What Opportunities do Emerging Markets Present for Law Firms?

On the global stage, UK law firms have long been a force to be reckoned with. Our legal sector is one of relatively few sectors where the UK is a genuine world leader. But just how much of an export success story is it, and in what areas is there still further scope for greater international coverage and specific market penetration?

Daniel Watts, Managing Partner at Edward Drummond & Co, here gives Lawyer Monthly an insight into where opportunities lie and how law firms can make the most of these, while managing the risks involved.

Broadening UK law firms’ horizons – exploiting untapped opportunity in emerging markets

How great is the focus on western economies compared to emerging markets and how might this change in the years ahead? And what challenges and opportunities could this present for law firms, as well as for general counsel working for corporates in these locations?

To shine a spotlight onto what shape UK law firms’ international reach is taking and to identify where future growth opportunities lie, we conducted research into where Partners at top firms are based. As shared owners and leading fee-earners, their presence in particular markets demonstrates the level of managerial expertise and revenue-generating power firms are prepared to commit in a given jurisdiction. Our findings reveal several useful insights which could provide food for thought when it comes to strategic planning for the years ahead.

Risks vs rewards in developed and emerging markets

While UK law firms have a well-established reputation for international work, our study highlighted just how far their global coverage has grown. In fact, today nearly two-thirds (63%) of Partners at Top 20 firms are now based outside of the UK.

But although that’s an impressive figure, we also found that only 20% of Partners are based outside of Europe and North America. As they focus heavily on western economies, leading British law firms are underexposed to other markets – notably emerging markets – despite many of these economies seeing rapid growth in recent years.

The ‘gap’ is particularly evident in areas such as Asia Pacific and Latin America, which are home to 13% and 2% of Top 20 UK law firm Partners respectively. Given that they represent 32% and 7.9% of global GDP apiece, the potential opportunity value is significant. While firms have been working hard to close the gap in Asia in particular, it’s clear that the region still offers plenty of scope for greater market presence.

Africa is another potential hotspot that is also relatively untapped, with only 1% of UK Top 20 Partners based there, although the continent accounts for 3% of global GDP. Former Soviet states and the Middle East, where there are currently low concentrations of Partners, could also represent attractive investment opportunities in the future. They account for 1% and 2% of UK law firm Partners respectively, compared to a 2.8% and 4.3% share of global GDP.

Of course, western markets make strategic sense in terms of cultural, business and legal fit. They are comparatively ‘easy-win’ locations in which to establish new offices, thanks to familiar, stable business environments, similar legal frameworks and regulatory regimes, easily transferable skills deployment, and fewer language barriers.

But although these emerging economies may be more challenging, that’s not to say that the effort would not be well-rewarded. Emerging markets still offer considerable growth potential for the UK’s legal expertise, especially as their economies continue to expand at a faster rate than more mature western economies. Multinationals and other ‘western’ businesses are building up more extensive operational networks worldwide, with bases in these locations increasingly strategically important. With this in mind, UK law firms may want to boost their efforts to identify future target markets – or risk losing out.

Facing up to the challenges

For law firms who want to continue to increase their global footprint, and for corporate in-house general counsel deployed in overseas markets, the execution risks of business roll-out are many and varied. Each country will pose its own unique challenges, and regulatory requirements can make it hard for foreign firms to establish themselves in some overseas markets. Conducting extensive research and thorough due diligence is therefore vital prior to launching into a brand new region.

Some basic steps to consider include:

• Market analysis:
• Evaluating the competition by gauging current service provision in the region and identifying competitors’ strengths and weaknesses as well as where gaps exist in the market
• Identifying potential clients by understanding the target market’s views on existing service providers, platforms and market opportunities
• Gaining market insight through accessing informed local comment on opportunities for growth

• Business environment/legal framework analysis:
• Law firms and general counsel will need to understand the red tape requirements in their chosen location, and how this will affect key areas such as contractual agreements with clients, suppliers or agents; employment of domestic and overseas staff; and business administration issues eg are local or sector-specific permissions needed?
• Adherence to strict regulatory guidelines may be necessary before operations can begin. For instance, South Korea expects foreign law firms to establish a joint venture with a local firm. China imposes special tax rules and limitations on foreign law firms’ new offices, and Indonesia is proposing a mandatory ethics exam for foreign lawyers practising there.

Performing these fundamental checks and taking the time to get to get to grips with the realities and nuances of doing business in a target location is essential groundwork to inform decision-making going forward.

If the UK’s top law firms are to maintain and enhance their standing worldwide, broadening their horizons could well boost their brand and act as an important competitive differentiator. With emerging markets offering such strong growth potential for law firms, identifying new areas which could present a logical strategic fit and taking an early lead could give them the edge. While European and North American markets in particular will remain a key source of revenue requiring extensive brand presence, forward-thinking law firms with truly global ambitions will want to be ahead of the curve in embracing new opportunities. Doing so in a well-considered, thoroughly researched way based on a sound analysis of the risks as well as the rewards will be critical as a foundation for success.