Australian gold: Opportunities for international law firms

In our previous article on international expansion for law firms, we looked at the USA as a destination for growth. This month, we are exploring Australia. Its position in the Indian and Pacific oceans, historic links with the UK and proximity to Asia gives it the unique position of straddling both Western and Asian markets.

Legal market

The Australian legal market, which is based on the UK legal framework, is worth approximately US$21bn and employs more than 100,000 people. Before the 2007 recession, the market was dominated by
six big law firms.

More recently, there has been interest in M&A activity with Australian firms from law firms across the globe and there has been a flurry of new mergers, strategic partners and boutique firms. Many Australian firms have been open to aligning with overseas firms, which enable them to advise on large-scale international transactions and to benefit from global branding and referrals.

The globalisation of the Australian legal market over the past few years has been against a backdrop of a mature market that was facing familiar pressures from the global economic slowdown, pricing pressure from clients and a reduced volume of transactions. Several firms responded by outsourcing basic processing to offshore providers in an effort to deliver services more efficiently, in addition to introducing pay freezes and cancelling bonuses.

In the past 12 months, however, the market for professional services has started to pick up again, presenting a number of opportunities for non-Australian firms.

Entering the market

For firms looking to establish a presence in Australia, there are two main options: a strategic alliance with a local firm or a full-scale merger.

Boutique legal practices which have been spun out of teams in larger firms are attractive targets for foreign firms looking to establish a footprint in the region. However, with a large number of non-Australian firms looking to enter the market, international practices will need to carefully consider what they can offer local teams.

How strong is your brand in the region, or in other regions that local practices are looking to access? What can your firm offer in terms of international referrals and connections? A clear business plan, identifying the areas of business alignment with Australian partners, commission rates and levels of investment in the market as a whole can help firms to develop a strong proposition when entering into talks with domestic firms. Some larger firms may also send partners and staff on secondment as a good way to establish or deepen relationships in the local market.

A merger with a domestic firm may be the preferred option for a more permanent presence in the region. However, this raises numerous operational challenges, from profit-sharing and incentives to ensuring integration with global quality standards and sectors. Common culture and values become increasingly important when entering into a merger over such a great distance, but branding and how you will approach marketing is also critical.

Every state and territory in Australia regulates legal services independently, but from mid-2015, the Legal Profession Uniform Law will change the way that the legal profession is regulated in Victoria and New South Wales. Together, they account for over 75 per cent of legal professional staff and include Australia's two largest cities, Sydney and Melbourne.

Setting up in any state will require careful consideration of the local regulatory environment. Where multiple offices are concerned, for example in Brisbane or Perth, in addition to those mentioned above, the complexities of working across different regulatory regimes nationally need to be thought through.

Another point to consider when deciding on how to enter the Australian legal market is the relatively high corporate and personal tax rates of 30 per cent and 45 per cent, respectively. However, these are likely to come under review by the government, eager to shore up the country's attractiveness as an exciting, growing and changing legal market.

Opportunities for growth

According to research by Credit Suisse Research Institute, Australia's average wealth per adult puts it second in the world after Switzerland in 2014.2 Its median wealth of US$225,000 is the highest globally, which has been consistently ranked number one for the past five years. Latest data published by The World Bank shows that Australia has the world's 12th largest economy, with a population of 23 million and a GDP of US$1.561 trillion (current US$) for 2013.

In 2013, Australia ranked 14th for gross national income per capita, based on purchasing power parity. Remarkably, the service sector of the economy - including professional services, financial services, tourism and education - accounted for about 69 per cent of GDP in 2013, according to the CIA World Factbook.

Historically, natural resources (particularly mining) have been an important sector for the country, driven by the increasing demand from China, India and other emerging market economies for energy and raw materials. More recently, difficult commodity prices and reduced investment in natural resources from emerging economies have led to attempts to reduce Australia's reliance on that sector.

Future growth sectors have been tipped as gas, tourism, education and wealth management, with other sectors such as financial services, technology and transport expected to follow suit in support of them.

In 2014, there was a substantial number of high value IPOs, leading to a positive general economic forecast for Australia. According to Thomson Reuters, IPOs in Australia raised US$14.67bn by mid-December, more than double 2013's US$6.2bn. Australia ranked fourth in the global IPO market, with 19 IPOs which raised a total of US$12.7 billion, according to Renaissance Capital.

The key sectors highlighted were aged care, financial services and technology. In November, the divestment of health insurer Medibank by the Australian government raised US$4.9bn in Asia's biggest public offering in two years. It was also Australia's biggest IPO since 1997, the world's third-largest IPO in 2014 and the world's fourth-largest insurance sector IPO. Another healthcare sector listing, Healthscope, also contributed significantly to a major IPO boost. Australia's second largest hospital operator, raised US$2.25bn in July 2014.

The signing of a major free trade agreement between Australia and China in November 2014 is also expected to drive investment from China and boost the Australian food & beverage and manufacturing sectors. As these sectors raise further funds to support their
growth, the benefits will spin out into
the M&A market.

The labour market

In terms of law firm staffing, there has been a growing trend towards leaner teams, longer hours and a more difficult route to partnership. For partners, there is continuing pressure to perform, as profit-sharing mechanisms continue to shift to more performance-based remuneration, which is now a feature at all levels.

Labour costs, whilst historically lower than in many other countries, sit against a backdrop of rising house prices. The growth of the legal sector in recent years has meant that lateral moves have become relatively commonplace as employees move around to get the best remuneration package, especially if they aren't being rewarded with a promotion or better work/life balance.

A temptation for some senior associates is the opportunity to work offshore in other markets where international firms are willing to export their expertise with sign-on bonuses and larger remuneration packages. Talent retention can therefore be an issue.

The partnership structure

The vast majority of law firms in Australia operate a partnership model, but Australia is also well known for having the only listed law firms in operation, the most high-profile being Slater & Gordon.

A key consideration is the lack of a limited liability partnership model. While this might make incorporation as a company more attractive, there is also a significant cultural shift involved, such as the desire to achieve partnership status, regulatory implications and a number of tax issues arising on incorporation.

Australia is an exciting, growing and changing legal market and, if done correctly, investment in the region will help most firms who aim to expand their offering in the
Asia Pacific region.

Next month, we'll be looking
at Singapore.

Andrew Radford works in BDO's professional services team
(www.bdo.co.uk)