ABA Section of Business Law
Business Law Today
March/April 2001 (Volume 10, Number 4)
Business Law Today
How do law firms do it and what does it change?
By PATRICK E. MEARS and CAROL M. SÁNCHEZ
Your firm has an office in London. How does the connection affect that office or indeed affect your firm at home? The legal industry has recently undergone a sea change in part because of the globalization of business.
Law firms, especially those with headquarters in major financial centers, are expanding overseas at a fast and furious pace. As noted in the "Top firms" sidebar, several law firms and multidisciplinary practices (MDPs) have a presence in almost every region of the world.
There are several reasons for this. First, firms want to accommodate clients needs. Second, the European Union has emerged as a new source of pan-European or "federal" law. Its common currency, the Euro, has spurred many firms to open offices in Brussels, Frankfurt and other commercial centers.
The collapse of the Soviet Union and the dismantling of the Iron Curtain have opened new markets for firms that are attracted to Eastern Europe by the privatization of former state enterprises. The growth of certain Asian economies and the opening of China to western business have created more incentives for firms to establish overseas offices.
Many of these offices are no longer outposts staffed by a few legal professionals. These offices now have many lawyers on staff, and offer a broad range of legal services not only to the clients of their home countries but also to local businesses. The "Whos global?" sidebar shows for several major international law firms the percentage of lawyers working outside the parent country, and the number of foreign countries in which those law firms operate.
The globalization of the legal services industry raises important issues. For example, how are overseas offices organized, and how do they relate to the home office? How do these firms compete in the international legal arena? Do they "export" their services from headquarters at home to new markets? Or, do they hire local national lawyers and give them the autonomy to run branch offices as they see fit and develop a local presence? Finally, how do these firms perceive themselves in the international arena, and is this perception consistent with the literature they publish that describes their international practice?
To try to answer some of these questions, we interviewed members of English-speaking, global law firms and multidisciplinary practice organizations. We hypothesized that law firms would behave similarly to manufacturing and other types of service firms as they globalize, and we used a model of internationalization often used to understand the behavior of manufacturing firms involved in international trade.
What this model says is that firms tend to structure themselves as one of four organizational types: international, multidomestic, global and transnational. Depending on the type, a companys assets and capabilities are either centralized or decentralized, knowledge is developed and diffused in either one direction or in many, and the importance of the overseas office to the home office varies.
For example, the international company will centralize most of its assets at its headquarters office, and from there it develops and transfers knowledge to overseas locations. The main responsibility of its subsidiaries is to leverage home-office capabilities. Examples of international firms are McDonalds and Microsoft. Microsofts core architecture is created at its Redmond, Wash., headquarters. National subsidiaries only customize the product to account for basic differences such as language and alphabet.
In contrast, the multidomestic company allows its subsidiaries to develop and exploit local opportunities, expects them to create a local knowledge and competency base, and decentralizes significant decision-making to the subsidiaries. An example of a multidomestic firm is General Motors, whose extensive European units tend to operate as self-contained entities.
Global companies are different yet. The headquarters expects overseas offices to adopt the entire companys most efficient strategies, and to develop the best knowledge and skills available drawing from all of its international subsidiaries. So, the global firm expects overseas units to funnel information to headquarters, and to respond to centralized controls provided by headquarters. For example, global standards have emerged in the semiconductor industry, and firms such as Intel and Motorola work to keep costs low through experience-curve effects and location economies.
Finally, there is the transnational form. The transnational company expects overseas subsidiaries to contribute actively to the development of the firms capabilities, to develop knowledge and share it with worldwide locations, and to use both centralized and decentralized methods to promote interdependence and specialization of units. The transnational form may be the ideal way for a firm to "think globally" and "act locally." Caterpillar Inc. has tried to do both by manufacturing many identical components at a few global locations, and setting up assembly in each of its major markets where the product can be tailored to local needs.
However, achieving this strategy is difficult because it puts conflicting demands on firms: to integrate activities across all units while being very responsive to local conditions. The transnational form is the least prevalent form observed among manufacturing companies.
To test our hypothesis, we interviewed partners at 10 law firms. All of the firms that participated are household names in the international legal marketplace. Their responses suggested how they viewed themselves based on the four types of international firms. Four of the firms characterized themselves as transnational firms, two as multidomestic firms, three saw themselves as a combination of multidomestic and transnational, and one as a combination of global and international.
We also analyzed the content of promotional materials published by these firms, such as brochures, publications and Web-site information, and identified the organizational type of each firm. The content analysis revealed that four firms fit the international type, two the multinational type, two the global, and two the transnational type.
We then combined the information from the two sources and developed the following profiles that describe how law firms of the four types are organized and how they do business in international markets. We used information found in the firms own brochures, publications and Web sites to describe the firms given as examples of the four types in the profiles.
The international law firm. The law firm that is organized as an international organization concentrates its assets and strategies in the home country. The focus of this firms international practice is to provide home country clients with legal services overseas. Their approach is centralized, and lawyers in the home country office make most decisions. Expansion outside the home country is a relatively unique concept, and the foreign office is perceived as an outpost that is set up to help home country firms do business there.
Most of the firms lawyers are hired in the home country. Lawyers share common values, methodologies, training and technology originating from the parent firm. The firms principal partners in the home country all tend to do international work, to provide a broad spectrum of international law services to their clients in all locations. These lawyers have some understanding of local law but not the level of understanding that native lawyers would have.
The international firms source of knowledge and competencies is in the home office, and the direction of the flow of skills and knowledge is from the parent firm outward to "outpost" offices in other countries. The firm may be associated with firms in other countries, but only to help the parent country firm to do business in a particular region. The international firm may call itself a multinational and a multicultural world practice, and little effort is made to standardize its services around the world.
Lovell, White & Durant is a good example of an international firm. The firms UK headquarters transfers a strong expression of the firms core values, professional standards, client relationship and lawyer integrity to its overseas offices. The firm tends to recruit many of its lawyers from leading universities in the UK, and the first office outside the UK was established principally to channel work back to the parent office. The London office is the largest of Lovell, Whites offices, and it offers a full range of legal services. Its other offices worldwide handle varied types of transactions and cases. International offices are encouraged to specialize to meet needs particular to that country, but they still receive strong strategic direction from the London headquarters.
The multidomestic law firm. Quite different from the international firm, the strategies and assets of the multidomestic law firm are located in foreign offices. There is little mention of a home office, and the firm prefers to call itself a truly international organization. Offices in foreign locations practice international and local law, lawyers are qualified in multiple jurisdictions and speak local languages. Skills become specialized according to country or region, yet there is little concern about merging competencies across regions.
The firms source of knowledge and competencies is the foreign offices. The direction of the flow of skills and knowledge is within the regions, but rarely among regions. Each country or regions needs are addressed separately, and offices in regions are autonomous.
Freshfields LLP can be described as a firm using the multidomestic strategy. Freshfields uses networking to achieve its international objectives, operating in 23 offices in Europe, Asia, and the United States. By not listing the UK office as the home office, Freshfields suggests that its assets are located throughout the offices in the three regions. Skills and knowledge are said to flow freely within the three regions, and the European, Asian and U.S. offices provide services unique to the regions needs. Lawyers are trained in international and local law, are qualified in multiple jurisdictions within the regions, and many speak several languages. Many of Freshfields Asian lawyers are trained at UK law schools but are then assigned to locations outside of Asia to give them broader world experience.
The global law firm. The global law firm is different from the international and the multidomestic type of law firm. The global firms strategies and assets are organized according to practice area, neither at the home country office nor in any geographic sense. The global firm attempts to create efficient scale of operations, and strives to provide consistent and somewhat standardized service to all clients everywhere. The global law firm recruits the best lawyers worldwide. While it may emphasize its staffs ability to function in different languages, it does not stress the nationalities of its lawyers.
The source of knowledge and competencies is frequently in nonheadquarters locations. The flow of knowledge and skills is multidirectional: An effort is made to identify and disseminate best practices, resources and opportunities in all offices around the world. The firm taps into its broad network of resources to serve clients everywhere in a uniform and standardized fashion. On the other hand, the firm does not see a great need to adapt to different national or regional systems, or to customize the nature of their practice to the particularities of any one country.
A good example of a global services firm is Ernst & Young, a multidisciplinary practice. The firm has 15,500 consultants in 133 countries, claiming worldwide coverage. It strives to provide a global standard of service and performance in all its worldwide locations. The firm is organized using a strategic business unit approach rather than a geographic approach, suggesting that specialists are tapped from various locations to create the strongest global team possible.
The firm has appointed a global chief knowledge officer, and transfers knowledge from a centralized system of "knowledge networks" that span the firms key business areas. It is unclear where the firms headquarters is located, suggesting a global, borderless approach to doing business.
The transnational law firm. The transnational firm distributes its strategies and assets to its locations worldwide. Locally qualified lawyers staff the transnational law firm with strong experience practicing law in their national locations, however the firms name is a global franchise. The firm stresses size and scale of operations, however it uses a cooperative approach to establish personal relationships with clients. The source of knowledge and competencies is worldwide, and the flow of skills and knowledge is multidirectional. Local knowledge is valued, and it contributes to what the firm hopes will be a seamless global network. However, this network approach can result in strong performance in some markets and patchy performance in others.
The transnational firm tries to think globally and act locally. It attempts to standardize the quality of service worldwide through education and professional development of lawyers, while recognizing that decision making must take place at regional and local levels. Regional and local offices are encouraged to initiate programs and generate business both within and across regions. Lawyers draw on their combined experience by using expertise found in other offices.
The transnational firm realizes that competition varies from geographic market to market, and that it competes with firms in the local market as well as with large international firms. In short, the firm is entrepreneurial, and it encourages variation and diversity among countries and cultures.
Baker & McKenzie is a good example of a law firm using the transnational strategy. The firm has 2,670 global lawyers in 35 countries, plus 584 "global partner" firms. Baker & McKenzie affirms that it is a global franchise, with offices staffed by locally qualified lawyers familiar with the legal system in their localities. These offices also strive hard to provide a standardized quality of service to clients worldwide.
Baker & McKenzie claims to "think globally, and act locally." It thinks globally in its geographic coverage and its large size; it has no "parent" country office; and it provides a uniform level of professional development and education to lawyers worldwide. It acts locally by delegating decision making to regional and local offices; appointing councils in four regions to generate local business and initiate new programs; and encouraging a cooperative approach and a personal relationship with its clients.
Returning to our original hypothesis that global law firms organize themselves in much the same way as other kinds of global companies the results suggest that to a large extent its true. Still, we observed an interesting difference between how some firms perceive themselves, and how others might perceive them. Only four of the 10 firms self-characterizations as a particular organizational form matched the external analysis of their promotional documents. The other six firms perceived themselves differently from what was reflected in their literature.
There are some reasonable explanations. For example, respondents may have wanted to see their firms as having adopted a preferred global strategy or structure. But when they began to elaborate on the details of the operation, another notion of strategy and structure emerged.
One consideration is that several firms had undergone mergers with one or more other firms in foreign locations. These firms may be in the process of moving toward a particular strategic and structural form of global operation. The full integration of merged or acquired firms takes time and patience, and the short time since the merger suggests many firms have a long way to go before they achieve their desired goal of full integration.
Finally, many law firms may be best served by a hybrid approach to strategy and structure. This means that law firms may adopt strategies and structures that do not fit neatly into the international model that we used, but that instead span the boundaries of the four organizational types.
Perhaps the strongest message emerging from this study of global law firms is that many firms strive to provide a standard, uniform level of service quality in all international markets. Many firms are attempting to create a global brand, and to establish one household name that will be recognized worldwide. For example, Clifford Chance wants to create a "one-stop shop" that is capable of handling a wide variety of local, English and American law work for big companies and financial institutions through its many offices worldwide.
Client firms desire uniform service, but they may be as concerned about the accountability that a global brand provides. If something goes awry with legal services provided in Beijing, the client may wish to hold the U.S.-based firm accountable. This is in contrast to the situation where an American client, retaining a Chinese firm, may have little influence with that firm.
Nevertheless, critics charge that creating a global brand of law firm is no more uniform than growing a franchise operation. Baker & McKenzie spent 50 years expanding internationally and has more offices in more countries than any of its rivals. Some argue, however, that Baker is a conglomerate of local partnerships that act independently, vary in quality and retain their own profits. Baker executives retort that they have built a truly international culture, and that local regulations dictate how profits earned locally are shared.
The issue of global firm culture is another topic that emerges from this study. Is it better for a firm to create a single firm culture as it becomes increasingly global? Or is a multicultural, pan-European or pan-American approach more desirable? The history of law firm mergers in national arenas suggests that existing firms shed much of their traditional, well-established cultural baggage to create a new firm culture. As cross-border mergers of law firms become more common, will firms behave similarly? When firms from the United States, the UK and Germany merge, will the largest firms culture dominate? Will individual firm cultures be represented, or will an entirely new culture one that strives to be global yet local emerge? And what kind of culture are we talking about? Where does firm-level culture end and national culture begin?
One thing is certain. The globalization of the practice of law is changing the nature of competition in the legal services industry around the world. Studies such as ours may be inconclusive since external environmental conditions for the organization of law firms are changing rapidly.
At some point in the future, the legal professions ethical rules may be changed to allow U.S. lawyers to associate formally with multidisciplinary practices (MDPs). If this proposal is adopted, the American legal landscape will be significantly changed, affecting law firms and MDPs that practice on a global basis. The adoption of these changes might cause many global law firms to alter their mode of organization and delivery of legal services worldwide.
Sánchez is director of International Business Programs at the Seidman School of Business at Grand Valley State University, Grand Rapids, Mich. Her e-mail is firstname.lastname@example.org. Mears is a senior member with Dykema Gossett, PLLC, in Grand Rapids. His e-mail is email@example.com.