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Facing up to national role

WHO holds the whip hand at Perth’s big law firms these days?

Is it the senior partners who know the local clients, or the people in Sydney and Melbourne who set the financial targets?

It’s a question exercising the minds of many people in the legal fraternity, who have seen most of Perth’s big firms folded into national businesses over the past few years (see table next page).

As this trend has continued professional managers at head office are wielding increasing power, and the critics would say to the detriment of local autonomy and service.

It’s also resulted in law firms operating within increasingly strict business models, where supervised revenue per partner and profit per equity partner is the mantra.

The challenge for local partners is to meet both the service needs of their local clients and the financial targets set by head office.

Lower billing rates in Perth make this a particular challenge.

It’s one reason why partner numbers at some long established first-tier firms have been shrinking and gearing (the ratio of partners to solicitors) has been rising.

Freehills, which had 57 partners in 1993 (at Freehill, Hollingdale & Page and its merger partner Parker and Parker), is down to 35.

Clayton Utz, which had 28 partners in 1993, is down to 19, while Mallesons Stephen Jaques has gone from 26 to 18.

Mallesons also illustrates the trend to higher gearing.

In 1987, when it became Australia’s first truly integrated national firm, it had 2.8 solicitors for every partner.

Now it has about 4.2 solicitors for every partner, which means the partners need to generate more and more work while also keeping their clients happy.

Mallesons, which often ranks as Australia’s number one law firm in national and international surveys, is a lighting rod for many of the discussions in the Perth profession.

It was the first firm to go national, and is regarded as having the most aggressive financial targets.

Its national revenue per partner was $2.11 million in 2002-03, according to estimates in BRW, putting it substantially above number two firm Freehills, on $1.8 million per partner.

The differential was even higher on the profit front.

Profit per equity partner at Mallesons was estimated at about $880,000, compared with Freehills’ $680,000.

Industry talk suggests that Mallesons is seeking to push profit even higher, to more than $1 million per partner.

Apart from the numbers, there is another critical difference between these firms that illustrates a wider industry issue.

“We have the luxury of a flexible partner remuneration system so we don’t have the same pressure to force an east-coast model on the Perth market,” Freehills chief executive Peter Hay told WA Business News.

“I think a lot of the firms are driven by their remuneration system to expect the same standards across the country.

“There is a risk that you get driven by your internal engineering rather than listening to your customers.”

Mallesons partner in charge Robert Cole insists his firm is driven by client needs and staff aspirations.

“An integrated ‘one firm’ practice was our response to client and career demands,” Mr Cole said.

Nevertheless, Mallesons has aggressive revenue targets and expects its Perth partners match the contribution of their Sydney and Melbourne colleagues.

Its critics suggest this has put Mallesons’ Perth partners under enormous pressure.

Mr Cole dismisses the contention.

“The responsibilities and workload on [Perth] partners and lawyers are no greater than anywhere else in the firm,” he said.

“Also, our surveys show that there is no difference between the hours we work and the hours our competitors in Perth work.”

That claim will raise a few eyebrows in the legal fraternity, where the perception is different.

The energy and resources sector is the main attraction in Perth for the national law firms.

“The reason for us opening in Perth was the drift of resource companies here, and the growing autonomy of Australian subsidiaries of foreign companies,” Allens Arthur Robinson Perth practice director Nic Tole said.

“There was a real drift of managerial responsibility to Perth.”

Allens’ clients in Perth include Rio Tinto and the North West Shelf partners.

“The primary focus of the Perth office is still to service that sector,” Mr Tole said.

In fact, Perth is now the centre of expertise for energy and resources law in Australia, which creates opportunities for Perth lawyers to work on the national stage.

A prime example is Mallesons’ work for Epic Energy.

It currently has a team of five Perth partners and three Melbourne partners advising Epic on the sale of four natural gas pipelines, including the Dampier to Bunbury gas pipeline.

Law firms that are fully integrated insist the current structure delivers real benefits.

“The benefits are many,” Clayton Utz partner in charge Peter Wiese said.

“For a start, a federation structure does not drive operational integration to nearly the same extent as a true financially integrated partnership.

“It is the full common ownership of the intellectual property of the national firm that enables the full range of benefits to be realised.”

He said the client benefits included a coordinated national approach to service delivery, and better access to knowledge and specialist expertise.

For staff there are more professional opportunities, including exposure to work of national significance.

Deacons chief executive Don Boyd believes financial integration has made it much easier to achieve true operational integration.

“With an association, there was little incentive to pursue national client relationships,” Mr Boyd said.

“We found trying to move work from one office to another or trying to resource a national project became bogged down in arguments about cost and profit sharing.

“It was very difficult to achieve consensus.”

In contrast to most of their competitors, the Perth offices of Phillips Fox and Minter Ellison remain financially independent.

“We see ourselves as an active and integral part of the Minter Ellison firm and work hard to achieve full operational integration,” managing partner Sean Larkan said.

“Financial integration will follow as and when the time seems right for both entities, and is not a matter of urgency or critical importance.

“The present arrangement works exceedingly well.”

To back up this comment, Mr Larkan said Minter Ellison’s Perth practice had enjoyed “three record years of growth and profitability out of the last four and a very good year this year”.

Phillips Fox partner Dean Hely said the Perth office offered the best of both worlds.

“We service national clients but we still have a local focus,” he said.

The autonomy enjoyed by the Perth office gives local partners more control over resources and billing rates.

Mr Hely believes the partners have a greater financial incentive to focus on the performance and costs of the Perth office. However he also remains open to the possibility of financial integration in future.

“For us it’s a case of moving closer and closer together and if that is the appropriate step we will take it,” Mr Hely said.

 

Among Perth’s 10 largest firms, Jackson McDonald is the only one continuing to defy the trend to national integration.

Chief executive John McLean said Jackson McDonald was the only independent firm in Perth able to offer a broad range of commercial services.

“We are comforted that there are a number of similar firms to us thriving on the eastern seaboard,” he said.

Mr McLean said the firm’s relatively low gearing ratio – it currently has 2.8 solicitors per partner – was another point of difference.

“We have always promoted that,” he said. “Clients want that direct contact with the partner.”

Deacons is another firm with relatively low gearing.

“One reason is that we have a lot of clients in the mid-corporate market who demand more partner input,” Mr Boyd said.

He argues that firms with higher gearing, or leverage, may start to pay a price. “Clients are more discerning and want more partner time.”

For some lawyers, the increased gearing is not just a client issue.

It also keeps them away from their legal work and turns them into business development managers, drumming up work for their supervised solicitors.

Minter Ellison’s Sean Larkan put this issue in perspective for aspiring lawyers.

“Business development is now a fact of life for all partners of successful law firms,” he said. “Those who are not able to develop enough work for the supervised teams will not survive or prosper. This is yet another challenge to the many which face partners.”

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