The recent merger agreement between Norton Rose (NR) law firm and Deacons Australia signifies another attempt by NR to expand their international operations and catch up with their UK counterparts in terms of a significant Asia practice. This is not the first time NR has attempted to embed a strong Asia practice within the firm as the article in The Lawyer UK recently highlights. The piece details well the trials and tribulations that the firm has faced (and quoted yours truly which was very kind of them).
In Asia, the firm has offices in Hong Kong, Beijing, Shanghai, Bangkok, Jakarta, Singapore, and Tokyo. The office in Hong Kong is really the second time they have set up here after they had to leave for three years following a contractual clause in their original alliance agreement with JSM. This put them behind the curve slightly and being behind the curve in Asia is not the best idea when alliances are needed in most markets to practice local law. Whilst the firm has two offices on the mainland it is hard to say the role these offices play in cross border transactions given the fact that foreign firms cannot practice local law nor hire local lawyers. In terms of client acquisition and a foot print on the ground local offices in China are crucial but whether NR can acquire the work it wants to through those offices is questionable since marketing in China relies heavily on relationships, or 'guanxi'. Of course they can hire overseas trained Chinese lawyers who may have some level of familiarity with the mainland but that doesn't solve the problem of local law practice. Deacons Australia does not help in this regard since it is Deacons Hong Kong who own the Deacons offices in China and now that relationship is terminated there will be no further linkage between the sister firms. Most of the other Asian offices that Deacons Aus has are independently owned alliance offices. It also doesn't help when you lose key people such as NR in Singapore did recently when finance specialist Josh Clarke joined Watson, Farley and Williams in the same location.
Another reason NR is aggressively seeking Asian expansion is their interest in a US merger or alliance. According to Peter Martyr, CEO of NR, the link up with Deacons would make NR more attractive to US firms who are relatively thin in Asia. This line of thinking may be OK but who exactly are NR trying to make themselves more attractive to? It would make sense to have a clear strategy in place before engaging in a merger if the point of that merger is to make yourself more attractive. For example:
- Which US firms are interested in Asia and why?
- What are their key practice areas and strategy
- If they are not in Asia yet, why?
- Which firms have compatible cultures and goals
- What makes NR stand out compared to other potential partners, do they have a clear strategy in the market place?
- Which US firms are actually interested in NR and why?
There have been some major steps taken in climate change whereby NR claim they now have a leading practice in this area. Certainly, climate change is a growing market and can have a substantial impact on an organizations activities given the Kyoto protocol. Lawyers have varying roles including advising companies on risk management, assisting governments on developing programmes for monitoring and controlling emissions, and exploring the potential of litigation and other tools to promote or delay action. However, even the largest revenues in Europe last year for climate change practice (8m EUR by Greek firm KLC) are modest and whether climate change work will roll into other projects as NR expect is hard to say. Perhaps they are eyeing a US firm that wants to build an Asia presence of the back of a strong climate change practice. My feeling is that clients would be happy to use one firm for climate change and others for the spin off work if they already have strong pre-existing relationships. How many full service, truly global law firms, can the market bear? Only time will tell but as clients seek savings through LPO, and other processes to streamline costs, legal work is now being broken up into components in a manner that has never been accepted before.
In all fairness, NR has a fairly low profile in Asia when compared to other UK firms such as Herbert Smith and we rarely see them mentioned in media re major deals. In the Asian context, reputation, size, and international presence are key proxies of work quality and I don't think that NR has reached that level of strategy. A US firm merger may help in that regard but it's a bit like the chicken and egg, will a US firm want to merge with NR before its Asia presence has real legs and will NR be able to get the big deals until it has a strong US base? The Deacons Aus deal becomes even more confusing as the Asian offices it has in Taiwan, Thailand, and Malaysia are not part of the NR deal and as far as I can tell, remain independent affiliate offices. The Deacons office in Singapore is of little consequence since NR received one of the six licenses issued by the Singaporean government to foreign firms for the practice of local law. In essence, that just seems to leave Aus and Deacons Aus is not really one of the big players in the market. Having said that, Deacons Aus does get involved in some of the cross border deals between China and Aus, primarily because of the high profile work of Ian McCubbin although the big six (Allens, Blake Dawson, Clayton Utz, Freehills, Mallesons, Minter Ellison) still tend to dominate the biggest deals.
Another issue that comes to light in the emerging markets of Asia is a strong alliance strategy. Since the many emerging markets in Asia (China, Malaysia, Indonesia, Korea etc) are closed to foreign firms, at least in terms of local law practice, foreign firms need to engage key strategic alliances in order to provide clients local law advise. The problem is there are only a handful of top class law firms in each emerging market and most are engaged in well entrenched relationships already. Even in India, which has no clear schedule for market opening has seen some of the top firms there, like AZB, team up with foreign firms (they have an informal alliance with Clifford Chance). Slaughter and May have shown that it is not necessary to engage in exclusive alliances to be successful but I believe much of that has to do with their reputation, culture and brand image. It is hard to envision a firm like NR using a best friends network to create the same sort of presence that Slaughter and May have done. NR needs to be more aggressive in seeking out high quality alliance partners that have the connections to generate business in the bigger deals. This is not going to be easy now as the really top firms in emerging markets are already inundated with alliance offers. NR would have to have a clear selling point to be considered. I'm not sure they have one. Firms like NR suffer from an affliction that seems to affect many law firms, the need to be all things to all people. Unless you are one of magic circle or largest law firms in the world, I seriously doubt this as a viable strategy due to the resource constraints of implementation and the believability in the market place. Perception is everything.
How Strategy (should) Work in a Law Firm
Law firm branding works on three levels: individual, practice, and firm level – many of the big deals in Asia are driven by individual partners who have strong reputations and connections in the market. These people are recognized as thought leaders in what they do and highly competent. Brand reputation also functions at the practice level as some firms are well respected for their work in certain practice areas. Finally, branding works at the firm level where the entire firm is well thought of for both its technical quality of work and how it treats clients. I think NR may have achieved some degree of recognition in finance but in Asia it is lacking in firm and individual brand recognition. They need some aggressive moves in lateral hires but this cannot work independently of how the whole firm functions as a coherent and well integrated organism.
Strategic success is a function of four factors (according to research at the Centre for Professional Service Firm Management, Said Business School, Oxford University):
- Expertise – knowledge and experience
- Relationships – clients and other stakeholders
- Reputation – expertise, experience, and engagement
- Service – processes, services, and engagement
These four factors point to an underlying culture of knowledge management, firm learning, and innovation. Reports in the press and elsewhere have pointed to the often disparate way that NR offices work where resource decisions are less than optimal. For example, it wasn't until 2006 that NR embarked on a new KM strategy to upgrade their old IT system, which by their own admission, was barely being used by the lawyers in the firm. This is not something you want to hear from a firm that bases its whole competitive advantage on knowledge, as law firms do. In fact, marketing and knowledge management are so intertwined that consultancies such as Booz and Co have positions of marketing and knowledge officer. Knowledge is something that increases in value with use and application, it evolves and firms that can take the tacit knowledge help by individuals and imbed this into the structural capital of the firm have a significant advantage over competitors when it comes to effectiveness and innovation. These firms are able to utilize this knowledge across the firm so that it can be added on by other professionals and put to use in solving client problems. Although I cannot comment on the internal workings of NR, I can speculate that their grasp of strategic advantage is not what it should be.
Focus: to be differentiated and valued in the market place means that firms must decide what kind of work they want to be known for and direct resources at these areas. They may even have to reject work that does not fit in with their strategic objectives. This is even more crucial for mid sized firm like NR since finite resources require a strong will in terms of where they will be applied. For example, NR is considered a first tier firm in small and mid cap flotation's as well as asset finance and leasing, but is well down the list in emerging markets and other practices areas. Being recognized as a top firm for small and mid cap flotation's is not exactly a ticket towards the top end of the market. If NR wants to attract a US merger partner and that US firm wants to work on the big deals in Asia and other emerging markets, what value would it see in NR? NR must make a concerted effort and decision to direct resources to the areas where it really wants to create a footprint, whether for themselves or for a future US merger scenario. Strategy is all about choice and I'm afraid most law firms don't have the guts to make the tough strategic decisions when it comes to turning down work and being different.
International Success and human capital: one might assume that social capital (client relations etc) would be a good way to create an international strategy as law firms follow clients wherever they go. Recent research however suggests this not to be the case. The research shows that human capital is a much better predictor of internationalization strategy success. The many problems that NR has had in Europe when creating alliances highlights the very real problem of entering markets without a clear strategy in place which includes the right people working in a culture that is conducive to knowledge sharing and meritocracy. One must also recognise that national culture has a huge impact on firm performance, for example, lock step remuneration is still preferred by some law firms over merit based systems in Asia due to the collectivist ideologies of Asian societies.
You have to give NR credit as they struggle to overcome some of their past problems but I am not sure that any major US law firm would find them an attractive target given their current status and perceived lack of strategic direction. Let's hope they prove me wrong!