The final frontier: Opportunities for legal services in Africa

Law firms in European and North American markets are looking eagerly to emerging markets to create new revenue streams. Sub-Saharan Africa seems particularly attractive: the region is clearly going through exciting, positive change and there can hardly be an international law firm that is not currently working on its Africa strategy.

A dozen or more major studies have been published in the past 12 months by entities ranging from the World Bank to Big 4 accounting firms to global consulting firms outlining the region’s considerable potential. Africa in the 21st century is rapidly demolishing the stereotypes that defined it during the 20th century.

Why Africa?

Seven of the ten fastest-growing economies in the world are located in Africa. According to Ernst & Young’s 2012 attractiveness survey, the GDP of the continent is set to grow by about US$690bn (£430m) by 2016.

The sub-Saharan region is blessed with vast mineral resources. With oil prices holding at >$100 a barrel, promising new oilfields in East Africa will add to those well-established resources from Angola to the Gulf of Guinea.

For now, the primary opportunities may be in extractive industries, infrastructure development and energy. As developments in these sectors give rise to greater diversification, the range of legal services that clients require will expand, creating greater opportunities for law firms.

Different parts of Africa have very different characteristics, however, and so have different needs when it comes to legal services. What really are the opportunities for legal services in sub-Saharan Africa and which law firms are best placed to profitably exploit them?

When thinking about how they ?should best approach growing their businesses in Africa, law firms need to balance their view of the potential opportunities over the next three to five to ten years with the likely scale of business in the short term. A significant investment in sub-Saharan Africa still represents more of a bet on the future than the seizing of a vast, immediate opportunity.

One needs to remember that the 2011/12 GDP of sub-Saharan Africa collectively still falls only somewhere between that of Mexico and Australia. ?If the 5.6 per cent CAGR that the continent achieved over the past ?decade is maintained, then by 2017 ?sub-Saharan African will have a combined GDP that is roughly the same as ?Canada’s was in 2011 (see Figure 1).

Segmenting Africa

Viewing the continent of Africa or even sub-Saharan Africa as a single market is also about as sensible as viewing Southeast Asia, Latin America or indeed Europe as single markets.

There are several ways of segmenting Africa into areas with similar characteristics. Three make most sense for law firms thinking about their strategy.

1. Geographically

The Sahara desert is a very powerful divider. The nations bordering the Mediterranean Sea have more in common with Europe and the Middle East than the countries of sub-Saharan Africa. Within sub-Saharan Africa, one may distinguish loosely between west/central Africa, East Africa and southern Africa.

2. Economically

McKinsey & Co distinguish between four categories of African economy on the basis of the percentage of their economy contributed by manufacturing and services, and exports per capita. The categories are:

(i) oil exporters (e.g. Libya, Angola, Nigeria);

(ii) pre-transition (e.g. Sierra Leone, DRC, Mali, Ethiopia);

(iii) diversified (e.g. Mauritius, South Africa, Morocco, Egypt); and

(iv) transitional (e.g. Zambia, Kenya, Senegal, Ghana).

3. Linguistically/jurisprudentially

Colonial powers left their indelible stamp on Africa in many ways, including in the languages used. While Arabic is prevalent in North Africa, south of the Sahara one can divide the continent roughly into countries that are primarily French-speaking, English-speaking and Portuguese-speaking.

The historical colonial powers also had a powerful impact on jurisprudence. The boundaries between English law and civil code are delineated largely by the borders of the former empires.

Every country has different requirements, although some convergence is taking place. The five nations of the East Africa community (Burundi, Kenya, Rwanda, Tanzania and Uganda), for instance, are working hard to harmonise the practice of law across their borders.

Opening a new office in Africa

There are three distinct perspectives to consider when thinking about the practicalities of opening an office in a particular market in Africa.

1. Restrictions on the practice of law

South Africa, for instance, has one of the tightest restrictions on the practice of local law, exercised through control over who may register to practice as a lawyer ?(one must have studied law at a South African law school in order to be ?allowed to do so).

However, it is relatively easy to establish a ‘legal consultancy’ to advise clients on matters of non-South-African law – several international law firms have followed this route.

2. Restrictions on immigration

Most African countries have tight controls on immigration and work permits. This is another highly effective barrier to entry that needs to be considered, irrespective of the ease with which foreign lawyers might be able to practice law locally.

3. Ease of doing business

The World Bank has a well-established methodology for measuring the ‘ease of doing business’ and has been applying this for many years to countries across ?the globe (see Figure 2).

The current version evaluates 183 countries, of which most African nations fall into the bottom quartile. Twelve African nations (including Nigeria and Egypt) are roughly at the same level as the BRICs, though, and eight are rated in the top 50 per cent, with four (including South Africa) falling into the top quartile worldwide.

Legal services market

There are clearly vast differences between the legal services markets in South Africa and the rest of the continent.

South Africa has a well-established legal profession, with firms in its top tier able to match their peers from London or New York, in many respects, in African markets. Given the depressed value of the South African currency, the rates that they can charge are also highly competitive compared to European or North American rates.

Over the past two years, Norton Rose, Eversheds and Baker & McKenzie have entered the South African market, the latter absorbing Dewey LeBoeuf’s office after that firm’s collapse. White & Case have had an office in Johannesburg since 1995 and Canadian mining boutique Fasken Martineau has also been present in the market for many years. In 2012, Fasken announced that it was merging with mid-tier firm Bell Dewar to create what will likely be quite a strong mining and project finance boutique firm.

DLA Piper has long been prominent in Africa and active in South Africa through its member firm Cliffe Dekker Hofmeyr. SNR Denton’s well-known African network includes two South African firms, Glyn Marais ?and energy law boutique KapdiTwala.

Poor billing rates have prevented lockstep-compensated global law firms from establishing offices in South Africa, but Linklaters recently confirmed market rumours that it was in discussions with Webber Wentzel about forming an ?alliance which, through Webbers’ membership of the Africa Legal Network, would give it better access to markets across the continent.

This intensifying competitiveness ?in the market is likely to have a seminal impact on legal services in Africa.

South African law firms wasted little time following their country’s return to international respectability in 1994 to start developing relationships in the rest of Africa. Werksmans, for instance, developed the first pan-African network by a South African firm (called Lex Africa) in 1993. IP boutique Adams & Adams, which has four offices in South Africa, opened offices in Angola, Burundi, Morocco and Tanzania.

Since the global financial crisis, South African law firms have intensified their pan-African focus. In the past year, Bowman Gilfillan has established offices in Dar es Salaam, Kampala and Nairobi, together with an alliance in Nigeria. Edward Nathan Sonnenbergs merged with small firms in Rwanda and Burundi in August 2012 to form what they call “the world’s first, fully integrated, pan-African law firm”.

The South African law firms appear to have been focused almost exclusively on serving South African clients, though. Evidence for this may be seen in the league tables for M&A transactions in sub-Saharan Africa. When one or more principals (target, buyer or seller) are South African, a wide range of South African law firms feature in the league tables.

If deals with South African principals are excluded, an entirely different picture emerges. No South African law firms appear at all then in the law firm league tables for African M&A deals >US$100m without a South African principal between October 2004 and October 2007, and only one firm (Werksmans) appears amongst the top 50 for similar deals over the past three years (October 2009 to October 2012).

Of course, one needs to treat such data with care because legal advisers are frequently omitted from market announcements for smaller deals, so this analysis provides only a partial picture focused only on the largest deals. Legal advisers are also sometimes not as comprehensively included in deal announcements in Africa as in other parts of the world.

What is interesting, though, is how much more geographically diverse the law firms are that are operating in Africa today, compared with five years ago. It is also noteworthy that, besides the South African firms, no African law firms appear to be advising principals in major deals yet (see Figure 3). The league tables for debt have a different profile, but communicate an essentially similar message.

Strategy considerations

Does this mean that foreign law firms should focus on markets other than South Africa when developing their strategy for Africa? Not necessarily. Strategy needs to be forward focused: history is only relevant to the extent that it helps us to understand what is likely to unfold in future.

South Africa is a good springboard into Africa and is likely to remain so for some time due, in great measure, to the sophistication of its financial markets. However, international law firms trying to compete directly with South African firms for South African work need to pay particular attention to creating ?a competitive market proposition.

Domestic firm strengths

In their home country and across the continent, South African law firms are likely to become more competitive in Africa for several reasons, which include the following.

?1. Increasing English and French law capabilities. South African law is not particularly relevant elsewhere in Africa, but South African law firms have been bulking up on foreign-qualified talent, especially South African lawyers who moved to London before the global financial crisis and have now returned home.

2. Cost advantages. Even at premium fees, rates for partners in South African firms compare favourably with those for associates in top global firms.

?3. ?Pan-African economic convergence. The number of initiatives aimed at encouraging cross-border trade and investment in Africa are increasing. South Africa is expanding its role as a leader on the continent and currently holds the chair in the African Union. South African companies and financial institutions are fast deepening their market penetration across Africa.

The continent has no fewer than eight regional economic communities, which have economic integration and even common currencies as ultimate goals, although the current problems in Europe may have put a dampener on appetites for the latter.

?4. Cultural affinity. For South African firms, Africa is home ground. They define themselves as African and empathise with the continent as a whole.

International firm opportunities

What, then, can international firms do to enhance their market position in Africa? There are a few areas in which they might focus.

?1. Leveraging linkages with other emerging markets. Global firms with offices in Africa’s major new trading partners and sources of foreign direct investment (FDI) can leverage these in order to drive their business in Africa.

Brazil, for instance, is a major investor into Portuguese-speaking Africa, while India has always been a major trading partner and investor, especially in East Africa. Chinese trade with Africa grew at 31.4 per cent CAGR between 2001 and 2011, and Chinese FDI into East Africa alone grew at 52 per cent CAGR over the same period. The nexus between China and Africa is no secret, but is likely to feature far more prominently in law firm strategies in future than many have considered to date.??

2. Developing a local presence. Entering a new market with an actual presence is always fraught with challenges, and emerging markets can be more risky than developed markets.

Acquiring a local firm often means radical surgery in order to align the new office with firmwide strategies, but the impact of local market dynamics is frequently underestimated. A plan-and-grow strategy requires patience and focus, along with a willingness to tolerate the office operating at a loss until critical mass ?is achieved.

Representative offices and tiny outposts seldom make strategic sense. Alliances do not generally deliver significant competitive advantage unless they are exclusive in nature or at least heavily preferential, with carefully-formulated mutual objectives and constant relationship management.

?3. Developing relationships with global clients. South African firms are still in the starting blocks when it comes to advising non-South African clients, although they are likely to close this gap quickly, at least with new non-SA African clients. Clearly, South African law firms that have entrenched relationships with global firms or have merged with international firms are at an advantage too.

For the last ‘independent’ law firms, there is the promise of referrals from global firms that continue to service the continent from international offices and the opportunity to pitch to foreign corporations and financial institutions themselves. International law firms wishing to serve the continent remotely need to build relationships with such firms, at least to be able to deliver the local law component of work they do for their clients.

Defining the right strategy

For any law firm, a careful assessment of the future needs of the firm’s most important clients must always underpin strategy if it is to deliver desired results. Of course, this is as true for global law firms as it is for law firms indigenous to Africa.

Expanding into markets like Africa without a very clear understanding of what one’s clients’ strategic objectives are and how those clients expect their legal services to be delivered in those market can lead to costly mistakes.

So, too, can acting without a clear understanding of the competitive landscape and precisely what one’s law firm is going to actually do in order to consistently win business away from equally-hungry competitors.

For those law firms that can hit the right balance by building a platform that delivers profitability in the short term while growing a long-term market position and strong client relationships, the bet on Africa should reap handsome dividends. As with other emerging markets, though, it is quite likely that there will be a fair number of firms that will act without sufficient forethought and lose their shirts.

Rob Millard is a partner at Venturis Consulting Group (www.venturisconsulting.com) and was formerly senior strategy manager at Linklaters