HA IPBA 2013 Seoul Restructuring of the Global Legal Market and the Role of Asia Pacific Alan Hodgart Author Dateaprl 18 th, April, 2013

HAIPBA 2013 SeoulIPBA 2013 Seoul

Restructuring of the Global Legal Market and the Role of Asia Pacific

Alan Hodgart

Author

Dateaprl 18th, April, 2013

© Copyright 2013 Hodgart Associates All rights reserved.

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ThThe global legal market is restructuring – with e global legal market is restructuring – with profound implications for all firms (1/2)profound implications for all firms (1/2)

There is a significant change in the buying decisions and in their selection of law firms by clients

Buyers are becoming more discerning about the true strengths of law firms

Also more discerning about the value of legal services overall to their business

The volume of legal work that is high value to the business/ or which is perceived as complex has reduced significantly

Tendency to reduce the size of panels – tighter on rates and expect ‘no charge support’

Select firms on the basis of one or two practice area and/or industry strengths – actually work with a small number of firms regularly

More sensitive about price – want greater certainty in the total cost of work up front

Demanding that lawyers demonstrate savings through efficiencies

Skeptical of lawyers claiming to be experts but cannot discuss ‘ball park’ prices

Corporate legal budgets are being slashed but the amount of legal work is increasing – law firms need to ‘share the pain’

The Pfizer approach to pricing being pursued by others


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The global legal market is restructuring – with The global legal market is restructuring – with profound implications for all firms (2/2)profound implications for all firms (2/2)

There is a significant change in the buying decisions and in their selection of law firms by clients (cont’d)

Clients see a growing gap between what law firms offer and what clients want – over and above the legal service

See few lawyers/firms that really get a deep understanding of the client industry/ business and the pressures on GCs

See few firms that have come to grips with ‘commerciality’

A long term dissatisfaction with levels of client service and service delivery in the legal profession

Lawyers do the work how they want rather than how the client wants it

A huge opportunity exists for firms that can adopt a true client focus and move away from a ‘billable hour’/technical focus


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This critical transformation is well underway This critical transformation is well underway – many firms are failing to grasp it (1/2)– many firms are failing to grasp it (1/2)

Law firms generally understand that the market is changing – but see it more as an extrapolation of the past rather than a radical reshaping of the competitive basis of law firms

Changes in client demand, expectations and buying patterns is one major market pressure

This is supported by the actions of a small number firms who are increasingly winning market share due to a more strategic and practical approach to their business

Three major trends that are restructuring the market

Segmentation

Consolidation, concentration and scale

Globalization

An underlying issue is the ability of a firm to develop a real competitive strategy rather than a plan that is simply an extrapolation from the past

The vast majority of firms fall into the second category

Poor understanding of major trends

Poor analysis of competitors

Failure to make choices


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Segmentation is becoming evident in law firm Segmentation is becoming evident in law firm market positioning (1/2)market positioning (1/2)

A number of market segments are emerging in the legal market

Two major segments at the international level

The Global Elite – focused on major transactions and Capital Markets work with the Global 500 companies and equivalent institutions

Increasingly focused primarily on Capital Markets centres

International Business Law firms (IBLs) - focused on providing a defined range of business law advice to the Global 1000 companies and equivalent institutions

These two groups are beginning to dominate the higher value end of the legal market and are mainly US and UK based firms

The IBLs have much more of a domestic focus in the countries in which they locate – use this strength to source work outside the country from multinational clients in the country

Focused on building strong relationships with multinationals at head office and then leveraging this globally

Longer term these two groups – now about 30 firms – will blur into a leading group of ten or so major global players – with a second tier behind this

Local firms need to be very strategic, well managed and working as a cohesive organization to compete


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Segmentation is becoming evident in law firm Segmentation is becoming evident in law firm market positioning (2/2)market positioning (2/2)

Within advanced markets there is a major shift in market positioning underway

A number of former leading domestic firms are being pushed down market

Becoming more a second tier player in a lower value segment – forced to restructure their business model in order to have a competitive level of profit

Those remaining in a leading position have mostly developed some form of international capability in order to counter the threat from the IBLs (mainly)

Some mid market firms are pursuing industry specialization as well as a focus on a defined range of practices and clients

Others are chasing a specialist position while others are drifting into a low value segment without realising it

A significant number of law firm failures have occurred in the US and UK over recent years and more will happen

There will also be more mergers – domestically and across border

There will be fewer leading firms in business law by 2017 in the advanced markets


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Building a competitive multi-office business Building a competitive multi-office business in different jurisdictions is a challengein different jurisdictions is a challenge

There are some key requirements for a firm looking at building a global (or regional) law firm

Choosing the market position in which to compete is the starting point – end ensuring the firm is strong in this position in its ‘home’ office

And has a client base with global needs

Develop a consistent strategic position in each market

Establish a global client management program with a global client information system

One client partner in charge of the relationship – at the client home office

Ensure people know each other between offices

Ensure there is one partner in charge of an engagement that crosses offices –and he/she can ‘make it happen’

Provide the client with one invoice no matter how fees and costs are shared between offices

Market entry strategy can be via merger or greenfield site

Merger - Due diligence on strategy and culture and plan for 3 years out

Greenfield site – start with practices in which the firm is ‘famous’ at home – and grow out from that


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Differing regional growth rates will result in Differing regional growth rates will result in a geographic shift in market importancea geographic shift in market importance

The advanced markets remain the largest legal markets but decline relatively as a percentage of the total market over the next five years or so

North America and Western Europe (including UK) have 69% of the market in 2012 – this falls to 61% by 2017 and will continue falling for some years after that

Asia Pacific will be the second largest regional market –increasing from $109 bill in 2012 to $215 bill in 2017

Market share increasing from 13% to 19%

Western Europe (including UK) rises from $174 bill to $197 bill – with market share falling from 21% to 17% - becomes third largest region

Latin America remains the fourth largest market although it increases from $105 bill to $167bill and increases market share from 13% to 15%

Hence the Asian Pacific and Latin America markets combined total will be $382 bill and a market share of 34%

The importance of this is the demand that will be created in these markets as the economies develop – much of which will flow out of the regions

A strong presence in these markets will be an essential requirement for firms seeking a strong international position – putting pressure on local firms


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Asia Pacific will become a major legal Asia Pacific will become a major legal market - although there is still much to domarket - although there is still much to do

Low economic growth is in part due to slow growth in the business sector and this impacts the legal sector

Economic growth in Asia Pacific is forecast to exceed that in the advanced markets for the next 7 to 8 years – at 6 to 7% compared to 3%

The Indian market will open creating another wave of international expansion

The Republic of China will continue to grow at a fast rate

And Chinese law could become mandatory for Chinese transactions

Indonesia, Singapore and South Korea will become major markets in Asia Pacific by 2020

Asia Pacific’s rise in importance will alter both the shape and structure of the global legal market

All leading global firms will require a strong Asian capability to maintain position

Will be a major exporter of legal work around the globe

Local firms will need to compete with the ‘giants’ or join them if they want to maintain a leading position

We expect to see two (or more) Asian based law firms emerge within the major global players by 2020


HADifferences in business environments cause Differences in business environments cause disparity between legal markets in Asia disparity between legal markets in Asia Pacific (1/2)Pacific (1/2)

• Asia Pacific has a wide divergence in its markets– Different levels of development – (e.g. Australia vs.Japan vs. China) resulting in different growth levels

– Hence differences in terms of growth potential, pricing, business models and buying processes

– But some very large markets potentially – PRC, India and Indonesia for example –all with high growth prospects

– South Korea, Vietnam and Japan also are – or becoming – important growth markets

– The market is more resistant to the pricing levels of mature markets

– Hong Kong already in the top 3 Global financial centres – will attract growth

– Singapore is making a strong play as the financial centre of South East Asia and also as a centre for International Arbitration

– India continues to block foreign businesses competing locally including law firms

• We forecast a high growth in demand for legal services given economic growth and increased income levels – and a significant increase in the number of lawyers

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HADifferences in business environments cause Differences in business environments cause disparity between legal markets in Asia disparity between legal markets in Asia Pacific (2/2)Pacific (2/2)

• The M&A market will be strongest in Asia Pacific – in part because of strong demand in China– Litigation will be below the Global average as the Asian markets are much less litigious than the North American and even European

– The Hong Kong and Shanghai markets will ensure that Banking & Finance and Capital markets work continues strongly

– Commercial Real Estate will also show a strong demand over the period

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New business models are emerging among law New business models are emerging among law firms – although more outside the higher value firms – although more outside the higher value focused firms (1/2)focused firms (1/2)

Client demand and actions by forward looking firms are starting to drive changes in the traditional law firm business model

The downgrading of the value of many legal services has led to a resistance to their price – so law firms have been forced to increase the discounts on their standard hourly rates thereby squeezing margins

Adoption of cost cutting techniques is now widespread – although many will have only a short term impact

Forward looking firms are seeking long term solutions and this requires significant investments

Standardizing work processes even in higher value work so that the work can be done by para legals and more junior fee earners

Implementing technology solutions in the work processes –as a part of the standardization process but going further in enabling fee earners to access a range of templates for a whole engagement

Developing technology solutions to engagement management processes thereby reducing the cost for each engagement

Using technology in delivering the legal advice to clients with interactive processes embedded in the systems


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New business models are emerging among law New business models are emerging among law firms – although more outside the higher value firms – although more outside the higher value focused firms (2/2)focused firms (2/2)

Client demand and actions by forward looking firms are starting to drive changes in the traditional law firm business model (cont’d)

The changes to work processes are across the board even in high value work where there are tasks that are routine and low value

Partners are able to delegate significant amounts of the work to junior lawyers or ‘technology’ – use senior associates for much of the supervision

Partners focus more on managing people, the engagements, new business development, ensuring service delivery meets client expectations and client relationship management

Performance targets are around the revenue and profit levels being managed and the other activities undertaken– not personal billable hours

Partners to only engage in legal work that really requires the skill and experience of a senior lawyer

Lawyers who wish to continue ‘doing the work’ will not be made up as partners with a few extreme exceptions

A major shift that is coming is in a new approach to client management – firms need to engage significantly more with the commercial and business needs of their clients


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There are seven critical areas requiring There are seven critical areas requiring attention for long term success (1/2)attention for long term success (1/2)

Sustaining competitiveness in the future will require high quality leadership and management

There are some potentially difficult issues to address – and management will need to be resolute

The starting point is the clarity of strategy and its acceptance

Seeking to compete at the upper end of a domestic/regional market leads to some clear choices

Requires specific core client types and core practices

Choose what work should not be done and clients that are not strategic

Dispose of non strategic practices and clients – the’ nice to haves’ - focus attention on the core and core support

Cannot compete effectively across a wide range of clients and practices – adverse impact on profitability in seeking to do so

Be clear about where other firms are more competitive and only seek to compete here selectively


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There are seven critical areas requiring There are seven critical areas requiring attention for long term success (2/2)attention for long term success (2/2)

Sustaining competitiveness in the future will require high quality leadership and management

There are some potentially difficult issues to address – and management will need to be resolute

The other issues flow from this:

2. Achieve high levels of performance – not just financial but also across a range of activities

Implement an effective governance and management structure

3. Implement processes to ensure work is done highly efficiently

4. Develop very effective, structured and disciplined business development and client relationship programs

5. Develop an appropriate economic structure for each practice group

6. Articulate and manage a set of acceptable behavioural standards

7. Ensure there is a strong international capability available to clients

HA 23 Carnaby St., London, W1F 7DD, U.K.23 Carnaby St., London, W1F 7DD, U.K.Telephone:+44 (0) 20 7292 3570Telephone:+44 (0) 20 7292 3570Mobile/Cell: +44 (0) 7961 847 150Mobile/Cell: +44 (0) 7961 847 150

Reproduction of all or individual slides of the presentation are permitted, provided proper attribution to Hodgart Associates is made.Reproduction of individual charts or displays is not permitted.

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HA IPBA 2013 Seoul Restructuring of the Global Legal Market and the Role of Asia Pacific Alan Hodgart Author Dateaprl 18 th, April, 2013