU membership, which resulted in an overall vote to leave the EU, are yet to make themselves felt on the legal services market and the wider economy. Although to date the economic impact of the “Brexit” vote appears to be regional rather than global, and the fall in value of sterling has acted to make UK corporate and real estate targets more attractive to US and Asian investors, the most important result of Brexit to law firms thus far has been its depression of overall transactional activity in the UK and Europe. With European deal activity likely to remain depressed and the UK economy widely predicted to contract later in the year, most law firms with significant exposure to the UK and European markets now anticipate financial results for 2016 to be flat at best, with some UK-based firms and UK/European operations of international firms likely to experience significant falls in revenue and profitability.

In the context of international strategy, law firm decision-makers will now be closely studying financial centres intent on taking both major banking and capital markets transactions and headquarters of major financial institutions from London (Frankfurt and Paris being most commonly mentioned, with other possible locations including Amsterdam and Dublin), as well as regions seeking to offer a more attractive climate than the UK for commerce, particularly start-ups and in areas such as technology and intellectual property (Ireland and Germany thus far being the most prominent of these). Brexit will also, inevitably, alter the perception of London as an oft quoted “gateway” to Europe for US and other non-EU law firms, with many of the US firms that currently only have a limited presence in EU jurisdictions likely to reassess the economic and strategic case for investments in Europe.


Key longer-term factors affecting international strategy:

1. Competition vis-a-vis other international firms and, increasingly, local firms is now one of the most important factors affecting the profitability of law firms’ international offices. PRC law firms in particular have become widely acknowledged as competitors in both PRC and Hong Kong legal markets and are well placed to capture the opportunities that will arise as the proportion of the PRC economy made up of consumption and services increases versus that made up of heavy industry.

2. Increasing demand for US law capability is likely to become one of the most important longer term factors affecting international strategy and in particular, recruitment. The UK legal establishment has prided itself for many years on the wide use of English law in international transactions. The rise in US law for international finance and capital markets transactions, however, and in particular, the leading roles taken by New York firms in high yield and other capital markets transactions under US law in both Asia and London, has made US law capability increasingly important.

3. Asia-Pacific private equity and related financing. 2015 saw total Asia-Pacific private equity deal value rise from $87bn to a new record of $125bn ($69bn of this in China alone – an increase of over 55%) despite volatile equity markets, currency fluctuations and sluggish economic growth in the PRC. With private equity having a strong record of performance in the Asia-Pacific region, and private equity firms seeking investments for very substantial amounts of capital, this sector, including related financing, is anticipated by a number of leading law firm managers to expand significantly in the Asia-Pacific as it did in London and Europe 10 to 15 years ago.


International strategies likely to be followed by UK and US firms over the short to near medium term:

1. Conservatism/contraction – The profitability of international offices and the often considerable investments made in them have always attracted considerable scrutiny, and in the current economic climate will be central to international strategy. Increasingly rigorous cost benefit analyses will likely lead some firms to cut their losses and focus on only the most profitable jurisdictions. This approach has of course long been followed by well known US and UK firms that have eschewed global expansion in favour of a more conservative international strategy focusing on major profit centres; firms such as Wachtell and Cravath in New York and Slaughter and May, Macfarlanes, and Travers Smith amongst the UK firms.

Fried Frank’s closure of its China and Hong Kong operations, a deliberate choice, almost certainly taken on the grounds of profitability, to remove itself from a market the great majority of its competitor firms consider essential but which has also proven to be one of the most competitive, is the most illustrative example of this approach. Other instances would include the closure of Abu Dhabi offices by firms such as Simmons & Simmons, Herbert Smith Freehills, Latham & Watkins (which has also closed its office in Qatar), Vinson & Elkins and Baker Botts, as well as the closure of offices in Rio de Janeiro and Moscow by Baker Botts and K&L Gates respectively.

Law firms may also downsize (as has happened in Russia and the Middle East) or cease hiring rather than withdraw completely from markets they see as being insufficiently profitable. A recently published survey showed only eight Middle East lateral partner hires amongst key US firms (and King & Wood Mallesons) in 2015, versus 91 in continental Europe and 106 in Asia.

2. Transformative expansion has been epitomised by the two most ambitious law firm combinations of recent years, Dentons-Dacheng and King & Wood Mallesons-SJ Berwin (KWM-SJB). These combinations go well beyond the addition of reach and capabilities in the PRC and impose challenges at both operational and cultural levels significantly exceeding those of most mergers. The KWM-SJB combination in particular represents a fundamental change in the firm’s centre of gravity towards the PRC market. One of KWM’s specific objectives is to win European and Middle East business from the PRC client base of the legacy King & Wood. This is an eminently commercially sensible strategy given the rise in outbound M&A activity involving PRC companies is. However, Chinese clients expect huge cost reductions and this dented London figures and reportedly contributed towards some of the recent London partner exits.

Dentons’ combination with Dacheng was more of a straightforward play for market share in the PRC and has not resulted in the same degree of friction, nor does it seem likely to lead to the extent of reconfiguration in London that appears likely to happen at KWM; however, the same commercial pressures are likely to exist, perhaps to an even greater extent given that Dentons’ key target clients are Chinese enterprises in the 43 cities in which Dacheng has offices intent on doing business outside China, while many of KWM’s PRC clients are more mature. The integration of Dacheng’s massive PRC operations (numbering over 4,000 lawyers) also poses significant challenges, as do issues such as data security – IT firewalls exist between KWM operations in China, Australia, Europe and Hong Kong, allowing lawyers in different locations only a limited-access global document library for cross-border transactions – and conflicts of interest.

This is undoubtedly the highest-risk strategy by far, with the majority of law firm leaders (and lawyers) likely to be averse to such radical moves.

3. Limited expansion/Opportunism is the path most likely to be followed by most firms, whether by considered judgement or insufficient resources or political will to take bolder steps. The desire to increase market share in existing legal markets, exploit new legal markets and keep abreast of rivals will remain powerful motivating factors, counterbalanced by the realities of market, practice and client synergies, risks and competitors. It is worth noting that oft used terms such as “strategy” belie the fact that in some cases the ability to identify and successfully pursue targets of opportunity – whether individual partners, teams, bolt-ons or alliances – has proved crucial in successful law firm expansion on both their home turf and in international locations. Opportunism, therefore – hopefully done right – is likely to continue to be a major element of law firm strategy.

4. Alliances with select local firms enable international firms to access high-end mandates in emerging markets while at the same time minimising risk. The formation of alliances, at different levels of closeness, is likely to become an increasingly important aspect of limited expansion strategies; not only in Latin America and sub-Saharan Africa – markets which are active and expected to grow significantly in the next decade but which pose the highest degree of risk – but also in controlled jurisdictions such as India, Singapore and Indonesia, and likely also jurisdictions where profitability can be an issue, such as the PRC.

Weak demand for commercial legal services and heavy pressure on costs from corporate clients have been persistent features of both US and European legal markets since the credit crunch – a state of affairs that recent global trends and events are likely only to reinforce. Against this backdrop the development of viable practices outside the US and UK will take on increasing and even critical importance to many law firms. The complex blend of opportunity and risk in these markets, however, demands not only ambition and the willingness to make considerable investment, but also shrewd judgement at both the business-commercial and cultural levels.

For more information on how SSQ can assist law firms to target new markets and expand their presence internationally please contact us.

In our next article we will look at the US law firms that have opened in the City of London after the credit crunch. The entry of this very diverse group of firms into one of the world’s most competitive and sophisticated legal markets should be of interest to both law firms contemplating entering London and those already present in the UK. We will analyse their strategies and seek to identify those that have been successful and the reasons for their success.

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