ARE US LAW FIRMS ADOPTING THE RIGHT STRATEGY IN EUROPE?

By Colin Fergus
International Financial Law Review, November 1990

US firms have the most to gain from the global market, argues Colin Fergus of Fergus Incorporated, legal search consultants, New York. But the firms have different views on how to tackle international expansion.

The New World, to paraphrase Keynes, is being offered a unique opportunity to stake out a claim in the wealth and potentialities of the Old. Enjoying a strong competitive advantage as the accepted leaders in providing the most sophisticated legal services and the most successful at converting legal skills into wealth in commercial practice, US law firms appear poised to follow their clients into the Single Market and beyond, into the countries of Eastern Europe. Successful firms will be able aggressively to court new clients attracted by the convenience and economies of using the same firm in Frankfurt, London, Tokyo and New York. The possibilities seem almost infinite.

European observers, however, may be in for something of a surprise when it comes to the transatlantic plans of US law firms. It seems safe to say that every US firm which sees itself as a major national firm, whatever its city of origin and almost irrespective of its existing client base, is considering seriously either expanding its presence in Europe or acquiring a presence if it does not already have one.

This is where agreement among US lawyers ends. The manifestation of each firm's presence varies considerably, and the form this should take is a subject of hot debate in many firms. The mood of most firms is to avoid foreign entanglements and to shy away from mergers or associations with European counterparts.

The IFL Rev March issue p13 (Invasion of the partner snatchers) tracked 16 cross-border associations made public in 1989 as against only two the year before. Those of O'Melveny & Myers and Macfarlanes, Sidley & Austin and Ashurst Morris Crisp, and Weil Gotshal & Manges and Nabarro Nathanson attract particular attention. From what most other major US firms have to say, however, these appear to be the exceptions. Rather than moving forward to follow their example, other US firms are proceeding with deliberate caution.

There are a number of reasons for this. European practice offers a moving target right now. US lawyers say this again and again. Professor Goebels of Fordham University School of Law, a longtime observer of international legal practice, describes it as an area of considerable agitation and revolution. We never know where we will end up'. Of course, they are not ignoring Europe. US law firms continue to grow in response to the needs of their clients, and it is probably true to say that every firm with an existing presence in Europe has experienced growth there. The degree and pace of many, however, continues to focus on the steady, but not dramatic addition of resources in existing offices.

Moreover, US firms long established in Europe tend to have equally long established relationships with European firms, and to find this an entirely satisfactory means of continuing to do business there. Davis Polk & Wardwell, for example, while increasing the size of its branches in London and Paris, has not seriously considered any deeper association with a foreign firm. Instead, the firm feels it has a solid footing in Europe through informal associations created with firms there through its 30 year old visiting lawyer programme. This programme has allowed over 200 foreign lawyers to work at Davis Polk's New York office for a year before returning as part of a network of friends and former colleagues. Conversely, a number of the most prominent firms in England, at least, each do business with several US firms. In view of the sensitivities attendant on such long established relationships, and the successful working of well established referral arrangements, there are clearly pressures on both sides not to rock the boat, much less abandon ship completely.

Taking the advantage
Not every US firm, of course, is in this category. There are many major US firms whose clients intend expanding in or into Europe, who do not have or do not believe they have the resources in place to service the clients' needs. If US firms choose to respond to those needs, and if they anticipate others, they will feel compelled to move more dramatically than firms which have longer established operations in Europe. There are other considerations. Many US firms believe that in a world of global business, law firms which can function globally will have a strong advantage in servicing first-tier clients, and can position themselves to take clients away from those firms whose reach is more limited. Clients of a firm without any presence in Europe, or whose presence lacks depth, may be hesitant to place their trust in lawyers to whom the US firm might refer them, but who have no apparent relationship with that US firm. They may very well see this limitation as indicating that the firm is not really as strong a player as they may have believed. Expansion in or into Europe may also be in response to the demands cultural differences lead clients to make of their lawyers. Japanese clients, it is often said, may feel that being referred to another firm which has no obvious relationship with their US counsel is a polite way of telling them they are no longer wanted. Moreover, US firms have noticed in Tokyo and in Europe that their clients in some cases prefer to use UK firms, but they recognise the US firms' pre-eminence in certain areas. This recognition gives US firms an initial advantage which they can reinforce very effectively by associating closely with an UK firm.

Graham & James is a firm with a strong Japanese client base, but which had closed its London office and saw a need to return to service these among other clients. Graham & James partner Michael Cavanaugh said of this, 'In 1989, the thinking was that you should not tie up with one firm ... that it will scare off the others. Then thinking changed'. Their solution was to establish a more formal association with Taylor Joynson Garrett, a City firm with which Graham & James had long had a less formal relationship. O'Melveny & Myers' alliance with Macfarlanes has given the California firm an instant network in continental Europe, which the two firms were quick to exploit in establishing a joint venture in Brussels with Paris firm Simeon & Associes. A more formal association also offers many possibilities for each party to be able to offer its services to new clients; there seems no reason to suppose that such a transatlantic approach would be any less successful than others have been within the US. And an affiliation, while risky in some respects, can require less of a capital and emotional investment than going it alone in opening a branch office. It offers each party an opportunity to acquire expertise from the other, and exposes lawyers from each to the legal framework and culture of the other. It also, of course, overcomes some of the legal and institutional hurdles different jurisdictions place in the path of those attempting to penetrate them. And it allows the firms to position themselves for a closer relationship should laws and circumstances make it possible and advisable.

The numbers alone do not tell the whole story. One of the largest US firms and very much a latecomer to the scene as far as overseas offices are concerned, Latham & Watkins, considered and then rejected the solution of their Los Angeles counterpart, O'Melveny & Myers. Latham chose instead to set up its own operation from the outset, and rely on the philosophy, skills and clients which have helped them achieve remarkable success in the branch offices they established in the US — in New York, Chicago and Washington. It is to be expected that Latham will be no stranger to the well of locally available talent. There is an accelerated movement to hire not only US attorneys locally (and for the long term, rather than sending lawyers out on 'short service commissions') on the part of certain US firms, but also to hire dual qualified lawyers and above all local lawyers. Those firms known for their international practice such as Coudert Brothers and Whitman & Ransom subscribe readily to this philosophy. James Sitrick, the managing partner of Coudert Brothers, indicates his firm has concluded 'that having a mix of US attorneys and local attorneys is the best way to go'. The IFL Rev reported recently on Coudert Brothers' planned growth in London which has as its cornerstone the hiring of UK rather than US attorneys, particularly UK rainmakers. Hiring laterally has proved to be a key factor in the expansion of US law firms within the US in the 1980s, not least in opening or expanding branch offices and in acquiring quickly expertise in new practice areas. The experience US firms have gained in this is likely to prove invaluable in Europe.

It is noteworthy that Skadden Arps Slate Meagher & Flom is another firm which has preferred whenever possible to avoid affiliations, and yet is expanding in Europe more aggressively than many other of the largest US firms and which from the first chose to rely on a mix of local (albeit US lawyers) and lawyers from its home offices. This many consider the ideal solution to the problems of controlling the quality of the work product and maximizing the potential for new business development in offices far from home. Most recently, Skadden intends extending its presence in Germany with the assistance of Utz Toepke, a partner hired laterally over the summer. Toepke emphasizes the concern Skadden feels that anything other than having one's own lawyers in place may lead to frustrations and anxiety on the part of the client. In opening a new office, whether in London, Brussels, or Frankfurt by sending in a mix of a firm's own attorneys and locally hired US and local lawyers, much more control remains with the US firm. The US firm will have not only local counsel, but a team in place to advise its clients and offer maximum reassurance that the same standards of excellence to which the clients are accustomed in the US will be available there. The US firm will also be able to introduce its own marketing methods to attract clients of other US firms not in that jurisdiction or not as well represented in that jurisdiction. The US firm may also be able to identify and hire lawyers in Europe who have access to clients not now available to the US firm, and not only service those clients in Europe, but open the door to servicing them in the US. One major US firm  least has had this approach recommended to it by an outside management consultant, and it seems likely that several firms regard Europe in the way the East India Company regarded the Empire of the Moghuls.

There seems an inevitability in a world in which business is held to be becoming global, and in which financial markets clearly already are, that law firms will follow the lead set by their clients. US law firms enjoy many competitive advantages: they have a great deal to offer in Europe, even if many will proceed with caution. It is still premature to imagine a Europe in which with few exceptions the principal providers of the most sophisticated commercial legal advice will be the European branches of US law firms. By the first years of the next century, however, this may be an established fact.



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