13/02/2017 - 10:31

Law firms grapple with market shift

13/02/2017 - 10:31

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SPECIAL REPORT: The shake-out in Perth’s legal services market is producing 
some surprising winners and losers, with one of the best performers being a firm many had expected to wither.

Law firms grapple with market shift
Malcolm Shelton-Agar (left) and Richard Sandover say the partners at Jackson McDonald cherish their independence. Photo: Attila Csaszar

The shake-out in Perth’s legal services market is producing
some surprising winners and losers, with one of the best performers being a firm many had expected to wither.

Richard Sandover remembers some spirited discussions when the partners at Jackson McDonald got together in the late 1980s and early 1990s to discuss offers for the venerable Perth law firm.

“We had lots of suitors, and some damn fine offers,” the current chairman of partners recalls.

“We had a diverse range of views and, as lawyers will, they were put very forcefully.

“Ultimately we held the line.

“I can tell you now, it was an act of courage, there is no question of that.”

Many of its competitors would have described the decision as foolhardy.

Jackson McDonald was a market leader at the time and was widely expected to wither in the face of competition from its peers, which federated with east coast firms in the 1980s, integrated financially in the 1990s, and in recent years linked with global firms.

Yet 30 years down the track, the independent Perth partnership seems to be doing very nicely.

It is the second largest law firm in Perth with 27 partners and 122 lawyers, and has enjoyed significant growth over the past decade, according to updated data in the BNiQ Search Engine

Herbert Smith Freehills remains the market leader in Western Australia, with 23 partners and 151 lawyers. Like many of the big firms in Perth, however, it has dipped in size.

The past decade, and particularly the past five years, has been a period of extraordinary change in the WA legal market.

BNiQ data suggest the market peaked in 2012, when the top 20 firms in Perth employed nearly 1,500 lawyers.

That number has fallen by 13 per cent to 1,273, with some lawyers in Perth believing the contraction has been even larger.

The market peak coincided with the entry of more than a dozen global powerhouses to the WA market, all chasing work on big resources projects – or on the complex litigation that has followed the end of the mining construction boom.

The global players have been followed by multiple east coast firms, such as HWL Ebsworth, Mills Oakley, Gilbert + Tobin, Hall & Wilcox and Gilchrist Connell.

The changes will continue next month, when national firm Sparke Helmore Lawyers expands its Perth presence by formally absorbing local insurance specialist Jarman McKenna.

Industry trends

Jackson McDonald chief executive Malcolm Shelton-Agar said the WA legal sector was being affected by three broad trends – the shake-out among global firms, the slowdown in the economy, and the growth of new technology and market disrupters.

“That makes a pretty interesting environment,” he said.

Mr Shelton-Agar believes Jackson McDonald is well placed.

“We’ve built a firm to deal with this market and where it wants to go,” he said.

Mr Shelton-Agar told Business News that included several practice areas that were not generally repeated in its major competitors, and which helped to insulate the firm from the cyclical nature of the WA economy.

Mr Sandover said these included strong insurance and insolvency practices, both of which fed into litigation. “I don’t think I’d be contradicted by any of my peers if I said we were one of the strongest, high-value, complex litigation firms in WA,” he said.

Tax was another point of difference.

“The fact we have maintained a strong tax practice, when our competitors gave up that game 30 years ago, is another unusual aspect of Jackson McDonald,” Mr Sandover said.

He said Jackson McDonald’s current profile reflected the decision taken all those years ago to stay independent, and that there were three main drivers of this strategy.

“We had a view that we could hold our national and global clients, and by and large that has been proved right,” Mr Sandover said.

“We expected the WA economy to outperform the rest of the country over time, and that has also occurred.”

The third was that the partners cherished their independence, and wanted to maintain the culture of a true partnership.

He believes the stability in the partnership has been an important attribute

“That feeds into efficiency, collaboration, making sure the right lawyers do the work,” Mr Sandover said.

Mr Shelton-Agar acknowledges Jackson McDonald will never win some of the big mandates from national and global companies that only deal with ‘tier 1’ firms.

However, he insists the firm is still able to win parcels of work from the big end of town, evidenced by the fact global, national and local businesses each comprise about one third of its corporate clients.

Mr Shelton-Agar said while Jackson McDonald’s billing rates were lower than those of global firms, this was not positioned as a selling point.

“We get the work because we see off the global and national law firms,” he said.

Global firms

Mr Sandover argues Jackson McDonald is better placed than most of the global firms that have come into the WA and Australian markets.

“Their business model is under stress,” he said, adding that the combination of big Australian firms with global firms was not sustainable.

Australia is a small part of the global economy, yet in some cases Australians account for 30 to 40 per cent of the partners in global firms.

“Tell me how that model is going to work without massive restructuring on the Australian side,” Mr Sandover asks rhetorically.

This thesis is supported by the experience of some global firms, but by no means all.

Ashurst was an early mover in 2011 when it acquired Blake Dawson Waldron, which had a very large full-service practice across Australia.

It had 124 lawyers in WA in 2012 but is down to nearly half that size, with 65 lawyers at the last count.

Against that, Norton Rose Fulbright has gone from strength to strength since buying Australian firm Deacons in 2010.

It started with a smaller base but has grown consistently to now have 13 partners and 82 lawyers in WA, ranking it number four on the BNiQ database.

Other global firms have also benefited from starting small in Australia.

Allen & Overy poached a group of Clayton Utz partners to establish its Australian presence, and now has a solid profile in Perth with seven partners and 41 lawyers.

Similarly, Clifford Chance had a targeted strategy, buying two boutique corporate law firms in Sydney and Perth for its entry to the Australian market.

Some of the big hitters have subsequently left the fold, but it hasn’t faced the big disruption experienced by some larger firms.

Looking outwards

As the managing partner of Perth’s largest law firm, Tony Joyner has a good eye for market trends.

“After years of strong growth, in 2012 the demand dropped materially and it’s been bouncing along ever since,” he said.

Mr Joyner suspects the sector has shrunk by more than 10 per cent but said it was hard to measure because of the amount of structural change.

He said firms had not fully adjusted to current conditions.

“I think some firms are still carrying a bit of excess capacity, in part because there is a level you can’t drop below,” Mr Joyner told Business News.

Herbert Smith Freehills’ response to the slowdown in WA has included a bigger focus on other markets.

“We’re doing a lot of work interstate and overseas and we won’t be the only one,” Mr Joyner said.

“Of my 23 partners, last year seven of them will have generated more than 50 per cent of their fees outside WA.”

He said this work was mainly in areas where WA had particular expertise, either energy or mining or infrastructure.

HSF has one Perth partner working for the Egyptian government on electricity transmission projects, and is about to start work on gas projects in Russia.

Mr Joyner said another partner was working on health projects on the east coast because of the skill set developed in WA.

“It’s good for Perth, because it means export dollars come in; often we are following our clients, so that’s good; and it means we keep really talented people here,” he said.

Mr Joyner said Freehills’ merger with UK firm Herbert Smith made it easier to win international work.

“We are now part of a global network that uses the best talent across the group,” he said.

Lower billing rates in Perth compared with major international cities also helped to win work.

Perth partner Mitch Artus is the national chairman of fast-growing HWL Ebsworth. Photo: Attila Csaszar

National firms

The impact of big east coast firms on the Perth market is highlighted by HWL Ebsworth, which has expanded rapidly since buying Downings Legal three and a half years ago.

Perth partner Mitch Artus, who chairs the national firm, said the merger had worked better than he expected.

“It has certainly helped our WA clients get access to resources we didn’t have, depth and experience we didn’t have,” he said.

“I think that was my biggest surprise, how helpful people were at trying to introduce clients and provide expertise.”

Mr Artus said Downings was already strong in commercial, insurance and litigation, and the HWL deal allowed it to add new practice areas, such as banking and finance, insolvency and OH&S.

“It allowed us to bolt on some very senior, respected practitioners that expanded our capability,” he said.

Mr Artus said new recruits had been attracted by HWL’s business model, which features low billing rates and low overheads.

“We are fully financially integrated and the partners are required to be on the tools and do the work,” he said.

“We have a lot of senior people doing the work.

“It’s a high-performance, high-profit model.

“If you enjoy being part of that, it’s great.”

Mr Artus said new recruits had also found HWL’s open and transparent processes to be refreshing.

“You’re measured, its accountable, it’s a meritocracy, and some people find that quite enlightening,” he said.

Added to that, HWL’s standard partner billing rate of $450 per hour was seen as value for money.

“The rate differential in some instances is substantial,” Mr Artus said.

“If you can get the same service at a different value proposition, that’s striking a chord.”

HWL is on the lookout for more growth opportunities, but Mr Artus insists new people need to fit with the firm’s culture.

“I’m not interested in a sharp increase in fees if it brings a whole lot of cultural problems,” he said.

“We’ve got it right so far, I’m hoping we can keep up that track record.”

Insurance focus

Another relatively new entrant is Melbourne-based Hall & Wilcox, which recruited insurance specialists Anton Vucak and Joel Sheldrick to establish its Perth practice in late 2015.

Perth is one of five new offices the firm has opened over the past three years, along with Sydney, Newcastle, Canberra and Brisbane.

“It was driven by the clients, they wanted a national presence,” Mr Vucak said.

“It was pretty clear the insurance industry was changing, it was going more national; that was the catalyst for opening this office.”

Mr Sheldrick said he and Mr Vucak had similar mindsets in how they worked.

“It was very strategic in the way they approached it,” he said.

“The way we work together, and manage our clients and our teams.”

Mr Vucak said the firm’s aim was to build a full-service offering, similar to what Hall & Wilcox offered on the east coast.

In-house lawyers

Another trend driving the legal market in Perth is the pressure on in-house legal teams, which have grown in size and capability during the past decade.

Recently updated listings in Law Almanac show that many companies in Perth employ four or more lawyers, with the biggest team being at Woodside Petroleum (see table).

Allen & Overy partner Geoff Simpson said many in-house legal teams were now being treated as a cost centre.

“As a result, while some in-house teams might have a similar head count, the more senior and experienced lawyers have been replaced by less expensive, more junior lawyers,” he said.

Mr Simpson said this trend opened up the potential for more work for external law firms.

“However, the relentless focus on costs extends to legal spend,” he said.

With a less-than-buoyant M&A and project development market, Mr Simpson said a significant portion of legal spend had been allocated to ‘bet the company’ matters that couldn’t be avoided.

King & Wood Mallesons partner Nigel Hunt said his experience was that in-house capability had not diminished.

“We are seeing the cost-reduction drive being implemented through consciously prioritising usage of the in-house team, including a robust process to see whether better utilisation can be made of the in-house capability before briefing externally,” Mr Hunt told Business News.

“We are also seeing in-house teams being required to look at jobs to work out whether they can be broken up so that only part gets briefed out rather than the whole.”

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