“Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich,” wrote James Grant, editor of Grant’s Interest Rate Observer, in an opinion article in The New York Times at the end of 2007. He made the comment in an article that criticised the US Federal Reserve Bank’s policy of lowering interest rates to avoid deflation at all costs, which he felt contributed to the subprime crisis having such a severe impact on the US economy.

 

Grant argued that downturns in economic cycles are necessary to return to healthy borrowing and lending patterns, and thus to a healthy economy. Inevitable as it might be, it does mean that many economies across the globe are currently faced with the realities of reduced liquidity in the markets.

 

From the second half of the financial year 2007–08, Australasian law firms started to feel the effects of the global liquidity shortage in their banking and finance practices, and, to a lesser degree, in their M&A practices, where fewer deals have been taken to the table. “There certainly are a lot of corporate transactions that are waiting for the go-ahead once there is more stability in the market,” says David Fagan, chief executive partner of Clayton Utz. His colleague in New Zealand, CEO Gary McDiarmid of Russell McVeagh, agrees. “M&A work is very quiet; anyone that says differently is delusional.”

 

But as the economy slows down, the number of businesses that get into problems increases, which leads to more work for a firm’s insolvency and restructuring practice. Therefore, for many firms the change in the economic climate has meant a shift in the type of work. “If you have styled your firm around one type of work, you lose out in the shift that has taken place,” says Robert Milliner, chief executive partner of Mallesons Stephen Jaques. “For law firms on the sophisticated end of the market, a recession means more work because a lot of things need to be sorted out.”

Australasia’s 30 largest firms
Rank	Firm	Total lawyers/ partners	Country of origin	Managing partner/CEO	Total lawyers	Total partners	No of offices Australia
1	Minter Ellison	1031	Australia	Guy Templeton	764	267	10
2	Mallesons Stephen Jaques	949	Australia	Robert Milliner	770	179	5
3	Clayton Utz	867	Australia	David Fagan	643	224	6
4	Freehills*	832	Australia	Gavin Bell	619	213	4
5	Allens Arthur Robinson	797	Australia	Michael Rose	627	170	4
6	DLA Phillips Fox	779	Australia	Tony Crawford	619	160	8
7	Blake Dawson*	768	Australia	John Atkin	590	178	5
8	Corrs Chambers Westgarth	524	Australia	John Denton	408	116	5
9	Deacons	472	Hong Kong	Don Boyd	262	210	5
10	Australian Government Solicitor	391	Australia	Rayne de Gruchy	391	n/a	8
11	Gadens	368	Australia	Ian Clarke	237	112	6
12	Baker & McKenzie Australia	315	US	Mark Chapple	209	84	2
13	Sparke Helmore	298	Australia	John Davis	240	58	8
14	Middletons	289	Australia	Nick Nichola	230	59	2
15	Russell McVeagh	271	New Zealand	Gary McDiarmid	227	44	2
16	HWL Ebsworth Lawyers	263	Australia	Juan Martinez	165	98	7
17	Simpson Grierson	245	New Zealand	Rob Fisher	197	48	2
18	Hunt & Hunt	229	Australia	Maureen Peatman	156	73	10
19	Bell Gully	223	New Zealand	Roger Partridge	180	43	2
20	Chapman Tripp	211	New Zealand	Andrew Poole, Mark Reese	160	51	3
21	Dibbs Abbott Stillman	211	Australia	Alan McArthur, Duncan Hart	141	70	5
22	Maddocks	196	Australia	David Rennick	146	50	2
23	Henry Davis York	178	Australia	Sharon Cook	130	48	1
24	McCullough Robertson	170	Australia	Brett Heading	135	35	1
25	Gilbert + Tobin	160	Australia	Danny Gilbert	108	52	1
26	Holding Redlich	156	Australia	Chris Lovell	112	44	3
27	Kensington Swan	153	New Zealand	Chris Heilbronn	111	39	2
28	Buddle Findlay	144	New Zealand	Peter Chemis	107	37	3
29	Moray & Agnew	144	Australia	Michael Pitt	91	53	5
30	Piper Alderman	143	Australia	Gordon Grieve	92	51	4

 Mallesons is one of the Big Six firms that have done well, reporting revenue growth of 10.7%. The firm is closely followed by Clayton Utz, which reported an increase of 9% in revenues, but top gong goes to Blake Dawson which realised an increase of 11.9%.

 

Although Minter Ellison is the largest law firm by total lawyer and partner numbers, it came in as the fourth largest firm by revenues. Last year it was in third place but had to step down in favour of Clayton Utz, whose consistently solid performance has placed it in the top three this year.

 

Other remarkable performers were Gilbert + Tobin, which revealed a revenue increase of 14.9%, and Baker & McKenzie, which posted top line revenue growth of 13.2%. Meanwhile, in the mid-sized segment of the market, Holding Redlich (+20.4%) and Maddocks (+17.1%) stood out.

 

On the other side of the spectrum we find the Australian Government Solicitor, which saw income increasing by just 1.8%, while Thomson Playford achieved only 1.1% growth. The worst performer in the ALB revenues table, however, is TressCox, which reported a meagre 0.5% increase in revenues.

 

 Many firms in New Zealand have a financial year that corresponds with the calendar year and, therefore, they are halfway through their financial year. In 2007, Bell Gully broke through the NZ$100m mark, says the firm’s CEO, Stephen Macliver. “We have comfortably exceeded 100 million dollars for the first year ever. It was a significant double-digit uplift on 2006.”

 

Macliver did not want to specify by how much the firm has broken the mark, but in the New Zealand tradition his remarks are already generous. While in many countries law firms are moving towards more transparency, with the UK leading the way by publishing profits per partner, most firms in New Zealand don’t reveal any financial details and, instead, claim every year to have realised another record year of growth. The reason for this shyness seems to have been lost in the catacombs of tradition. “There hasn’t been a history of, or demand for, disclosure of this specific financial information,” offers Macliver.

 

 For future revenue growth, many law firms rely on expanding the share of work that comes in from outside national boundaries. Mallesons’ Robert Milliner expects the highest growth to come from the Asia region. “Growth in Australia will be moderate, as opposed to high growth in Asia,” he says. But despite the opportunities there, he is not looking for hasty expansion. “It’s not a question of having dots on a map; we want to build solid offices and do things that we do really well. Our priority is to build up the Beijing and Shanghai offices to the same level as our Hong Kong office.”

 

Australian law firms have taken different views on the best way to reel in international advisory work. On one hand there are firms such as Mallesons and Minters that which have set up extensive networks of offices in the Asia-Pacific region. On the other hand there are firms that favour law firm alliances, such as Clayton Utz which is the Lex Mundi member for Australia. Interestingly, it doesn’t seem to matter which approach is taken as the share of revenue coming from cross-border work is roughly the same. All of the firms mentioned above estimate that the percentage of revenue coming from offshore activities amounts to 10%.

 

“Each firm has their own strategy that they are pursuing and different people have different views on what works best,” says David Fagan. “For us, the approach we’ve taken is quite successful. We’ve committed a lot to our regional offices. For example, our Perth office will grow this year by about 18% to A$45m in revenues. In the last three years, our Brisbane office has doubled in size and this year we expect the office to contribute about A$80m. There are not many firms in our area that have significant offices in Perth and Brisbane.”

 

Clayton Utz might not have offices in Asia, but it does have partners on the ground there, sometimes for extended periods of time. “We have had a number of lawyers and partners based in Taipei for the last five years, working on the Taiwan high-speed rail project. We have a large power project in Vietnam and we’ve been running litigation in Kazakhstan; it ranges all across the globe.” Fagan says the decision not to set up offices in these jurisdictions is largely explained by cost control. “You can have an offshore office that wouldn’t even contribute A$50m and you pay a lot of costs to service that office.”

 

For many law firms 2007–08 has been another good year in terms of revenue growth and this seems to justify the unabated optimism of law firm managing partners. But there is a catch to continued good conditions, warns James Grant in his before-mentioned opinion piece. “People get carried away, prices go too high and economic resources go where they shouldn’t.” Let’s hope that the legal industry is the proverbial exception to the rule.

 

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Clayton Utz is set to post revenue growth of 9% this financial year, an increase to A$470m and another strong result after last year’s 11% increase. “It’s a year of two halves,” says David Fagan, chief executive partner of Clayton Utz. “Up to December, it was a very buoyant corporate and banking market, while beyond December it was a very buoyant litigation market.”

 

It’s clear that the economic climate has changed since December, but Fagan says it’s not all down to the liquidity crisis stemming from the subprime mortgage industry collapse in the US. “The subprime crisis, the packing up mortgages with very problematic credit quality, we’ve not had that here. In the US one in every five houses has had a foreclosure notice, in Australia that’s 0.2%. We’ve not had that asset problem and, correspondingly, I don’t think we’re going to have the litigation they had over subprime issues.”

 

Fagan does acknowledge that some of the fallout of the subprime crisis has trickled into the Australian market and he says Clayton Utz is advising Lehman Brothers on products that the financial services company sold into the Australian market. But the large corporate collapses that Australia has seen in recent months are not tied to the US-originated crisis, he argues. “The work that is related to Allco, Centro and MFS, that is more about their business models than the credit crunch.”

 

The slowdown in the Australian market is a result of the culmination of factors, including a rising oil price, record low consumer confidence and fewer corporate sales, and there is no telling when the climate will improve. The firm is, therefore, budgeting for more subdued growth next year, says Fagan. “There is uncertainty in what the next 12 mon