It has been said that New Zealand is the most overlawyered jurisdiction in the world except for that stalwart leader, the US. Reliable statistics that support this claim are difficult to find, but here are some numbers to digest: as at 31 July 2002, the New Zealand Law Society had 8430 members. New Zealand's population was nearly four million at that time. This means that in 2002, there were 21 New Zealand Law Society members per 10,000 people. In the US, for every 10,000 people there are (depending on the source) between 18 and 24 lawyers.
Now put those figures in the context of the size of New Zealand's capital markets and it is immediately understandable why competition between firms is so tough. New Zealand has one of the smallest equity markets relative to GDP among OECD member countries. Throughout 2000 and 2001, the market capitalisation of the New Zealand Stock Exchange averaged $46bn, or 45% of GDP. In Australia, UK and US, these numbers are respectively 110%, 190% and 120%.
There are eight firms in the top-tier of the New Zealand market all competing for the big, sexy deals. Little wonder then that competition, as is repeatedly reported in the press, is fervent. Perhaps, considering lawyer numbers and the size of capital markets, the relevant question is why, despite all these things, the legal market remains robust.
New Zealand firms understandably want to move the conversation beyond what has become a clichéd tough market description. And there is enough going on to keep things flowing. 2004 has shaped up to be a better year than previous years. Revenues are up. The 'Australasianising' of business is both a threat and a blessing - firms have lost and gained work from the corporate flight to Australia. The recent trend of 'breakaway boutiques' is gathering momentum, enough to make the otherwise static hierarchy in the top-tier interesting. Plus, at least two firms claim that their lawyers are having fun.
Sources of growth
It's easy to steer away from pessimism when business really is on the up. Simpson Grierson partner Peter Stubbs concedes that the firm approached 2004 with some trepidation. "We didn't know how the war in Iraq would affect us, the global economy not doing well," says Stubbs.
It turns out that the firm should not have worried so much. "The reality is that we achieved a double digit revenue increase across all departments," Stubbs reports enthusiastically. "We've got great direction... I couldn't be happier being the head of a commercial department."
Simpson Grierson has not neglected the right hand side of the balance sheet. Chairman Rob Fisher says that the firm has achieved some success with trimming expenditure (for example, it has trimmed hundreds of thousands of dollars of expenses on internal catering). On the other hand, the firm also expects to increase expenditure when it relocates in May or June 2005 to new premises on levels 23-28 in a building in Shortland Street, Auckland.
But the emphasis is on generating more revenue and, in this regard, Simpson Grierson sought the help of Professor Stephen Mayson, a specialist with law firm management who has helped the firm analyse business and restructure.
A crucial lesson that the firm learned from the professor is cross-selling to other departments. "It's something that all law firms should've been thinking of. It was a point [Mayson] hammered home. We all want new clients but we learned how to capture opportunities from clients we already had," says Fisher.
What other strategies are firms employing to achieve growth?
"Ourselves and Bell Gully, are taking a specialisation approach," answers Stubbs. After conducting research, Simpson Grierson restructured its practices into four departments: banking and finance, commercial, litigation and resources and infrastructure. Partner Mariette Van Ryn says, "The reconstruction resulted in the carving up of the firm in the
key industries we wanted to focus on. By dividing the firm, we give something that our competitors can't give."
Bell Gully does not quite describe its approach as specialised, but Stubbs is close. According to chairman Matthew Cockram, the firm's strategy is "to concentrate on the few industry areas where we're not in a leadership position, though we should be". The firm has split its practices into departments. "You get large firm expertise, while clients are dealing with top specialists and get personal service," says Cockram.
Bell Gully leads the rest in M&As - the firm is the only New Zealand firm that features within the top 15 of Thomson Financial's M&A league tables for completed deals in the Asia-Pacific (ex-Japan), released midway through the year. "We have leadership in M&As but we're not in corporate relationship-type work - the businesses' day-to-day requirements," says Cockram. How does the firm plan to change this? "It's about managing relationships well," he says. The firm is investing time in their clients by collecting feedback and visiting clients.
Cockram calls it taking care of the firm's 'crown jewel group', which includes not only the clients who rack up the most bills, but also longstanding clients. Bell Gully has experienced, over the past year, "consistent but small growth".
Least shy about its growth is Kensington Swan. Whereas most firms like to keep their vital statistics secret, Kensington Swan lays it out on the table: 28% growth in profit from the previous year. "We're going against the trend. We're in a growth phase," says chairman
Clayton Kimpton.
What tough times? Kensington Swan appears to have achieved full closure over that niggling worry of New Zealand firms - the loss of clients due to corporate flight from New Zealand to Australia and other bigger markets. Commercial partner Rob Noakes is finding the emerging local companies, many of which are spending money in capital investment, a good source of work. "If you look at the New Zealand market, the companies that grew in the eighties and nineties were gobbled up by US, Singapore and Australian companies. Now the smaller companies are coming through," he says. The idea of a shrinking market, says Kimpton, "is focused on the clients that we used to have rather than looking at the market that's still there. There are companies that have grown and need full services firms. [The market is] certainly not downbeat."
Noakes is optimistic about the developments in the New Zealand legal market. "We've changed our strategic focus - as with a lot of law firms, we were constantly saying, look at poor us, the money's going to Australia... We decided last year to focus on the market that there is, and our growth rate has been a result of that."
Sarah Roberts, national chairman of Buddle Findlay, advises a number of emerging companies on matters such as capital raising and possible listing on overseas stock exchanges. Achieving growth for local companies, particularly the technology companies, usually means going outside New Zealand. The bottom line is the most crucial issue for these companies. They need cash in order to put in place the distribution channels for exporting. "I find that these companies don't have such a great corporate spirit but are more entrepreneurial - they want practical instead of black letter law," says Roberts. "A lot of them are in the mid-growth stage. We're helping them move offshore."
Finally, the clients that are never in danger of drifting overseas are the government agencies. For both Buddle Findlay and Simpson Grierson, government work is a constant and important source of work.
Buddle Findlay's Carl Rowling describes giving strategic advice on government regulations as "almost a new practice area", called regulatory design. The firm's Wellington office has a dedicated regulatory team comprising four partners and 10 lawyers. All in all, it has been a very good year for most firms, "better than what most expected", says John Lamb, chief executive at the pre-eminent IP firm in the country, AJ Park.
Trans-Tasman work
The first logical step for New Zealand corporates looking for growth opportunities outside New Zealand is to go to Australia. Bell Gully's Cockram points out that the corporate drift from New Zealand is not a new phenomenon, and he doesn't understand why there is so much emphasis on it as a recent trend. "Clients have been moving from Dunedin to Wellington, to Auckland, and to Sydney and London for years now. It's not any more intense and active than five years ago," he says.
Has the firm retained legal work from these businesses that have gone offshore? "Absolutely, we have retained business," answers Cockram. "We continue to act for the Rank Group which owned a part of Burns Philp, which was acquired by Associated British Foods." Rank Group is the investment vehicle of Graeme Hart, New Zealand's first billionaire, who made his fortune buying early into Burns Philp. Another Australian-based client is Cadbury.
"Some say you lose head office work - the sexy stuff. But I'm not sure if they would have stayed here, given the size of the capital market," says Cockram.
Simpson Grierson too is not too worried about New Zealand corporates' move across the Tasman, or rather Australian companies swallowing up local companies. The firm sources work from the New Zealand entities of Australian-based corporate groups as well as directly from the Australian headquarters of these groups. Virgin Blue and Westpac are clients of the firm. At Buddle Findlay, Carl Rowling says that the firm regularly 'carpetbags' Australia, though the work is not consistent enough to justify setting up an office there.
Kensington Swan is similarly sourcing work from companies headquartered in Australia. Kimpton says that a number of these companies tried to conduct New Zealand-related work from Australia, then realised that they needed on-the-ground assistance. An example is Red Bull, which has an Australian in-house legal function. The general counsel discovered that the New Zealand work was getting too large, says Kimpton. The firm also receives work from New Zealand businesses that have relocated their headquarters overseas. "Just moving offshore doesn't remove the local need for legal input," says Noakes.
For a number of firms, trans-Tasman capability is a crucial part of their makeup. Russell Hay from Minter Ellison Rudd Watts typifies his firm's positioning in the market as a trans-Tasman firm. Australia's Minter Ellison is naturally a source of referrals for the New Zealand firm, and vice versa - Minters in New Zealand refers about a 10th of the work that it does for Fonterra, New Zealand's largest dairy co-operative, to its Australian counterpart.
Trans-Tasman work comprises between 20% and 25% of the New Zealand firm's workload. "We've got the Minter Ellison name," says Hay. "We're one of only two trans-Tasman firms. It's important to have this capability, as the Asia-Pacific connection is growing."
The biggest New Zealand corporate to have gone across the Tasman is the Bank of New Zealand, swallowed up by the largest bank in Australia, the National Australia Bank. Laurie Mayne observes that the corporate flight to Australia, particularly in the finance sector, has accelerated over recent years.
"We refer to that move as the provincialisation of New Zealand finance," says Mayne. "At the same time, the banks here are becoming more sophisticated. For example, there are more lawyers in-house. Five years ago, the in-house departments at banks were not like this. Now, having 15 or 25 in-house lawyers at a bank is not unusual. Therefore, there is pressure on big firms and their profitability."
A quarter of the work that the former Russell McVeagh finance department did was for Australian clients. "The plan is to go to Sydney," says Mayne. "We will see ourselves as a New Zealand firm in Sydney, doing Australasian-focused work. We have very good relationships with banks, Australian law firms and clients in Sydney. We'll be spending a lot more time in Sydney. A firm like this, that's specialist - I like this term over 'boutique' - we can see ourselves having an address, a presence in Sydney."
A firm that has already established an office in Australia is Duncan Cotterill. The office opened in January this year. It now has four lawyers, a consultant, plus partner Mark Smith. About half the firm's work is trans-Tasman.
Standing out from the others, Buddle Findlay prefers to focus on domestic work. "Historically, we didn't have clients that have fled the country," says Rowling. "So we haven't suffered as with other firms. We have put in place consistently a strategy for growth that focuses on NZ-safe clients. An example of this is a client that a lot of the time people would have thought was mission impossible to get - we put in a tender against another firm that had been their legal advisers for a century," he exaggerates. "We're now on their panel [along with the other firm]. It keeps things competitive. It's been a success story for us and it's a client that definitely can't go to Australia."
Panel selection
How aggressive is the market? The apparently increasing phenomenon of formal panel reviews by clients might provide some measure.
Clients say that the practicality of having a panel of firms is that they avoid potential conflicts. Should a firm be already acting for the other side of a transaction, then another firm on the panel can do the job. The trickier part about panels is in the selection process, which provides an opportunity for clients to pit firms against each other. As Quigg Partners' John Horner puts it, panel selection "keeps the regular legal advisers on their toes".
The use by clients of panels draws interesting responses from lawyers. Rob Noakes from Kensington Swan comments: "Now, there's a lot of suspicion about panels. The strike rate of knocking out some of the incumbents is very small. Some law firms don't tender because there is caution." Clayton Kimpton calls it "cynicism" rather than caution.
"You spend a lot of time and money on this," continues Noakes. "You find that the incumbent is back, but for a lesser price," says Kimpton.
In some cases, Noakes has found that when an established significant client of Kensington Swan puts out a tender for legal services, the firm does not need to respond to the offer, as the client already knows the firm is doing good work. "I can understand why they have a panel for banks," says Noakes, "but for smaller companies, they're just sharpening their pencils."
Carl Rowling and Sarah Roberts at Buddle Findlay give diplomatic answers when asked whether smaller companies use panels to sharpen their pencils. "Some larger companies are also guilty of that," says Rowling. "It's an overused mechanism, [but also] I don't see why they shouldn't have a choice," says Roberts.
Mayne Wetherell has not seen too many 'beauty parades' because its partners are well known through their many years working at Russell McVeagh. Laurie Mayne, who was part of the finance team at Russell McVeagh that defected and formed Mayne Wetherell, observes, however, that some clients' panel structures are too rigid. "The constraints put on in-house counsel are too formalistic," says Mayne. "We have a number of people who would like to use us. Three to four significant clients wanted to use us, but couldn't... The tide will turn on that - it will not move back to open skelter - but there will be a loosening of the tight and constrained panel... simply because the market is fairly mobile."
Competition or collusion? Rather than spending time and money one-upping each other, firms on the same panel can collaborate. For example, Minters and Russell McVeagh worked on a joint initiative for dairy giant Fonterra. The two put together a newsletter on issues that their client would want to hear about. It's just one example firms using innovative methods to keep clients happy and loyal.
Marketing for growth
In a competitive market, any smart player will examine all avenues to get an edge over its competitors. Legal practitioners, being the conservative breed that they are, can be accused of being slow on the uptake when it comes to exploiting marketing strategies.
Bucking this trend, New Zealand firms have become adept at marketing practices. Firms have embraced marketing as an essential component in their strategies for growth. All the top-tier firms have well-staffed marketing departments. Russell McVeagh has six staff in its marketing department. Bell Gully has a team of eight.
Simpson Grierson has a marketing director, Glenda Macdonald, three business development managers, and other staff in charge of sponsorship and entertainment, events and database information. This team of eight has produced some of the slickest advertising the marketplace has seen so far. The firm also outsources some of its marketing functions.
Simpson Grierson's advertising campaign is spread across different media - billboards, major newspapers and business magazines. The firm even has its own magazine, called Source, a glossy publication in the same style as in-flight magazines, which highlights the deals in which its lawyers have assisted. Stubbs explains that before the campaign, Simpson Grierson was "a hidden light under a bushel", and that the firm needed to get across the message to clients that it was doing good work. Source stands out because, rather than the firm overtly tooting its own horn, the articles on the deals celebrate the clients' success. That is not to overlook the publication's attention to detail - the photography and the paper look and feel luscious.
"With Source magazine, we don't spend any more producing that than what we do producing our annual report," Fisher points out. "Our annual report was interesting but boring compared to Source magazine."
The firm's campaign steps away decisively from the staid image of the legal profession. "Our ads are tongue in cheek," says Fisher. "One of the ads that I feature in explained our sponsorship of guide dogs. Rather than sending boring old Christmas cards, we sponsored guide dogs. It features me looking like a farmer." The two labrador pups in the photo
have been named Simpson and Grierson.
Still, the trend of breakaway boutiques is hard to ignore, although larger firms might feel uncomfortable talking about it. The boutiques happily contribute news on this phenomenon. "It's becoming more popular," says Horner. "You have Lee Salmon and Long - they broke away from Russell McVeagh and KPMG. They're in commercial litigation. Harmon Horton & Lusk is a corporate securities firm that broke away from Russell McVeagh. Mayne Wetherill [whose lawyers were formerly with Russell McVeagh] is in banking and finance. If the rumours are true, there are six partners breaking away from Minter Ellison."
Why are breakaways happening?
"There are a number of reasons," says David Quigg. "The competition in the top-tier. The shrinking of the big firms - perhaps they got too big - they are finding the right balance for them. Also, it's a lifestyle choice - gaining more control, being my own master."
Australian lawyers would empathise with the sentiments of New Zealand lawyers. Mahlab's 2004 survey picked up on the trend of senior partners giving up the perks of big firms and heading for mid-tier firms that are perceived as having more desirable cultures. Katherine Sampson, Mahlab's managing director in the state of Victoria in Australia, told ALB in an interview conducted in August this year that lawyers are voting with their feet against the culture in their firms. "As the mega firms have got even bigger, the partners that have been there for 20 years think, 'I'm doing well, I'm earning well, but this is not how I want to practice law, in a cutthroat fashion.'"
Quigg echoes these thoughts when asked about the differences between practising in a big firm versus a boutique. "You get control back - in your practice, backslash, life. In a big firm, you're part of a machine. There's good and bad in that. The good side is if you fall ill, the machine goes on, it looks after you. The bad side is you lose your identity. In a boutique firm, you're in a situation where firms were 30 years ago. You achieve success through your own efforts, not because of a brand. You have to go out and get your hands dirty. It's more fun," he says.
How significant is this trend of breakaway boutiques to the market?
"We have brought over to us every client that we wanted to have, bar one - a bank that has a very formalistic panel," claims Laurie Mayne.
Meanwhile, over at his former employer Russell McVeagh, corporate partner Pip Greenwood maintains that her firm has not lost clients as a result of the departure of the banking and finance staff which became Mayne Wetherell. "It's had no impact on the revenue from this area of the firm. We haven't lost a single client. We also haven't reduced our capability," she says emphatically. The firm recently made up three finance partners. There are also five other partners in the finance department. "It's still a big team," says Greenwood.
Russell Hay has witnessed partners leave Minter Ellison Rudd Watts to form their own firms. "The boutique firms will always be there and will be forming - they have specialised skills," says Hay. "But the big firms will still do 80% to 90% of the corporate work."
The strategy of New Zealand's biggest firm - trying to beat the boutiques at their own game of specialisation - is a sign that, small though the boutiques may be, they are serious competition. As already mentioned, the largest firm in the country, Bell Gully, appears to want to be seen as specialists. "Our answer to [the trend of boutiques] is that we have split our firm into departments," says Cockram.
It will be interesting to see how the tension between the boutiques and the firms plays out.
Will the trend continue? "It has been happening over the past two to three years," answers Mayne. "I think it will continue. A lot of the people would like to do it but whether they have the guts to do it is another thing. Do they have the balls to do it? I don't know how many more will do it."
The breakaway trend is yet to reach its peak, predicts Kimpton. His forecast is: "I think that they're going to struggle to keep clients. Some of these clients are full service clients." He discusses the scenario where a client seeks advice on risk in relation to a commercial transaction. In a big firm, the commercial partner would normally bring in the litigation department to address the risk issue. "You need a litigator for that, but if you're a boutique [commercial firm], you can't just go to litigation."
That's the business side of things. The other major repercussion of the departure of senior partners is the harm to the reputation of the bigger firms as employers.
Kensington Swan has not seen its own people leave for other firms. Rather some of the firm's staff have gone in-house. Also, the firm has picked up people from Chapman Tripp and Russell McVeagh. Kimpton observes though, that, increasingly lawyers are moving from firm to firm, that "you're seeing loyalty going... more among the 40-50-year-olds, not the younger generation."
Kimpton reasons that perhaps the senior partners move from the big firms because, "They've been bogged down by the pressure of having to perform. They know what people are earning overseas. There comes a time - about 40 to 45 years old - when you've had enough of it."
Noakes adds, "When you have a large equity partnership, the top earners are not satisfied. They feel that they should be earning more and that they are having to carry the weight of average partners."
Mayne sees his move from Russell McVeagh as a challenge. "I'm now 45 years old - I didn't want to be at Russell McVeagh, I wanted to do my own thing, I wanted a challenge. I had the opportunity to do that out of the constraints of a big firm," he says.
Another concern for the big firms is the rumours about how the cost-cutting at firms affects fringe benefits. The firms interviewed here are adamant that this is not the case. "If you start trimming the benefits, that will disenfranchise the staff," says Noakes. "We see that as a bit shortsighted. We expect our solicitors to work damn hard, and they should be rewarded for it."
For associates who dream of making partner, the widespread view that the road to partnership is becoming lengthier is a worry. In addition to that, "There is talk about town that there is a perception that the legal industry is holding equity quite tight - that they're not increasing their equity," says Kimpton. "Whether firms are doing this to reach a short-term goal... but in the medium-term, you might have lost your successors."
At Bell Gully, Cockram makes no apologies for the 10-year wait to reach partnership level. "We are very choosy about who we bring through," he says. As for holding equity tight, he says, "We are an equity firm only. Either you're an equity firm or you're not."
Apart from the internal challenges in firms, another recruitment issue that firms deal with is losing talent - and its investment in the expensive training of its lawyers - to overseas firms. That can include Australia, Cockram points out, as many lawyers stop there on their way back from UK.
Finally, a relevant issue for the younger generation is whether a small firm can provide the right environment and training for succession planning. "I would encourage graduates to go to the top firms," says Noakes.
Give the boutiques some time to prove themselves, however. Mayne believes that he can offer younger people opportunities that he could not in a big firm - and they are interested. We've had a lot of approaches to join us, both at partner and associate level - young people are looking at this as opposed to the big firms," he says.