Australian firms were swept back home in the '80s when they first attempted to ride the great Asian wave. Now, with the domestic market bursting at the seams, and clients penetrating deeper into the region, Asia is being viewed as a necessary growth strategy

Australia's biggest firms are big. Too big, some would argue. The number of lawyers in the country when held up against the population "beggars belief", as one  managing partner of a first-tier Australian firm once put it, with the top six firms each boasting an average of 200 partners and over 700 legal staff.

Although the Australian economy has remained relatively robust, the last couple of years in particular have been a time of belt tightening. Firms are not taking on the number of graduates they once did, lawyer numbers are being kept in check and revenue figures carefully examined. In some cases, firms are actively looking to downsize. For some, there is a sense there is not much more room for expanding in their home market.

Against this background, legal services has emerged as a key sector in the export of professional services from Australia, experiencing year-on-year growth. According to the Australian Bureau of Statistics, the balance of trade in legal services stood at A$164m for the 2000-01 financial year. And it is into the wider Asia- Pacific region firms are being encouraged to sell their expertise.

The Australian Federal government is getting behind firms in this push. It set up the International Legal Services Advisory Council (ILSAC) in 1990, and has also formulated a Legal Services Export Development Strategy 2003-2006, the aims of which include promoting international awareness of the capability of Australian law firms and identifying export opportunities.

ILSAC held a conference in Sydney in March, headlined "Buying and selling legal services into Asia: Risks and rewards". Speakers included the CEOs of two major investment banks, partners of firms in Singapore and China, and the Australian Trade Commission (Austrade), the Federal government agency charged with assisting Australian companies in winning overseas business. Although war breaking out in Iraq prevented the attorney-general himself from attending on the day, his representative delivered a strong message to Australian firms: be more aggressive in seeking opportunities in Asia.

Firms have heeded the call. Many have had 'Asia' strategies in place for some time, although those strategies vary. And not all claim to be driven by the need for growth outside the domestic market - or consider that a presence on the ground is essential.

Clayton Utz's Brian Salter, who heads up the firm's international practice, says it is "not through any philosophical objection" the firm has not opened an office in Asia. It is currently reviewing its approach to the region, which may involve establishing an on-the-ground capability in the future. But for the time being, it is happy to adopt a "fly in, fly out" approach, or introduce clients to Clayton Utz "equivalents" in Asia through its membership of the Pacific Rim Advisory Council.

"We just haven't been able to find a sensible business case that stacks up for us," says Salter. "We feel our mission statement in Australian hasn't been completed."

In contrast, Salter claims, the belief they have grown as much as they can in the Australian market is driving the push of firms such as Mallesons and Allens Arthur Robinson into Asia. Allens managing partner Tom Poulton confirmed as much in an interview with ALB last July. "If we are to see any growth, it has to be outside Australia," he said. "That's why we're happy we've got an Asia strategy & and I suspect that's why Mallesons and Freehills have got an Asia strategy."

Allens' strategy has been to pair up with a UK name, Slaughter & May, and pitch for work jointly. Jim Dunstan, head of the firm's banking and finance practice out of Sydney, claims this approach is paying dividends. "Pretty well every job we get in the Asian region is a job we wouldn't get on our own," he says. "We're batting in a league above where we were batting before. Everything we get is a bonus for us." [See sidebar]

Other firms have hand-picked markets in which they have identified growth opportunities - such as Shanghai - and set up shop there, or used a particular location as a base from which to operate throughout the rest of Asia [see side box]. Freehills, for example, has a long-established presence in Singapore, which it has essentially used as a springboard into other jurisdictions, focusing mainly on project and infrastructure work. It has been particularly active in power-related projects in South Korea and Indonesia, and also Vietnam, where it has offices. Phillips Fox has also focused on Vietnam, where it has been involved in infrastructure, construction and project finance work.

On the China front, Blake Dawson Waldron was awarded a licence in 1998 to open a Shanghai office, and has since acted for both Australian and Chinese clients in relation to infrastructure, investment and joint venture work. Hunt and Hunt, despite having a presence in every Australian capital city and in New Zealand, admits to having no "big firm" aspirations. But it has also tapped into the China market, with an official presence in Shanghai since 1998. Says Michael Wadley, the firm's chief representative in the PRC: "In my view there is no doubt that an Australian firm needs to be on the ground with permanent staff if it is to adequately service China business clients, let alone service them well. It is not just a matter of being available but also having a better understanding of business practice and being part of the business community in terms of both the foreign and Chinese business communities."

But Salter says underpinning any Asia strategy needs to be a sound business plan. "You need to be able to justify growth rates that would exceed your growth rates in Australia," he says. "At this stage, we're quite positive towards Asia, but we don't want to make the same mistakes as our colleagues in the past."

Mallesons is one Australian firm that has taken a different tack to Asia this time around. Determined to establish itself as a name in the region, it has focused on building up its Hong Kong office around a solid reputation in construction work. Partner David Bateson has been based in Hong Kong since 1980, acting on major construction projects and related disputes matters. Over the past 18 months, the firm has sent up partners Adrienne Showering, Richard Mazzochi, Robert Milliner and Damian McNair from Australia, giving the office capability in securitisation, banking and finance, project finance and energy and resources as part of a longer-term strategy to become full-service.
Mallesons Hong Kong-based banking and finance partner Tom Lennox says the firm is largely responding to the forces of globalisation in seeing its future as a "pre-eminent Asia-Pacific law firm". "That's how we see a large number of our clients looking increasingly in the future," he says. "They don't stop at Australia and think 'that's where the world ends'. Clients think in terms of cross-regional, cross-jurisdictional investment flows & It's just the way we see our clients thinking and we think it's optimal for us as a law firm to think the same way."

A key feature of Mallesons' strategy is a focus on achieving "critical mass" in Hong Kong. Lennox says this is necessary to instil confidence in clients that the firm can handle the larger transactions. "Simply having one or two partners isn't sufficient for that."

But the extent to which maintaining an office in Asia is financially viable in the current economic climate is questionable. A number of US and UK firms have closed their doors or significantly scaled back their operations in Hong Kong and Singapore - Cravath Swaine & Moore, Dewey Ballantine, Orrick Herrington & Sutcliffe and Simpson Thacher, for example. And if conditions were not already bad enough, SARS blew in and took the wind out of any burgeoning recovery.
Lennox claims the firm's size enabled it to withstand the harsher effects the combination of these factors produced. "We're not a firm that has 200 lawyers. If I was a firm here in Hong Kong with a large legal platform, I would be a bit nervous in a contracting market," he says. "But by us being able to cherry-pick the areas we can offer a very competitive service in, that has proven modestly successful in being able to grow our practice."

Despite its aspirations, the firm lays no bold claims as to its brand recognition in Asia. "Don't get me wrong - we know where we sit in the food chain here," says Lennox. "We're not causing international firms to quake in their shoes and we don't have any illusions in that regard. But we think we're having modest success."

Minter Ellison's Hong Kong managing partner Sam Farrands says the firm's focus on niche practice areas has helped it build up brand recognition in those particular areas. "We don't practice in areas that are generally dominated by US or UK magic circle firms," he says. "There are two banks that we pitched to recently where we said: 'We're not here to talk to you about your banking and corporate work; we're here to pitch for your HR work and your outsourcing work'. And you could visibly see the relief on their face." The fact Australian charge-out rates are more competitive than that of their international rivals is, Farrands says, not a major selling point. "Price is not enough, and you must have expertise and experience in this jurisdiction in any area of practice. If you don't have that, it would be very difficult to compete. You won't get invited to pitch for the work in the first place."

Farrands says the firm's move into Asia was initially in response to client demand, but its strategy has moved beyond that. "The firm saw an opportunity to develop a sustainable business in Asia on the back of existing clients and, equally importantly, off the skills and experience of its lawyers in key practice areas where there are market opportunities in Asia," he says. "In turn, this has had the benefit of cross-fertilisation back into the Australian market, enhancing our relationship with Australian clients that go offshore and providing opportunities for our good lawyers overseas." 

While other international firms in Hong Kong are contracting or withdrawing from the market altogether, Farrands claims Minters is in expansion mode. The Hong Kong office, which Farrands describes in measured terms as "contributing to profit of the firm as a whole", has doubled in size in the past 12 months, including lateral hires from UK firms Linklaters, CMS Cameron McKenna and Sinclair Roche and Temperley to the project finance, construction and dispute resolution practices. The firm anticipates its Bangkok presence will be on the scale of that in Hong Kong by the end of the year, and its Shanghai office is "small but growing".

"All our practice groups in the Hong Kong office are busy. We've been able to maintain profitability in a very difficult economic environment, and we see only opportunities moving forward as the economic environment improves."

The Hong Kong office certainly enjoyed a success with its role on the A$25bn LNG supply contract deal, under which Australia will supply China's Guangdong province with liquefied natural gas over a 25-year period. Led by Farrands, Minters was principal legal adviser to Australia LNG Pty Ltd, the North West Shelf Venture's marketing group for China, which led the bidding supply for the contract. But Farrands says the office is not riding on the back of one deal.

"Although it's the one that has received the most publicity," he says, "it isn't the only large deal in the office. In each of the core practice areas we have similar landmark transactions." These include the major project group's advising on gas supply arrangements for a US$3bn Petrochemical plant in China, and on Hong Kong's first PPP, the HK$2bn International Exhibition Centre Project. The office is also advising on the new Manila Airport construction project, the Hong Kong government on the 'Hong Kong ferries' case, and a substantial outsourcing transaction. "Key issues for us are sticking to what we are good at, maintaining and developing cutting-edge expertise that is in demand in this market, and providing a consistent high quality delivery of service that is not necessarily found in Asia."

Salter remains sceptical of the approach of trying to build up critical mass in Asia, but concedes the merits of playing to one's strengths - in Mallesons case, building a practice around its construction law expertise. "The area Australian law firms are weak on [in Asia] is brand," he says. "Are they going to compete against English and US law firms head to head? For general counsel, it's taking a punt. It's the IBM factor & if you plump for an Australian law firm and they're cheaper and then something does go wrong, you will get into trouble." While Farrands would not comment specifically on Mallesons' approach, it is clear he has reservations. "They [Mallesons] have their own strategy and good luck to them - but that's not the strategy that we'd adopt."

Lennox does not under-estimate Mallesons' ability to compete against UK and US firms. But he claims it can offer something different to clients in the region. "These are world-class firms staffed by some of the world's best lawyers, so we certainly don't come here with any arrogance or not realising how difficult our task is," he says. "We think we offer a standard of international legal skills. We practise English law, Hong Kong law - and of course, we practise Australian law - but first and foremost [the former]. And the areas where I believe we can offer a very innovative product are in those high-quality, innovative, complex areas we've identified."

From here on in, it's a "steady as we go" approach, says Lennox. "We're monitoring our performance relative to our business plan as we proceed & our plan is to establish a strong, regional firm which has a strong presence in Hong Kong. That critical mass in Hong Kong does require a firm probably slightly bigger than where we are now, but we're on the way to achieving that."

What's in a name?

Allens Arthur Robinson remains convinced that its 'best friends' arrangement with UK firm Slaughter & May is the approach most likely to reap it dividends in Asia.

"We wanted to call it 'best mates'," jokes Allens' banking and finance team leader in Sydney, Jim Dunstan. From Dunstan's perspective, the benefits for Allens in teaming up with a UK firm are clear. "Pretty well every job we get in the Asian region is a job we wouldn't get on our own," he says. "We're batting in a league above where we were batting before. Everything we get is a bonus for us."

The two firms, which remain independent of each other, share an office in Singapore. From Slaughters' perspective, Hong Kong-based partner Neil Hyman says his firm gets "the best legal advice out of Australia". There are also benefits in pitching jointly for work in terms of the lower rates of Australian lawyers (the firms usually offer a blended rate) and the ability of the two firms to jointly cover the region via offices in Singapore and Hong Kong. "Asian clients like small teams of experienced people. [It is] highly cost effective," says Hyman. On each transaction, there is one co-ordinating partner, and one bill issued. The firms decide between themselves how to share the spoils.

Both firms claim any misconceptions among potential clients as to how the relationship works in practice is just that. Says Hyman: "In the market, people would invite us to do joint ventures. Now, we don't have to explain the best friends relationship. We would expect the number of jobs and the success rate & to get better." Dunstan admits they have not won every job they've bid for. But where bids have not been successful, the firm has often secured spin-off work. "We've been invited to bid for jobs our competitors have said they would not have expected us [to have]."

Slaughter & May began its 'best friends' strategy in the early 90s, with firms including Hengeler Mueller in Germany, Uría & Menéndez in Spain, and Davis Polk in the US. Says Slaughters' Singapore-based corporate partner Andrew Johnson: "It is not an exclusive relationship. [We] won't force a client to work with a best friend. If the client has a strong relationship with a Mallesons, say, or simply likes a particular person & [we] will not stand in their way."

But despite its cosy relationship with Slaughters, Dunstan says Allens is not looking for a merger proposition. "We've got to be realistic. The firms that have merged have shrunk. For us, to get into a model that means we drop thirty percent in size &Merger maybe makes sense in Europe. Not in Australia."  Hyman agrees. "UK firms don't need Australian law capability as a fundamental tenet of their business. They'll need [it] for a particular job."

The in-house view:
how do Australian firms fare in Asia?

Simon Brookes - general counsel, Telstra Bigpond Media Services and Sensis

Simon Brookes has recently returned to Australia from Hong Kong, where he was Telstra's international general counsel. He has also worked in Jakarta and Hanoi.

In acknowledging the stiff competition Australian firms are up against in Asia - particularly in Hong Kong, where UK and US firms have been long established - Brookes puts it simply: "In Australia, the leading firms have a brand name. Offshore, they haven't."

But it is not an impossible proposition. And Australian firms have an edge, claims Brookes, whether or not they have identified it. With clients becoming increasingly cost conscious, the ability of firms to handle "back office" work in Australia at Australian rates while still maintaining a presence in the region is, Brookes says, a "significant competitive advantage".

"Why don't Australian firms play to their strengths?" he asks. "To open a local office is a very expensive proposition. Australian charge-out rates are very competitive on an international scale. You can take advantage of the Australian infrastructure and yet have the expertise off shore. From a customer perspective, I find it an attractive proposition, because then you have a firm that is knowledgeable on the ground, yet is able to compete on the basis of service and price."

While having a presence on the ground can be an advantage, this is only the case where there is a "genuine" commitment to the region, reflected in a sound local knowledge. "It's got to be a real office in the sense that good people are put on the ground there, and not people who've failed in Australia and are being given a second chance," he says. "The people who are there - it's got to be the 'A' team, not the 'B' team." Understanding the local business environment and culture is also critical. "You really need someone who's prepared to make a long-term commitment to building a practice there - not someone who's practised in Collins Street [Melbourne] and thinks they can hang out a shingle in Beijing."

Brookes would not be drawn on the merits of one firm's Asia strategy over another. But he says any strategy should be driven from a client and not a firm perspective. "No one model's got all the answers," he says. "But it's important to keep sight of all the principles. We're moving into a different environment. The economy's tight - people are looking to cut costs & I think it's going to be difficult for firms to justify doing work in Hong Kong or a very high cost centre if it can be moved to a lower cost centre."

He says it will be some time before Australian firms establish brand recognition in the region. "It's a long, hard process. Word of mouth is probably, at the end of the day, the best form of advertising."

Choosing a firm
Brookes says a number of factors come into play when deciding on external legal advisers. "To us, the most important thing is quality - and we can't compromise quality, particularly when you're doing deals off shore. They [deals] attract a disproportionate amount of interest in the market - that's the reality. Secondly, you're operating out of your home market, so the risks are higher. It's more important than normal to make sure you're managing that risk. The deals being done and the investments being made are very significant."

David Graham - general counsel, Morgan Stanley Asia-Pacific
Q: Australian firms are being encouraged to 'sell' their services into Asia, but some have suggested they will struggle. What is your view of where Australian firms stand in the 'food chain' in Hong Kong? How can they expect to compete with a Freshfields or an Allen & Overy or a Clifford Chance?
A: There are a considerable number of challenges facing them, looking at it from the perspective of a major international investment bank and the sort of services we require from our outside counsel. I think that there remains a natural tendency for the major investment banks to go to their traditional UK or US law firms who provide services to them on a worldwide basis, and to perceive (wrongly in my view) the Australian law firms as providing only local Australian advice on Australian issues, rather than providing international advice on non-Australian issues.

However, in my view, they can compete in this part of the world on the basis that first, they have very good lawyers; secondly, many of their lawyers have international skill sets and experience; and thirdly, their cost base is lower than the equivalent UK and US firms and therefore they can afford to undertake matters at a lower cost without undermining their profitability.

Q: How much is price a factor?
A: It is an issue on some projects, but not all. As you would expect, we have demands for different types of legal services. In relation to transactional legal services, where firms are working with us or with a client on a specific transaction, cost is not so much an issue as experience and track record.
However, we do have a lot of internal projects which are not necessarily time critical but which require assistance on a regular basis - not particularly high powered, but a consistent requirement for help on, say, customer documentation reviews. If the cost per document from a UK firm is, say, HK$2000 and the cost from an Australian firm is HK $1500 then, over the course of that project, that is a significant cost saving and would influence our choice of counsel.
Q: Do you instruct Australian law firms?
A: We do and would be prepared to use them more. On a number of ongoing projects, we already have law firms in situ, and the Australian law firms have come forward to us with proposals which would undercut the prices currently offered by our other law firms. We haven't actually moved any of these over yet, because to move them over would itself be quite costly and disruptive. If, however, we found a situation where the quality of service we were getting from one of those law firms did not meet our requirements then, certainly, going forward, we would consider moving those projects over to an Australian law firm.
Q: Is that likely to occur?
A: It could do, because this is work that is not necessarily very attractive or remunerative work for the US and UK firms to do. They are doing it more for relationship reasons.
Q: Australian firms have different 'Asia' strategies & What would you say in terms of the merits of [different] approaches?
A: You have to play to your strengths. There are clearly some areas where it is very difficult, in my view, for the Australian law firms to compete on the international stage - [for example] capital markets, because they don't typically have a US capability; and public M&A insofar as it's not Australia-related. Where I think the Australian law firms do have some opportunities are in the funds and the REITs area, because that area is very big in Australia. Securitisation is another area where I know some firms have been successful.  And the whole structured products/derivatives area has also been one where they have made inroads. I can also see opportunities in employment law and IP/IT.
Q: How necessary is it to have people on the ground in Asia with the relevant expertise?
A: My view is that it is very important. You need a critical mass and you need good people. It should not just be a post box, and I am not a fan of the 'fly in, fly out' strategy. I would much rather be able to go around to an office two buildings away from me and talk to a lawyer who I think is very good and can deal with my issue, rather than speak to somebody who will then pass me through to the Sydney office.