The latest European Lawyer research on the international strategies of leading independent legal practices has confirmed a growing phenomenon: the regional European law firm. Since our 2003 investigation, an unprecedented number of branch offices have been opened as partners across the continent come under increased pressure from clients to abandon the traditional single site model. Further, this more aggressive approach to expanding their reach is reflected in a new appetite to take on local law markets rather than simply setting up representative offices.
Traditionally the definition of an independent firm has been one that kept to a sole jurisdiction, if not just a single site, and aimed to be the best it could in the law it practised. Investment was made only to improve the operation of this jurisdiction. When it came to cross-border work, best friends or other trusted referral firms would be used. But things are changing.
Even back in 2003 when the European Lawyer last researched the issue of branch offices it was clear that a single site was no longer the model shared by all independent firms. Examination revealed that a growing number of firms, from Scandinavia to Italy, were investing in – not just representative posts handling their clients in places like New York – but were actually launching fully-functioning foreign offices that offered a multi-jurisdictional practice. With the stunning entrance into the English legal scene of Gide Loyrette Nouel that year, the question was raised of whether we were about to see a new era of foreign expansion among independents.
The London adventure has turned out to be, as they say in English, a ‘red herring’ (see box). The UK is not where European firms are trying to build local practices, even if many have representative offices there. But this does not mean the branching out trend has died off – in fact, the opposite is true. For a certain stratum of European law firms it has become an integral part of their strategy. With regard to such outfits it would be fair to no longer talk of independent practices with the occasional foreign office, but rather of a new model: a regional firm made up of an integrated network of neighbouring law practices.
So what is driving this new direction? There are two key influences, of which the first is client demand. In the past domestic clients that had grown up hand-in-hand with independent legal practices had not demanded such firms grow abroad because their own focus was the home market too. But now, even mid-size national companies are investing in new and less developed European markets, often EU accession countries. And clients are telling partners they want ‘their’ firm to go abroad with them into these un-chartered territories.
The second driver is opportunity. With the opening up of Poland, along with Romania next year, there is a window for the far more developed and sophisticated Western and Central European firms to enter at the top of a new market and make money in a way they couldn’t in more advanced jurisdictions. The same factor is seeing independent firms rolling out foreign practices across Portugal, North Africa, the Balkans and the Baltic States.
Austria’s CHSH, Wolf Theiss and Schönherr have all bought into the Central and Eastern Europe (CEE) regional strategy. And Spain’s Garrigues now has two fast-growing offices in Portugal, opened in the last 18 months, while Uría Menéndez in 2004 took over Lisbon firm Vasconcelos F Sá Carneiro Fontes & Associados to build a regional capability. Then there is Italy’s Studio Legale Sutti that has six foreign offices, mainly in the CEE and Southeastern Europe; Germany’s Nörr Stiefenhofer Lutz, that has six CEE branches; and Gleiss Lutz, which also has a significant East European practice. Meanwhile, France’s Gide has 20 offices and is still expanding. And in the Channel Islands, the historical modus operandi of sticking to a home market is well and truly over: three of the top Guernsey and Jersey firms have opened offices in each other’s jurisdictions this year in a bid to create a regional practice.
This trend has led to several recruiting raids. For instance, following the example of MAQS and Magnusson Law Firm, Finland’s Roschier in 2005 shocked Sweden’s legal market by taking a top tier team from leading Stockholm player Mannheimer Swartling to build a regional outfit. The firm says that its 2004 alliance with three Baltic practices may one day lead to a four-sided merger that would produce an integrated regional concern.
Meanwhile another Finnish firm, Hannes Snellman, has expanded its international reach in the region by merging with rival Finnish firm ETL. The merger hands Hannes Snellman three offices in the CIS region: one in Ukraine, as well as St Petersburg and Moscow in Russia. Partner Johan Alto says: “Investment from our clients in Russia is increasing and this is the main reason for the merger. You could now call us a regional firm in Northern Europe.”
These new expansionists are clearly focused on three main geographical areas: Italian, German and Austrian outfits are branching out into the Balkans and CEE region; Scandinavian firms into the Baltics; and Spanish players are forming ‘Iberian’ practices by entering the less developed Portuguese market and also tapping parts of North Africa.
It is no accident that these countries are the focus for growth. Of course, geography plays a big part. Nations like Austria have an ‘open door’ to the relatively undeveloped East and more importantly so do their clients, that are based in Vienna or Berlin. Geography also explains why firms in some European jurisdictions have not been so keen to go regional. A French practice wanting to expand is faced on all sides by heavily developed and competitive markets: to the West, London; East, Germany; South, Spain; North, Holland. It is no surprise then that only the mighty Gide, which opened its first branch in 1967 in Brussels, has been able to expand so far. And even Gide’s main expansion is limited to North Africa, Asia and CEE. Very few French firms have followed its example, and only at a fraction of Gide’s pace.
The difference between having developed or undeveloped markets on your borders can be critical. Even Gide has bowed to the logic of opening in markets where there is less competition and has therefore avoided Germany, Spain and Holland – even though they are next door. Its London practice is only 40 lawyers and focuses mainly on cross-border finance rather than trying to win English M&A work. In effect, Gide has ‘leap-frogged’ the developed markets to gain access to the geographically distant undeveloped markets. This is costly, even just in air travel, and perhaps only a French firm the size of Gide – with a €187.4 million turnover – would risk it. But it has worked: senior partner Gerard Tavernier says he expects 50 per cent of turnover to come from foreign offices next year.
However, for firms that are physically close to undeveloped markets, expansion is easier and there are more likely to be clients thinking the same way. Germany’s Gleiss Lutz and Nörr Stiefenhofer have both set up in Warsaw for just this reason. After all, it is easier for a German company to set up a subsidiary in neighbouring Poland than in distant North Africa. Whereas in Spain, local giant Garrigues finds opening in Casablanca an opportunity because Spanish clients have set up shop in neighbouring Morocco. Geography and a less developed local market were key to these moves. But most importantly, such conditions allow a firm’s clients into the market and provide the added incentive to branch out.
For example, real estate partner Alfred Nemetschke explains why top tier Vienna firm CHSH has staked its future on a regional model: “A major client said: ‘We will give you every job we do in the CEE, but only if you have an office there.’ So for me the decision was easy.” It now has eight CEE offices, all with local lawyers and growing year by year. The key client was Immoeast, part of the massive Austrian Immofinance corporation that – like other compatriot businesses – has seen the huge untapped potential of the CEE region. Mr Nemetschke is open to more expansion but says realistically: “All the new development is eastward.” He adds the CEE offices have already proven their worth to the firm. In 2004 CHSH opened in Romania and now Mr Nemetschke says that, with its regional capability, the practice can effectively compete for the best work in that market. Also, with such a spread of local bases, work is not only coming from Vienna to, say, Romania, but cross-border activity is also taking place between the firm’s CEE offices.
Austrian rival Wolf Theiss has also followed its clients beyond the borders of its home market: it now boasts nine CEE offices as well as a 50/50 ratio of around 100 lawyers in Vienna and 100 practitioners abroad. Partner Horst Ebhardt says: “We have set ourselves the strategic goal of becoming a leading European regional firm, not just an Austrian firm with foreign offices.” Wolf Theiss is clear that clients are the key driver for its expansion – especially Austrian or German clients going into the CEE region. As proof this approach has worked Mr Ebhardt mentions a recent €3 billion secondary public offer for Austrian Erste Bank that then financed a merger with a Romanian bank. The firm’s Austrian and Romanian practices were able to handle the regional capital markets aspects of the massive two-part deal as well as corporate matters. Nor is the growth over. Mr Ebhardt points out the firm opened two offices last year: one in Bucharest, the other in the Bosnian capital of Sarajevo. Bucharest already has 22 local lawyers and a US-trained practitioner has also joined the practice to boost its international credibility. Further offices are on the horizon.
At first sight it may look like the traditional single site/best friends prototype is losing favour. However, the situation is not so simple. The truth is the market has just grown more complicated and there are now at least two independent firm models operating in tandem. Outfits like Paris’s De Pardieu Brocas Maffei maintain that best friends still works well and will not change, while top Austrian independent Dorda Brugger Jordis says it sees advantages to both models.
Charles-Henri de Pardieu, founder of De Pardieu, explains why his firm will not be losing its single site ethos: “Opening foreign offices means a huge investment both in terms of money and human resources.” After all: “It is difficult enough to be among the best in one’s own jurisdiction.” His point is that when you have to compete at the highest level in a place like Paris, building another practice just as good in a foreign country is a major undertaking. Top tier rivals such as Bredin Prat and Darrois Villey Maillot Brochier certainly would subscribe to his view.
The other argument that firms choosing to retain a single site often use is that if you aim to service the top of the market, it is very hard to find people abroad you could bring into the partnership – which is the reason Slaughter and May says it uses salaried partners in Hong Kong, and had previously done so in France. Of course, one could also contend that if quality is so hard to find in other jurisdictions then a high-level referral or best friends system should not work either, as there would not be the ‘best people’ out there to send work to. And if top quality lawyers are spread throughout Europe, then why not just hire them and set up a branch office? “Time and money”, firms like De Pardieu would probably say. Others, however, are convinced by the branch model.
Austrian player Dorda Brugger Jordis is currently grappling with these issues internally and says it is weighing up the pros and cons of opening offices abroad. Founder Dr Christian Dorda admits it is “not a black and white issue” and that some lawyers in the firm are asking to expand to other jurisdictions while others prefer to preserve the best friends model. For now the practice uses a group of best friends across the CEE region, while most of its rivals have built their own regional branches. Its CEE best friends stay in close contact and Dorda Brugger tries to encourage a uniform quality of work among them. Dr Dorda explains: “We feel we can offer clients a better service with best friends.” But he says the firm is open-minded about opening offices, especially if it were in the situation of other Austrian firms where clients are demanding it: “There are advantages to branching. You have stricter control over the foreign practices and the profits made by work abroad come back to the firm. Also, it is a good marketing tool.”
So it seems that client demand is the deciding factor even for traditional firms. In Spain the new model’s logic has already been accepted however. Top tier outfit Garrigues has opened three foreign offices since 2005: the first in neighbouring Morocco, an office in Lisbon last year and this year a second Portuguese presence in Porto, giving it a total of 80 local lawyers in its Iberian relation – a practice bigger than many Portuguese firms. Co-managing partner José María Alonso explains: “Why are we doing this? It’s easy: we’re client driven. We just go where they go.”
With Morocco it is the same logic. The office in Casablanca makes sense because Spanish clients invest in the country and there are few top-tier European firms already there. Cuatrecasas merged with Gonçalves Pereira, Castelo Branco in 2000 in Portugal for similar reasons. As Mr de Pardieu says, you need the best people if you want to open a new office. Undoubtedly this is not easy, but it has not put off the expansionary firms. Garrigues has managed its growth abroad with a mix of lateral hires and takeovers of local firms to provide sufficient local talent. For example, this year to boost its Lisbon practice it took over IP boutique Cabral Cunha Ferreira & Associados and grabbed a tax team from Portuguese player Castro Silva & Associados in February.
Another example of hiring in quality to launch abroad is Finnish firm Roschier, which opened an office in Sweden last year with a team led by Mannheimer Swartling M&A partner Axel Calissendorff. The group had its own clients and fitted in with Roschier to make a real Scandinavian corporate practice. With the addition of the Baltic alliance partners in Latvia, Estonia and Lithuania known as Roschier Raidla, the result is a formidable regional enterprise. Senior partner Tomas Lindholm admits it shocked the market: “They are still talking about it in Stockholm.” He says the firm has 20 local lawyers in the Swedish capital now and this is expected to grow to 50 by next year: “Some people doubted what we did was a good idea. But that is typical of lawyers being cautious.” The practice has already scooped some major cross-border deals, such as for metals giant Ovako Steel, because of the move. But Mr Lindholm admits that unless you bring in the best people at a local level you should “forget it”. Interestingly, he has exactly the same view on regional identity – as opposed to being a national leader – as the Austrian players: “We are a North European firm now ... It is encouraging to see significant growth prospects outside of our traditional market.” Roschier is the only Finnish firm to ever attempt such a step, but if it succeeds it will be intriguing to see if more follow.
Other Scandinavian firms, such as Magnusson Law Firm and MAQS, have strong regional practices too and both say they want to see more growth in this direction. Magnusson founder Per Magnusson says of his Warsaw office: “We saw a greenfield market in Poland and thought we could explore and see what happened, starting on a small scale and then building it with local partners… We have tried to co-ordinate this growth with a geographical strategy around the Baltic region.” The firm now has offices in Poland, Sweden, Russia and Denmark, which it is working at growing. Mr Magnusson does not rule out new locations if “there was a big client that wanted us to be there, or we connected with some people”. While he feels there has been a certain prejudice in some European firms that East European partners are not a good investment, he stresses: “Even if charge-out rates are lower this does not mean that profits per partner are less, as the cost level is not as high in these offices.”
With offices in Poland and Estonia, Sweden and Denmark-based MAQS has followed the same strategy and may in future open offices in Latvia or Lithuania to complete its Baltic strategy. Board member Dan Öwerström says the regional plan was not just about going into new markets: “We concluded we had to go into the Baltics. For example, half of all investment in Estonia is from Sweden.” Likewise, the remaining independent German firms such as Nörr Stiefenhofer Lutz and Gleiss Lutz have expanded into the CEE – although the latter has continued to rely on its strong links with the UK’s Herbert Smith and Holland’s Stibbe to boost its international credentials to clients.
Nörr, on the other hand, still stands alone. Its 120-fee-earner foreign practice is seen as a growing part of the firm – which like other top independents is also changing its identity. As partner Dr Dieter Schenk puts it: “We are a Central European firm; it is our unique selling point.” This is remarkable, as to most people in the wider market, say the name “Nörr”, and you will hear: “German firm.” However, the challenge these firms are now facing is to get the message across they have a new model and identity. Dr Schenk gives an illustration of the strategy’s effective working: Deutsche Bourse’s August launch of a subsidiary in Prague is the kind of high profile job Nörr has been able to handle due to its move into the Czech Republic. And he says the expansion is not about to end: “Kiev is being considered now.” Bulgaria and even Belarus are also possible new sites – one gets the feeling that just about every capital city between the Rhine and Moscow is a potential target. Moreover, there is nothing stopping Nörr or any other German, Austrian or Italian firm expanding this way, other than the will to make it happen and enough clients opening in these new markets.
So what does all this movement mean for the European market as a whole? Certainly it is not the end of the single site model for the best independent firms that can offer the highest levels of service, nor will global giants like Clifford Chance be challenged in their key markets. The players that will suffer are the middle tier of independent outfits which aren’t able to offer their expanding clients either a top tier service at home or the added advantage of cross-border coverage.
Managing partners are at an important juncture of the development of the region’s legal market. They must place their bets and decide which model is the way they will jump – only time will test their wisdom as the eventful story of independent European law firms continues to be written.
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