Twenty years ago, the term “Globalization” was a seminar topic – today international capability is viewed by many as inherent to the practice of business law; the natural offshoot of law firms need to serve the growth of their global business clients.  But the fact that a large number of law firms have substantial investments in a variety of countries around the world doesn’t mean that they have necessarily invested wisely or that globalization at this stage of development is appropriate for every firm. 

The Global Legal Marketplace

To succeed, a global law firm must appreciate that the demand for legal services by businesses follows economic growth, both in volume and location.  Where there are business transactions there is a need for legal services, both to service the transactions and to resolve the inevitable disputes that result.  And when those transactions involve businesses that manufacture their products in one country and sell to other countries, the legal services necessitated are multiplied and more complex.  Accordingly, growth in international trade – or even a shift among the countries with which trade occurs, increases the legal issues.

The World Bank projects that the world’s gross domestic product will grow in real U.S. dollars from $50.9 trillion in 2010 to $97.9 trillion in 2030 – almost double in 20 years (remember, that’s after adjustment for inflation).  But, in 2010, two thirds of world’s GNP resided in the traditional economic powers: the U.S., Europe and Japan.  By 2030, it is projected that the traditional powers will produce only half the world’s GNP.  That is because, while North America’s GNP is expected to increase by 66% in 2030, Asia’s (without Japan) will grow by more than 250%.

It is, therefore, logical to infer that there will be a corresponding increase in the world demand for legal services and much of that demand will be in places other than North America and Europe.  Accordingly, 70 percent of the AmLaw 200 law firms have at least one office outside the United States, as do a host of sub-AmLaw firms.  At least one international office is maintained by 10 of the 11 “Magic” and “Silver Circle” firms in the U.K., six of Canada’s “Seven Sisters” and all of Australia’s “Big Six” law firms.  And this doesn’t begin to describe the foreign offices that are operated by a host of second and third tier, and mid-sized law firms around the world.

In theory, any law firm with two or more offices in different countries can be characterized as global and there are lots of firms with a single office outside of their headquarters country.  Certainly some of those firms have strong cross-border practices that contribute heavily to their reputation and revenue stream.  But for a good portion of the firms with a random office in Shanghai or London, the office’s primary purpose is to show off on their website.

It’s hard to define what should officially constitute a global law firm, but most of the “Global 100” firms would seem to make the cut.  One of the most noticeable features of the 100 largest “Global Law Firms” is that many don’t claim a home country.  Indeed, it is increasingly common that an international firm’s managing partner may be in one country, its administrative functions in another and their largest office in a third.  But globalization is still new enough that most observers consider Baker & McKenzie and White & Case to be “U.S.” firms, while Clifford Chance and Norton Rose are considered by most people to be “British.”  But it is quickly apparent that for some of the largest global firms, 70 plus percent of their lawyers are located somewhere other than their home countries.

The Global 100 have offices in 70 countries on every continent other than Antarctica.  Europe is the most populated by foreign law firms led by England with 65 firms that have over 6,500 lawyers in country.  Germany, with 44 firms that have over 4100 lawyers in the country, and France with 41 firms and more than 2500 lawyers, are second and third.  Indeed, of the non-former USSR countries in Europe, only Denmark, Lichtenstein, Malta, Andorra and Monaco don’t have an office of a major law firm.  This is, by and large, the contribution of the Magic and Silver Circle British firms which quickly expanded to continental Europe to follow the emergence of the European Union.

In Eurasia, the Global firms have offices in 16 countries that were formerly part of the Soviet Union.  While there are 27 foreign offices in Russia with almost 900 lawyers, and 13 offices in Poland with almost 700 lawyers, most of the countries have a limited number of law firms and a small number of lawyers.

The next most popular region for global offices is the Pacific Rim.  There, 12 countries have foreign offices including 74 of the Global 100 firms in China.  Actually, at last count, China has permitted almost 120 firms to open over 200 representative offices (even though Chinese law limits the number of foreign offices to 80).  Global 100 firms have over 3,500 lawyers in the PRC including Hong Kong and Macau.  The most rapidly growing Asian country is Singapore with offices of 33 of the Global 100.  Singapore is a transaction city that serves as a surrogate for growing Southeast Asian countries where foreign legal offices are prohibited, particularly India, Vietnam and South Korea.

The Global 100 has offices in 14 Middle East and Africa countries. Of course, the region is led by the United Arab Emirates where 30 Global 100 firms have offices serving the energy industry.  There is anticipation that offices in South Africa will increase because it is the most sophisticated and stable Sub-Saharan country to support global mining interests throughout the continent.

The Americas include three four major legal markets in the U.S., Canada, Mexico and Brazil.  Interestingly, despite the fact that the United States’ legal market is larger than the rest of the world combined, only nine of the non-U.S. based firms have a U.S. office.  Equally surprising is the small number of global firms that have an office in Canada, given the high volume of cross boarder legal work with the United States and Canada’s ties to England.

There are, however, a significant number of countries that effectively prohibit foreign law firms from establishing offices in their domestic legal markets. These countries represent some of the fastest growing economies in the world including India, Brazil and, effectively, China.  The decisions that those countries make about expanding competition in their legal markets, together with the choices that independent law firms make in deciding to join international firms, will largely shape the nature of global law firm competition through this century.

Global Objectives

The business objectives of virtually all firms with foreign offices involve the generation of additional business.  There are, however, distinct differences in how these business objectives play out in creating international strategies.  Generally there are five options, all of which involve the creation of what is essentially a marketing platform.  The first two are largely focused on existing clients and objectives three and four involve the generation of new clients.

  1. Domestic Work for Foreign Clients.  The most common objective of firms seeking a foreign merger (and for their potential merger partners as well) is to create a flow of business in the firms’ primary market from clients in the foreign market.  For example, last August, the Israeli law society amended its bar rules to permit foreign firms to open offices there.  The primary interest thus far for U.S. and U.K. firms pursuing a merger with an Israeli firm is to hopefully obtain legal work in the U.S. or U.K. from Israeli based companies.  By the same token, the motivation of Israeli firms in considering U.S. and U.K. merger opportunities is to obtain work in Israel from U.S. and U.K. companies.  Essentially, this objective views a foreign presence primarily as a remote sales office.  However, we have rarely seen this work as a stand alone business objective.   International operations are most successful where there is a shared benefit from the work through a synergy between the clients of both merger partners providing new business for both.
  2. Foreign Work for Domestic Clients.  This is the converse of the first objective and is often the international objective of firms that have a strong client list of global corporations.  The mutual motivation of both merger partners is to capture a larger share of their clients’ legal work by providing services in another country in which the client does business.  This can be a difficult objective to achieve for a number of reasons.  First, the acquisition of legal services in global corporations, especially for practices involving local issues, can be highly decentralized.  As a result, the hiring decision may be in the hands of the foreign management, uninfluenced by a firm’s relationships in other countries.  Secondly, it is difficult to compete in sophisticated foreign markets if a firm’s merger doesn’t create a critical mass of lawyers and if those lawyers do not have a reputation and apparent capability equal to local competitors.  We certainly saw this in the U.K. where U.S. firms attempted to obtain the EU work of clients by opening a small, couple-of-lawyers office in London.  Finally, the predominant use of separate profit pools in international mergers through Swiss Verein structures limits the incentive of either firm to send work to the other.
  3. Foreign Work for Foreign Clients. A further motivation is the ability to differentiate the firm for potential clients not from either merger partner’s country on the basis of the merged firm’s shared reputation and name recognition.  This objective is most effective in mergers where there is a shared profit pool and both firms can benefit from new clients.
  4. Domestic Work for Domestic Clients.  This is the merger motivation of many smaller firms in merging with a larger firm from another country.  The hope is to establish a differentiated position in their local market based on the size, capability and international influence of their merger partner (having a Beijing office makes us appear to be a “big time” firm).
  5. An additional motivation that does not directly involve marketing and business development is the ability to perform legal services less expensively in some foreign countries.  This is essentially the concept of “insourcing.” the ability to perform work within the firm at a lower cost while being able to effectively supervise the quality of the work.  At the same time, it counters the demands of clients that savings through outsourcing be passed along by the firm.  Unfortunately, the marginal cost difference among English speaking countries is generally felt to be too small to, as a sole motivation, justify mergers.  This may change if India loosens its restrictions on foreign lawyers.

Of course, the primary motivation for any business activity is to create a profit and most of the large global firms point to their international operations as the source of much of their profit growth.  However, many law firms just entering the international arena, report that international operations are, at best, a break-even proposition.  There appear to be three reasons for this:

  • Most law firms have relatively unsophisticated accounting systems that limit there ability to track profitability on any basis.  The credit that firms give for revenues tends to be limited to work performed in the foreign location with little or no recognition of work referred to other offices.
  • There is a difference in economic comparability between countries.  Receipts of a foreign office, typically received in the foreign currency, may be substantially lower than in the U.S. or U.K. because the local economy will not tolerate international billing rates.  And, while operating costs and partner compensation may be lower in the foreign country, the larger firm may layer on overhead, the travel expenses of visiting partners, and the costs of attaining technological compatibility eat up any available profit.
  • The Swiss Verein structure utilized by many firms generally involves separate profit pools thereby eliminating cross-office profit motivations.

The management intensity, operational complexity and cost of maintaining an office in another country requires that there be a clear path to significant profit contribution.

Global Strategies

Essentially every large law firm describes itself as international and, apparently, the presence of at least one actual office in another country defined a firm as being international.  But to be successful as a global firm requires an accepted strategy that supports foreign offices.  There are a wide variety of possible global strategies but there are a couple that are common and comparatively successful.

  • Omni-presence.  This is the Baker & McKenzie strategy that has been successful duplicated by a number of other firms, particularly UK firms.  With an office in 46 countries and every continent (ok…they’re not in Antarctica), Baker & McKenzie’s strategy is to establish in clients’ minds the assumption that there are Baker & McKenzie lawyers in every place where the client would logically do business. 
  • Regional.  The regional strategy is best demonstrated by the Magic and Silver Circle firms in the U.K. who developed foreign offices to essentially follow the growth of the European Union.  Having created positions of dominance by merging with many of the largest European firms, U.K. firms have continued to expand into an Omni-presence strategy.  Similarly, large Australian firms developed their strategy around the Pacific Rim.
  • Regional Centers.  A unique strategy that a growing number of firms are using is the creation of a global presence through region centers rather than trying to be Omni-present.  Baker & McKenzie has 14 offices and over 400 lawyers throughout Latin America.  White & Case offers an alternative strategy for providing a South and Central American presence.  With a comparative handful of lawyers in three offices in the region, White & Case sells its Miami office as “the hub” of their Central and South American practice.  Their strategy is to present the client with American-based, Spanish-speaking lawyers who are experienced in Latin American transactions, supported by “on the ground” local lawyers in the two largest legal markets, Mexico and Brazil.  Firms are using similar “hub” based strategies in Sub-Saharan Africa from Johannesburg and in Southeast Asia from Singapore.
  • Client Specific.  As a strategy for international growth, some firms simply follow their clients’ needs.  When a client expresses a demand for their law firm to serve them through an office in a specific country, the firm opens an office – even if it cannibalizes work currently performed by other offices.  The firm then depends on its presence in the country and existing client base in other countries to fill out the need support in the office.  Jones Day’s domestic and international growth has largely been built on client’s demand.

It is, however, worth noting that for a global strategy to work, the city, country or region being considered must meet two criteria.  It must have an entrepreneurial value – locations, where by the nature of the economy, revenue potential, and regulatory environment, present a favorable opportunity; and a synergistic value – locations with a tie to existing clients in other locations.  Entrepreneurial value can change over time as the competitive landscape changes.  In China, for example, where non-Chinese firms are only permitted to open representative offices that cannot practice law, the growing capability of Chinese firms and the familiarity with the market of global corporations, has reduced the opportunity for some foreign firms dramatically.   Similarly, the synergistic value of a location can change rapidly as clients’ business objectives evolve.

The Impact of Swiss Vereins

To maximize the success of a global firm, every action must demonstrate the intent to function as a single firm with a common culture, combined management structure, interactive compensation, and shared financial benefit.

The driving influence in the globalization of the legal profession appears to be the availability of a structural vehicle that assists firms in dealing with the legal and functional hurdles of international mergers — the Swiss Verein.

Swiss Vereins are not new and were originally designed for the international affiliation of non-profit entities (the word verein means association or club in German).  The creation of a verein under Swiss law permits a variety of entities to affiliate while maintaining their status as an individual legal organization.  That is, a collection of law firms, organized under different corporate or partnership structures in different countries can present themselves internationally as a single organization without the necessity of each of the firms complying with the regulations and tax codes of each country in which the verein operates.  This conveniently avoids law society regulations regarding the qualifications of law firm owners and the necessity of member firms filing multiple tax returns around the world.  A Swiss Verein, for example, is not subject to the regulation of the Securities and Exchange Commission in the U.S. or similar regulatory bodies in other countries.

Perhaps the most significant advantage of a Swiss Verein structure is the avoidance of two of the biggest stumbling blocks to large-scale mergers.  First, members of Swiss Vereins do not share commercial or professional liability for the debts or actions of other member firms.  Second, there is typically no sharing of revenues or pooling of profits.  As a result, the ticklish due diligence issues, differences in profitability and compensation schemes are not a problem in a Swiss Verein.

Critics argue that vereins are simply marketing platforms without the common culture, shared knowledge and standardized practices that single partnerships enjoy.  The particular fear is whether, if the business objective of an international merger is to share work between firms, the lawyers who do not have a direct financial benefit from sharing work will do the aggressive cross-marketing necessary to maximize the benefits of a foreign office.

But, just as the spread of the global law firm could not have occurred without the verein structure, Swiss Vereins will effectively drive international growth, especially in developing countries by removing much of the risk that would otherwise be present.  Much of the risk of an international merger is on the smaller firm which may fear the loss of its identity and management control.  The verein permits contractual assurances that help to relieve that fear, but, at the same time, make it easier to dissolve a merger if the relationship sours.  This could lead to situations where entire foreign offices move from one global giant to another as easily as lawyers move laterally among firms.

However, it is precisely that removal of risk that can defeat the goal of operating as a single partnership.  Firms who tout the ability of merger partners to continue to operate independently after the merger are effectively creating a marketing platform that is little more than a formalized affiliation and unlikely to enjoy opportunities beyond the façade of a common name.  Time will tell if such firms will succeed in the long run or collapse from a lack of common purpose.

Globalization Lessons Learned

While the practice of law world-wide continues to function much like a cottage industry, law firms have sufficient experience in international legal markets to provide some instructive experiences about globalization:

  • There are no Blue Ocean geographic legal markets.  If Baker & McKenzie, White & Case, DLA Piper or Norton Rose doesn’t have an office in a country, there is probably a good reason.  In all likelihood the economics are so poor or the local limitations on the practice of law are so severe that establishing a profitable office is not feasible.  That doesn’t mean there aren’t any opportunities.  There is an increasing potential for the easing of protective limitations on the practice of law in some growing markets and being early on the scene could provide a substantial first mover advantage, e.g., Greenberg Traurig being the first in the door as Israel permitted foreign firms to practice.
  • If you build it, they may not come.  A lot of firms have opened one lawyer representative offices in far flung global markets with a very naïve understanding of the local legal market and extremely optimistic business plans.  Unlike opening an office in the U.S. or England where revenue streams can be enhanced through aggressive marketing and lateral hiring, the revenue the office will have to survive on will largely be that which it gets from existing clients.
  • One way streets don’t work.  For firms looking to open an international office through a merger, either as the acquirer or the acquiree, don’t expect to justify the office solely on the referrals of the merger partner.  No firm wants to merge just so they can refer work to another firm – they can do that without a merger.  The win is always how much new work each partner will receive from the other.
  • Successful international mergers require commitment.  There have been any number of large international mergers sold largely on the fact that each firm can effectively remain independent despite the merger.  The jury is still out on the long range success of Swiss Vereins as an operating structure but we have seen enough to know that the closer firms move toward being a single firm, the more successful the result.
  • Go big or go home.  As a general statement small outposts in a couple of countries don’t work.  Even in developing countries, lawyers are multi-lingual and are becoming much more sophisticated in dealing with major international clients and issues.  Clients look for capability in foreign locations in the same manner they do in their home country.  There are some exceptions where the firm has a unique regulatory capability or is functioning as a client’s representative office in a third world country, but those situations are few and far between.
  • Manage.  The cash at risk with foreign offices is great and the issues involved in language, cultural and time zone differences are tremendous.  International offices require a lot of management time and focus. A Laissez-faire management style is a recipe for disaster.