Melbourne: the spiritual home of AFL, the W class tram and some of the nation’s most enterprising young law firms. ALB investigates.

There’s talk of a “three speed economy” in the air: resource-driven Queensland and Western Australia leading the national economy, followed by the ex-rustbelt states of Victoria and South Australia and finally the troubled NSW bringing up the rear. Notwithstanding dire predictions over the impact of the proposed resources super profits tax, it is an analysis which makes sense – but if you talk to Melbourne firms, they’re very comfortable that they were in exactly the right place for the GFC and are now in exactly the right place for the recovery.

“Victoria was the least hurt [by the GFC],” says Herbert Geer’s Bill Fazio, who has observed the past year from the three vantage points of his firm’s Melbourne, Sydney and Brisbane offices. “Sydney got the downturn harder and faster, Victoria was the least hurt and Brisbane hurt the most in the end – I think the slowdown in property development in South East Queensland really hurt them and Brisbane had more of a bubble pattern. There was more fear in Sydney at one point. But things are more stable in Victoria – less ups and less downs.”  Access Economics has predicted that Victoria’s economy will grow by 2.3% this financial year and 3.4% for the next year – second only to Western Australia and interestingly ahead of Queensland. “It’s feels solid – there’s no rustbelt feeling,” says Fazio. “People are optimistic - they’re not worried about losing their jobs.” 

 Southern focus

It is always difficult to ascertain incipient economic trends, but there is anecdotal evidence that Australian companies are beginning to look more closely at Victoria – either as a potential growth market for their services, or as a place to relocate core parts of their businesses.

“I’ve had clients tell me that it’s cheaper to do business in Victoria than it is in Sydney. By the time they take into account the taxes they pay and the rent they pay it makes sense to downsize Sydney and upsize Victoria,” says Damian Paul of Macpherson+Kelley (M+K). “I wouldn’t say it’s enough to be a trend, but I’ve heard it a few times from clients – particularly in the manufacturing space. They tend to operate on a fairly low margin and if you only operate on a single digit margin it doesn’t take much for those things to encroach into that bottom line.”

Tony Macvean of Hall & Wilcox has also observed an increased Melbourne focus from some clients but again cautions against drawing hasty inferences. “It’s not necessarily a pattern – these things tend to be fluid over time,” he says.

Many Melbourne law firms know first hand of the additional overhead costs associated with operating out of Sydney – however this does not necessarily mean that these costs will be reflected in the hourly rate. John Nerurker of Mills Oakley says that differential costs are all part of the challenge of being a national firm. “You need to absorb the cost and not expect your clients to pick it up or expect your partners to earn less. That’s an investment you need to make,” he says. “It would be perverse to charge clients more for using the Sydney office over the Melbourne office – you need to structure overheads efficiently. Clients are not interested in how you run your business or what your rent expenses are in a particular location.”

In ALB’s Perth report earlier this year, some Perth firms said that national clients and particularly mining companies were beginning to decentralise their businesses and move core staff to centres such as Perth – and by implication, away from traditional centres such as Melbourne. None of the Melbourne law firms interviewed by ALB had seen any significant evidence of such a trend. Even if such a pattern were established, it remains to be seen as to whether there would be an impact on Melbourne firms, many of whom have opened interstate offices and would prefer to describe themselves as serving a national or at least an east coast client base. Similarly, firms which have not opened new offices, such as Hall & Wilcox, have always been at pains to stress that their work is not limited to Victorian clients.
“Relationships will determine where the work goes,” says John Nerurker. “The work goes to those people who are suitably qualified to do it.”

Competitive market

The Melbourne market is home to some of the most entrepreneurial firms in Australia and the city is always well represented in the ALB Fast 10 survey of Australia’s fastest growing firms. Last year Herbert Geer (52% revenue growth, partly via acquisitions), M+K (21% growth), Mills Oakley (16% growth) and Hall & Wilcox (14% growth) all graced the Fast 10 list and there is a general optimism that this year’s results will also reflect solid organic growth.

The last few years have seen the emergence of a new generation of astute, entrepreneurial mid-size firms which have created headaches for existing players by invading new markets and poaching prized partners and clients, capitalising on brewing discontent in existing relationships and offering alternative structures.

ALB LAW AWARDS 2010– MELBOURNE’S BEST LAW FIRMS
Finalists:	Clarendon Lawyers, Hall & Wilcox, Herbert Geer
Winner:	Mills Oakley
Why:	• Six years of double digit growth • Firm made the ALB Fast 10 list for the third year in a row • In 2009 it won appointments to ASX200 legal panels including Telstra, GPT and Suncorp • Has embraced alternate billing strategies forits clients

Many of these players are Melbourne based and the best – and perhaps the original - example is the firm which took out this year’s award for ALB Melbourne Firm of the Year. ALB has commented in the past on the Mills Oakley strategy of judicious lateral recruitment and the firm is continuing to land some telling blows on rivals, most recently poaching star Holding Redlich commercial property specialist Andrew Johnson and his team in Brisbane. Maddocks is another firm to be active in the recruitment space, snaring employment partner Bruce Heddle from Clayton Utz and infrastructure specialist Patrick Ibbotson from Blake Dawson.

Population pressures

According to a study by BIS Shrapnel, Melbourne is building new homes and attractive migrants at a faster rate than Sydney and is set to become Australia’s most populous city by 2037.  Such demographic projections need to be viewed with some caution given the imprecise nature of the science, but it is clear that firms are already downstream beneficiaries of plans to accommodate population growth. The most obvious example is the very high profile Victorian desalination project, a A$3.5bn PPP which kept AAR, Clayton Utz, Corrs, Mallesons and Minters busy with highly complex funding and equity arrangements. Clutz, Mallesons and Freehills also advised on the innovative A$759m Peninsula Link PPP which closed earlier this year.

But it is not only at the “mega-project” level that population pressures are translating into legal work. Mid-size firms are also reporting an increase in work in the planning, property and construction space. Residential developments in particular have been a highlight. Maddocks, for example, has been advising on the strategic planning, financing, construction and sale aspects of the Sanctuary Lakes project at Point Cook which encompasses new suburbs, schools, hospitals and recreation facilities. “We’re building infrastructure for entire suburbs,” says CEO David Rennick. “The legal work is incredibly interesting and you’re involved in the creation of something.”

M+K’s property practice has grown by 40% over the past year and managing director Damian Paul says that the residential market is a key contributor. “In Victoria the market for first and second home buyers is still going very strongly – we act for a number of sizeable broad acre developers. Despite interest rates going up, it’s just marched on. Migration continues to have an impact – skilled migration in particular. They’re coming in, they’re first home buyers but they are buying properties which a second home buyer might buy – they have a reasonable size deposit, so they don’t have to borrow all the money.” 

Commercial property development, however, is a slightly different story. Damian Paul describes his firm’s practice as “steady, but not growing.”  “We are just seeing signs now of a bit more activity - banks are still very tight on the reins,” he observes. David Rennick says that his firm’s commercial property practice is “quite subdued.”

However, he says that there is still some standard leasing work to be had and the retail sector has also been relatively active. One prestigious commercial development which has received the green light is a new CBD development at 171 Collins St which is being billed as the city’s largest property development of the year. Mills Oakley has been appointed to advise on this Charter Hall /Cbus Property joint venture, an achievement which must have pleased the firm as much as its recent appointment to GPT Group's legal panel.

Victorian government panel

The Victorian Government has had a consolidated legal services panel since 2002 and this panel was revised last year. Use of the 20 firms appointed to the panel is mandatory for government departments, but optional for statutory bodies. This allows firms which are not on the panel to still do government work for statutory authorities. The current panel arrangements commenced in July 2009 and have an initial four year term, with an option to extend the arrangements for a further two years to June 2015.

A particularly important piece of work for Maddocks has been advising government counsel in the Victorian Bushfires Royal Commission. At the time of printing, the hearing had concluded and a report was forthcoming. Maddocks had a core team of eight lawyers working on the commission, with up to12 involved at peak times.

VICTORIAN GOVERNMENT PANEL – APPOINTED JULY 2009
General panel	Allens Arthur Robinson, Baker & McKenzie, Clayton Utz, Corrs, Norton Rose, DLA Phillips Fox, Maddocks, Minter Ellison
Commercial panel	Allens Arthur Robinson, Baker & McKenzie, Blake Dawson, Clayton Utz, Corrs, Norton Rose, DLA Phillips Fox, Freehills, Maddocks, Middletons, Minter Ellison
Specialist panels	Allens Arthur Robinson, Baker & McKenzie, Blake Dawson, Corrs, Norton Rose, DLA Phillips Fox, FAL Lawyers, FOI Solutions, Guild Lawyers, Herbert Geer, Holding Redlich, Lander & Rogers, Maddocks, Minter Ellison, Moray & Agnew, Rigby Cooke, Russell Kennedy

SME space

In the modern era of mid-tier consolidation, is becoming increasingly difficult to characterise mid-size firms as being exclusively pre-occupied with the SME market. Perhaps the safest way to generalise on this point is to state that SMEs continue to make up a significant part of the client base of Melbourne firms and this fact is likely to explain part of the relative buoyancy of the Melbourne market.

One firm which has had no aversion to identifying itself with the SME market is M+K.  “I can’t name one client of ours that has become insolvent,” says Damian Paul.  “There might be some out there, but none that are big enough to come to my attention.” Still, Paul is keeping an eye out for opportunities from the bigger public companies and says that it is not out of the question that the firm could undergo a shift in client mix.

Dealing with the SME market means that a firm is likely to be dealing more with managing directors and CEOs rather than panels or procurement experts. “We deal with managing directors and CEOs who traditionally don’t have the time to shop around for different service providers – they want to come back to the firm they know, that they’ll get good service from and won’t charge them through the nose,” says Paul.

One striking point of difference between M+K and other firms is that M+K is not a member of any panel and has no intention of tendering to join one. “We don’t compete to be on panels – our mantra is to form relationships with individuals – the CEO, the managing director, the in-house counsel, whoever it might be,” says Paul. He explains his firm’s aversion to panels: “Panels tend to squeeze you on margin and tend to de-emphasise the relationship. You find yourself in a situation every second year or every third year where you don’t know if you’ve got the client. Often it comes down to a beauty parade based on price and we just don’t like beauty parades.”

It is worth noting the substantial amount of work in the mid-market space which Melbourne firms are transacting for local, national and international clients. Within a space of two weeks, Hall & Wilcox recently announced its involvement in boutique fund manager Patriot Asset’s sale of two funds to Ironbark Asset Management, the sale of a majority stake in Boost Investment Group to US-based private equity firm The Riverside Company and a A$31m subcontracting deal for Canon Australia. Managing partner Tony Macvean says that there has been a noticeable level of mid-market M&A and funds management activity in Melbourne of late. Many firms have reported a good level of M&A deals in their pipeline.