Crossing borders: How international law firms can thrive in emerging markets

Rob Millard explores the strategies that can help international firms '¨to thrive in emerging markets

Over the past year, large law firms have stepped up their efforts to penetrate emerging markets.

For some, the move into emerging markets is defensive. Home markets have become moribund and fees are under threat. Clients are moving to these new markets and relationships are under threat.

For others, including the largest global law firms (such as DLA Piper, Allen & Overy and Norton Rose), it is about developing a global reach and the ability '¨to serve their clients anywhere that they '¨do business.

This may be driving others to feel that they will lose their market positions if they do not follow suit, even if a less compelling strategic imperative exists for them to '¨do so.

However, there are some for whom the move into emerging markets is more opportunistic. They may have one or more partners who originate from that market and wish to return home in order to ‘plant a flag’. Such a firm may have secured a mandate from a client in that market that is of sufficient scale and lifespan to warrant the cost of a permanent or at least semi-permanent presence.

This article, the second in a series '¨on competitive advantage, will address some of the most important obstacles facing law firms from developed western markets seeking to thrive in emerging markets. It will then examine a number of strategies that firms typically use to enter emerging markets.

Regulatory hurdles

There are a range of regulatory constraints affecting the practise of law in the world’s jurisdictions, which are too numerous and diverse to attempt to comprehensively describe here. However, the process of liberalisation of markets with regard to the practise of law and the establishment of foreign law firms can be seen as a continuum (see Figure 1).

 

Figure 1: The process of liberalising legal markets

Note: From ‘The challenge of internationalisation’, R. Millard and C. Silver, The Business of Law, Globe Law and Business, 2012

 

In the case of tightly-guarded jurisdictions like India, this alone is enough to prevent foreign law firms from establishing offices. Even in such jurisdictions, though, strategies may be devised to serve one’s clients through carefully-conceived alliance arrangements.

One might expect law firms to be easily able to understand and deal with regulatory requirements. In fact, considerable ambiguity often exists. Current litigation in India and pronouncements by bar associations in Brazil are evidence of this. This is nothing new: international law firms have been seeking and finding holes in bar association and law society regulations '¨for years.

In 1966, for example, Baker & McKenzie opened an office in Toronto, where the Law Society of Ontario required that a law firm could only use the names of its partners, and that those partners had to be qualified to practise law in Ontario. Undeterred, the firm went out and found two such lawyers with the surnames of Baker and McKenzie, persuaded them to join the firm and made them partners.¹

Regulatory differences are not the only hurdles that need to be overcome, however. Trying to emulate too many characteristics of the head office in an office in an emerging market can be dangerous, especially where that market’s culture is radically different to that of the home market. A careful balance needs to be struck between the needs of the local office and those of the firm as a whole, especially if a ‘one-firm firm’ construct is valued (see box: Market entry strategy).

 

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Market entry strategy

A firm’s entry into an emerging market needs to be based upon a very carefully conceived strategy, taking a sober and objective view of:

• The views of the firm’s most important clients that would be affected by such a move

• The nature of the firm’s intended practice in a particular location (e.g. its substantive focus) and, in particular, whether it intends to advise on local law

• The level of investment that the firm can afford to make, which may relate to the number of lawyers supported in a location, among other things

• The intensity of competition, whether from local or international law firms or other organisations

• The logistics involved in travelling to the jurisdiction concerned from the firm’s other offices

• Socio-political, economic and other risk factors

• The firm’s ability to attract and retain key talent in the location

• The availability of a suitable merger or alliance partner, or of trusted local referral firms with which to establish referral or ‘best friend’ relationships

• The firm’s ability to offer competitive prices to target clients

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Entering a new market frequently ends up being more difficult and expensive than expected. It is very common in business (not just the business of law) to underestimate the hurdles to establishing a thriving, profitable business in any new market. In emerging markets, the hurdles are amplified by the degree to which they are different to the firm’s home market.

A compelling argument might be made for establishing the minimum presence that is required in order to execute the firm’s strategy. If the firm’s objectives can be achieved with a ‘best friends’ relationship or an alliance, then that is preferable to establishing a local office. Equally, if a small, local outpost will suffice to meet the firm’s objectives, then that is preferable to merging with a local firm to create a major local presence.

Figure 2 presents a continuum of possible levels of involvement that a law firm might elect to adopt in entering a particular emerging market. This ranges from no formal links to a full local office practising both international and local law.

If the firm decides that establishing a local office is the minimum level of involvement required, then a range of tensions exist that need to be managed.

 

Figure 2: Strategies for entering a local market

 

Local market tensions

The entry of a large international firm into a local market can cause significant disruption to that market.

In South Africa, for instance, local law firm Deneys Reitz was able to leapfrog back to the pre-eminence that it had lost in several practice areas by becoming part of the Norton Rose stable. In turn, Norton Rose was able to secure a very credible pan-African platform from which to grow an African business. This would not have been possible without a willing partner in the form of Deneys Reitz.

A less compelling market entrance may cost a firm more in lost referrals than it secures through its local presence. Local law firms that were happy to collaborate with the firm and refer work back and forth when the international firm had no local office usually take a far more competitive stance once it enters the local market, even if it has no intention of practising local law.

In more sophisticated markets, the leading local firms have well-entrenched relationships and very capable international practices. Some local firms may have English or US qualified lawyers among their ranks. Some may even have offices in western markets.

Intra-firm tensions

There may also be tensions between the local office and the firm as a whole. The more different the emerging market is to the home market, the more difficult it usually is to fit the local office into a ‘one-firm firm’ construct. The further the market is from the home office, the more likely the local office is to develop ways of doing things that are at variance with the firm’s overall strategy.

How a firm enters a market, particularly if it is through a merger or acquisition of a local law firm, often requires that local entity to be significantly reshaped so as to conform to the firm’s global strategy. There may be duplications and redundancies of staff. Certain areas of the local firm’s practice may create conflicts or simply be incompatible with the overall strategy. Local offices may evolve into different structures, tied to their new firms by new organisational arrangements.

Another key consideration is how much authority to delegate to the local office. Some functions, such as managing conflicts and setting the overall strategic direction, must obviously be steered centrally. Marketing and human resources may, at least partially, be best managed locally or regionally.

Many functions of the firm will benefit from a carefully-managed interaction between global, regional and local levels. Ensuring a consistent level of quality, both substantively and in terms of managing clients and other relationships across offices and jurisdictions, is also one of the most serious challenges facing multijurisdictional law firms.

The balance of influence

For international law firms, developing effective strategies for emerging markets may be right up there with improving efficiencies and developing alternative billing arrangements in terms of their importance to the firm.

While projections by Goldman Sachs, Standard Chartered and others promise growth and prosperity in certain '¨emerging markets in the medium to long term, many are quite volatile in the short term.
In fact, many are highly dependent '¨on trade with China for their current economic stability and, if that trade '¨were to slow down, the internal impact could be significant. The Arab Spring of '¨2011 is a trenchant reminder of how quickly a stable society can become destabilised, irrespective of the merits '¨of the changes induced.

Over time, as emerging markets become more confident in projecting their geopolitical and economic influence, the balance of influence will likely tip in their favour. Some law firms in these jurisdictions may develop international aspirations of their own, as is already the case with the larger Chinese firms.

If this trend continues and western markets continue to stagnate, many law firms will need to fundamentally redefine their global strategies to focus on these emerging markets more as equal partners, rather than simply as sources of fees to feed legions of lawyers at the head office.

robertfmillard@mac.com

 

Endnote

1. See Pioneering a Global Vision, J.R. Bauman, Harcourt Professional Education Group, 1999