Among the highest risk decisions a law firm can make is the opening of an office in another country. But firms can mitigate some of the risk by making an informed decision laced with a healthy dose of skepticism.
The explosion of U.S. firms’ overseas offices has reached the point where it is comparatively rare among the AmLaw 200 to find a law firm without some form of foreign presence. While globalization seems to be on every firms’ priority list, the cold opening of an office can be extraordinarily time consuming and expensive. The following 10 point checklist may be mainly common sense, but following it could help you decide between a profitable opportunity and a money pit.
1. Start with the business case. Even in the best-case scenario, a foreign office will involve a cash flow investment of hundreds of thousands of dollars. Start by putting together a formal business case. Even before doing the financial projections, does the need for the office pass the “smell test” as something that makes sense for your firm? Do a pre-mortem: assume you can magically move forward five years and look back at this decision. What would have been the signs that predicted success or failure?
2. Understand the regulations. Many of the most popular locations that your clients are interested in are virtually closed to Western law firms. Among the BRIC countries, Brazil and India do not permit any form of foreign law firm practice in their countries and China has stringent limitations on what a law firm representative office can do. Most other developing countries are equally strict. Note that most Ministries of Justice have some form of approval process that, in some cases such as China, takes a minimum of 18 months to navigate.
3. Identify revenues. Prepare a list of clients from which you anticipate your new foreign office will receive business. Next to each client note what services you anticipate they will want your firm to provide and the annual revenues you expect during the first mature year after the office is opened. Divide the clients into four categories: (1) absolute revenues, (2) good chance revenues, (3) possibilities and (4) unknowns who you hope will walk in the door. What is the expected likelihood of keeping your office’s lawyers busy?
4. Prepare a Budget. Understand the cost structure of maintaining a foreign office and ex-patriot lawyers. For example, Class A office space in Shanghai costs about $175 a year per square foot and that rate is expected to continue going up at 25-50% a year. In addition to a U.S. level salary, a lawyer working in Shanghai will need at least $4,500 per month as a living allowance plus the cost of two-business class home leaves a year. There are also the costs of tax and currency equalization. It is worth the effort to have your CFO have a couple of candid conversations with his or her counterparts at other firms that have an office in the location your firm is considering. Most importantly, never entrust the budget creation to the partner advocating the office.
5. Talk to clients. Make it a priority to have a conversation with every client from whom your firm is expecting to, with a reasonably high certainty, obtain business. Understand that, for even your most loyal client, the act of opening an office with a couple of lawyers in a foreign city may not justify their moving their work to you from a locally connected law firm. We could fill volumes with the stories of law firms that opened foreign offices because a major client “asked them to,” only to find out after the fact that they had misinterpreted what the client meant.
6. Entertain options. There may be attractive options for serving your clients and demonstrating your firm’s knowledge in a foreign market, without opening an office. Consider exclusive alliances or joint ventures with local law firms, or virtual offices where your partners serve the clients by commuting to an office suite or even a hotel room. In countries that have difficult approval processes for law firms, consider options such as labeling your services as consulting (subject, of course, to compliance with local law society regulations).
7. Understand local billing rates. Don’t automatically expect your clients to be willing to pay your normal rates in a foreign country. In many emerging countries, the legal marketplace is becoming extremely competitive and rates, which may already be low, are being squeezed even further.
8. Understand the management issues. There is a normal expectation of cultural differences when doing business in a foreign country. But in many countries the unique work styles may be very subtle and, despite numerous trips to the country, may not be recognized until a lawyer works in the country on a daily basis. This ranges from the need for “gratuities” to secure normal business services, to the techniques of managing local staff members. Missteps can be expensive and very inconvenient. Added to possible cultural differences are the problems of managing an office that is only open when the headquarters office is closed.
9. Compare with alternatives. When the pro forma revenues and expenditures have been prepared and the risks have been assessed, consider the venture in comparison to other options available to the firm. One of our clients who represents a fast food franchiser always compares growth options to opening one of their client’s stores. If, even with the most positive assumptions, the fast food franchise returns a greater profit to the partnership at the end of three years, they don’t pursue the growth option. It’s not that law firms should be in the fast food business but they should enjoy a reasonable ROI.
10. Develop a strategy. Trust me on this, “If we build it they will come,” is not a sufficient strategic direction on which to base a very large investment of time and resources. A cogent strategy to maximize your competitive advantages will help your management keep tabs on the office and justify the investment in the eyes of your partners. Make sure that the strategy includes some specific objectives and revenue benchmarks over, at least, a three-year period.
The above may be common sense but very often law firms get swept up in the glamour and the rush to take advantage of the “blue ocean” potential of foreign offices. Time, planning and critical analytics are what differentiate a successful office from a money pit.