Sydney 2008

Last year, ALB reported that Sydney firms were enjoying the fruits of a single office policy. This year we find Sydney firms hatching new and novel plans to endure the long winter that the credit crunch promises to deliver

Year in review: the hub goes into slow motion

This time last year the Sydney legal services market was going through something of a purple patch; staff numbers were growing steadily and revenues per fee earner were at record highs, according to the NSW Law Society.

Similarly, figures from firms themselves indicate that 2006/07 was part of a longer pattern of consolidation and profitability in the Sydney market after downturns in the early part of the decade. Firms suggested that growth in subsequent years was a given, ensured by both a fluid employment market and the wealth of international transactions passing through the city.

Luke Stevens, CEO of Bartier Perry, says that Sydney law firms have had "close to 10 years of wonderful economic conditions" and that performing well and growing have not been difficult.

Mark Pistilli, partner at Chang Pistilli & Simmons concurs. "Over the last couple of years, the Sydney market has consolidated its reputation as the Australian gateway to the world," he says, noting that Sydney now has the largest international reach of any Australian jurisdiction.

However, and perhaps even because of this very point, the figures for the early part of 2008 have been anything but flattering.

Recent statistics show that in the first half of 2008, the Sydney legal services market grew by only 1.4%, representing a 3.5%decline on the same period last year and a 3.25% decline when compared to the first half of 2006.

Undoubtedly, the major catalyst behind the decline has been the credit crunch, with the concomitant economic slowdown that it creates, reducing both the quantum and value of transactional work on offer, not to mention revenues.

The long list of casualties

Financial services, private equity and M&A work are the areas which have taken the biggest hit, according to those who ALB spoke to. Sydney firms say it is the areas that are most closely related to the international liquidity crisis that are being affected now and will continue to be affected in the future.

Fred Swaab, managing partner at Swaab Attorneys, reveals that his firm has seen a decrease in the securitised lending space. "It''s probably an area which won''t recover for a while," he notes. Damian Paul, managing director of Macpherson+Kelley Lawyers, agrees: "We''ve definitely seen some commercial deals which would have settled by now but have been put on the backburner because funding has fallen through."

However, despite already being responsible for decreasing the amount of work on offer, it is widely held that the true effects of the credit crunch on the Sydney legal services market have not yet been felt.

Shane Barber, managing partner at Truman Hoyle, explains: "We''ve been watching the credit crunch for some time now, and we expect it to hit any time early next year. There''s always a lag in terms of when its true effects will manifest," he says.

Sharon Cook, managing partner at Henry Davis York, also believes the worst is definitely still to come. "I think what we''re seeing now is only the tip of the iceberg. It has
the potential to become much worse than this."

"It could change the complexion of the legal market," Cook concludes. And, those that ALB spoke to were busily hatching plans – plans to weather the storms gathering on the horizon and plans to capitalise on the opportunities that it will create.

Credit crunch: the pendulum swings

As much as the global credit crisis is responsible for bringing some practice areas to a grinding halt, it is also responsible for bringing others to life. Litigation and insolvency & restructuring are the areas set to boom in the months and years ahead; it is a logic that Sydney firms are familiar with, according to Swaab. "When there''s a downturn in the financial services space, there''s always an upturn in recoveries and litigation – that''s a historical fact," Swaab says of a trend that is marked by a distinct shift in client behaviour.

Pistilli has already started to see this phenomenon manifest itself: "We''re seeing clients change the way they act already.

"People are now restructuring holdings to reduce debt, selling off parts of companies, assets and businesses," Pistilli continues, noting that for his firm, it is simply a different type of M&A work. "In tough economic times, people''s mindset changes – they become more litigious.

"In periods of strong growth, they might have let some good cases go; now they''re more willing to proceed to litigation," explains Pistilli. If client behaviour is changing, it is a change that firms are acutely attuned to. While all of the firms that ALB spoke to were actively bolstering their headcounts across the board in all practice areas, the area to swell the most was litigation, with all firms, irrespective of size or specialisation, bulking up in the area.

Sweet are the uses of adversity

A major reason behind why Sydney firms are ramping up their activities in these areas is that the increases already experienced are only a taste of things to come. Many of those that ALB spoke to believed that the quantum of work on offer may increase ten-fold in the short and long terms. "While insolvency, restructuring and litigation work have taken off in the last few months, it still hasn''t become litigious," says Pistilli.

And the prospect of further growth in the area has seen some firms become extremely excited. Cook''s firm is no exception. "For almost 10 years now, these areas have been very quiet," says Cook. "Our insolvency and restructuring team is certainly looking forward to the months ahead."

Notwithstanding, the consensus among Sydney firms was that while these areas will present a net benefit to almost all firms, it is only those firms with established credentials in this area that will reap the benefits over the long term. "A lot of the recovery work on offer is being done by specialist firms," says Swaab.

Bill Fazio, managing partner at Herbert Geer, agrees. "Traditionally, the Sydney firms that have been active in the financial services space haven''t been beneficiaries of an upturn in litigation and recovery type work," Fazio says, noting that "it''s quite rare in recent times to see firms that boast equally strong credentials in both upturn and downturn work".

To be sure, there are some other factors which have the potential to mediate the gains to be made by firms in these areas.

Geoff Connellan, a partner at Moray & Agnew, suggests that the current economic climate, which has fostered upturns in insolvency, restructuring and litigation, may be a critical factor. "While the reality is that commercial litigation is on the boil, in the current economic environment it would appear that costs will be an issue … It may not be the bonanza that people are expecting," he says.

Interstate work: capturing a slice of emerging markets

However lucrative the explosion of litigation work may be for Sydney firms, almost all of the harbour city''s firms were unanimous in suggesting that weathering the credit crunch was about far more than reinforcing their litigation expertise. According to those that ALB spoke to, enduring the impending winter of discontent is as much an exercise in diversification and expansion as anything else; it is about looking beyond Sydney to emerging markets throughout Australia. While it is a well-trodden path for Sydney firms, it is the pace at which they are pursuing diversification and expansion that is novel this time around. Hence, while the Sydney legal services market has always been considered the nexus to the international legal market, Sydney firms now conceive of growth as resting more with the burgeoning domestic markets in Perth, Brisbane and Darwin. Spurred on by gangbuster mining and natural resources industries, these markets are shaping up as the Holy Grail for Sydney firms – but it is a pursuit that has many traps for young players.

Looking westward… and northward

"The market in emerging cities like Perth and Brisbane is probably the best for legal services at the moment and will remain so," says Swaab, noting that it is the quantum, sophistication, and importantly, the fees generated from work in these markets that set it apart from the rest.

Indeed, the fact that emerging markets can provide both a steady flow of revenues and insulation from the tumultuousness of the international liquidity crisis is what makes it so appealing for Sydney firms.

"The legal market in places like Perth, and to some extent Brisbane, are unique because they probably won''t feel the full force of the credit crunch until well after it hits the financial centres in Sydney and Melbourne," says Pistilli, noting that the type of work being carried out in these places – things like infrastructure development, mining and energy security – are either vital or non-discretionary.

But entering these emerging markets is not simply a fait accompli. According to Fazio, fraught with difficulty for Sydney firms, especially if work is being done in a fly-in-fly-out basis.

Swaab says the Western Australian market has become saturated but suggests that this impinges on firms and lawyers to take a different approach. "What''s required is a lot of refocusing," he says, recounting how his firm breached the WA and Queensland legal services markets.

Realising that his firm could not compete with the wealth of technical mining and energy and resources specialists in the emerging markets, Swaab says they found more traction by looking at the ancillary issues raised in the course of natural resources projects – issues such as mine acquisition, water transport and various other logistical issues. It is an approach that both Pistilli and Danny Gilbert, managing partner at ALB Australasian Law Awards 2008 Sydney Law Firm of the Year, Gilbert + Tobin, subscribe to. According to Pistilli and Gilbert, it is closer engagement with clients and market trends that will mediate the level of success enjoyed by Sydney firms.

Rising litigation stocks

Capturing a slice of this pie is attracting their fair share of markets and international interest

Sydney firms and their share of Australia''s emerging markets