In February this year, New Zealand Deputy Prime Minister Bill English laid out a stark assessment of the NZ economy. Rising unemployment, sluggish growth even in the pre-GFC era and a five year drop in exports were the highlights – or lowlights – of what English described as an extended passage of decline. English’s prognosis about the long term challenges may be correct, but credit must also be given where it is due – the NZ economy, like its trans-Tasman neighbour, has proven to be surprisingly resilient. The Reserve Bank of New Zealand’s latest forecast is for about 3% growth this year and 4% growth the following year.
Meanwhile NZ government has laid out an ambitious long term plan to help revive the NZ economy. It has increased its capital allowance by NZ$7.5bn over the next five years, with much of this is earmarked for infrastructure projects such as the roll-out of ultra-fast broadband, better hospitals and more modern schools. NZ$7bn will be spent on the road network and NZ$3.3 bn to strengthen the national electricity grid. Sweeping regulatory reforms – which have been in train since last year – will continue, led by more reforms in the tax and resource management space. The reforms to taxation will sound rather familiar to Australian readers - but as NZ lawyers have tartly pointed out, the NZ government has not shrouded its plans for taxation in the same level of secrecy and obscurity as its Canberra counterpart.
It is a mixed environment for lawyers, many of whom remain optimistic that transactional activity is on the mend. However, the counter-cycle appears to be playing a stronger part in firm workflows than is the case in Australia, and firms are also strengthened by the government’s renewed commitment to infrastructure investment. The result is an operating environment for law firms which is fragile, but not without redeeming features.
How are firms performing? Observing the customary secrecy surrounding New Zealand revenue figures, nearly all firms interviewed by ALB described their results with adjectives rather than numbers. Russell McVeagh’s Gary McDiarmid said that his firm was tracking towards “comfortable” growth in 2010 following a “flat” 2009. Chapman Tripp’s Alastair Carruthers was even more cautious, saying that he was “very happy” with his firm’s performance. That can presumably be understood as meaning that the firm is, at least, recording growth. Minter Ellison Rudd Watts’ Mark Weenink said that his firm had recorded “double digit” growth last financial year. Bell Gully’s Roger Partridge said that his firm recorded “modest” growth last year and was expected a similar result for 2010.
Kensington Swan’s Clayton Kimpton said that his firm had recorded growth last year and expected further growth in 2010. Kensington Swan recorded a 10% increase in profitability last year as a result of increased revenue and running a tighter ship.
Duncan Cotterill’s Janice Fredic says that her firm has recorded “just below double digit growth” evenly spread across the offices of this trans-Tasman firm.
Simpson Grierson did not have growth last year, but chairman Kevin Jaffe says that things are looking “stronger” for 2010. Buddle Findlay’s Peter Chemis, who we suspect is not enamoured with rigid industry traditions at the best of times, brushed aside the customary adjectives and put a percentage figure on his firm’s growth – 4% last year and tracking at around 5 to 8% this year – a good result which Chemis says is attributable to across the board performance and not just one or two practice areas.
New Zealand firms – by lawyer and partner size Firm name Total Lawyers Partners Offices Anthony Harper 34 18 16 Auckland, Christchurch Bell Gully 199 152 47 Auckland, Wellington Buddle Findlay 186 143 43 Auckland, Wellington, Christchurch Chapman Tripp 207 153 54 Auckland, Wellington, Christchurch DLA Phillips Fox 88 65 23 Auckland, Wellington Duncan Cotterill 115 83 32 Auckland, Wellington, Nelson, Christchurch, Sydney Kensington Swan 128 92 36 Auckland, Wellington, Abu Dhabi Minter Ellison Rudd Watts 170 131 39 Auckland, Wellington Russell McVeagh 235 195 40 Auckland, Wellington Simpson Grierson 231 184 47 Auckland, Wellington and Christchurch Figures supplied by firms and accurate as at April 2010. This list covers firms interviewed for this feature and does not purport to be exhaustive.
Activity
Commercial activity is beginning to show signs of life. “It is looking the best it has in one to two years - that is good, but obviously off a low base,” observes Gary McDiarmid. “Like all overdue downturns, there is a deep bath tub shaped trough. You can spend a fair amount of time in the bottom before the inevitable upturn – but without doubt an upturn is on the way.” McDiarmid is well known for his apt turn of phrase and usually has a new metaphor to describe the economic season whenever ALB pays a visit (last year’s post GFC slump was described as “the hangover following the party”) but he hastened to make the disclaimer that this year’s bathtub analogy was borrowed from a colleague at a rival firm.
On the subject of M&A, New Zealanders evince the same level of caution and optimism as their Australian counterparts – but perhaps slightly more weighted towards caution. Alastair Carruthers suspects that M&A workflows will be “soft” all year. Gary McDiarmid says that there are “encouraging” signs that various players are looking at targets, but he too is unsure whether 2010 will see a genuine acceleration in activity. Roger Partridge says that he has seen something of a pick-up in activity, although a far cry from the halcyon days. “There’s been a bit of interest from private equity, a bit from off-shore, perhaps more of a resources and primary industry focus – but it’s not possible to draw a [common] theme,” he says. Peter Chemis is optimistic: “Last year there were a lot of tyre kickers and enquires that didn’t go anywhere at all - now a lot of those are actually coming onstream so we are seeing a lot more activity than we were last year,” he observed. Buddle Findlay and Chapman Tripp recently played key advisor roles on a complicated series of deals relating to Shell Overseas Holdings’ divestment of New Zealand downstream businesses.
A number of firms were busy with capital raisings last year and this work has continued into 2010, albeit at a reduced level. Gary McDiarmid says the bond market also may have peaked, for a similar reason: “Expect to see relatively less of that this year as bank debt is gradually becoming more available for good risks and is as a result also becoming cheaper. As a result this is easing the pressure on corporates to diversify their debt profiles.”
Unsurprisingly, firms are still reporting strong workflows in traditional counter-cyclical areas such as insolvency, restructuring and litigation – however there is a distinct possibility that the bulk of the major insolvency matters have already passed.
A host of regulatory reforms, both planned and already enacted, is proving to be a particular headache for the in-house sector. “These changes are very challenging for business – on one level they are good, but on another level you would rather be helping business with constructive deals that actually create value, rather than [focussing on] compliance,” says Roger Partridge.
Pressure on GCs
In the February edition of ALB, CLANZ president Rebecca Holbrook warned that cost pressures on the in-house profession were set to remain strong. “This is not a time for firms to decide that the GFC seems to have passed, so they can put their fees up by 10%,” she told ALB. Julian Daly, General Counsel & Company Secretary at PGG Wrightson says that it is possible to identify discrete trends within the overall pattern of belt-tightening. “It is more keenly felt in areas of ongoing general business-as-usual work where the focus has been on driving further efficiencies,” he says. “However, on the bigger matters – for example, recapitalising balance sheets and capital structure issues, there is not the same opportunity to avoid big legal spend. In many cases these initiatives are a matter of ‘life and death’ for the organisations involved and accordingly those organisations have necessarily sought the best financial, legal and banking advice available and have just had to bear the pain whatever the cost of that advice.”
In last year’s New Zealand report, ALB ventilated the theory that there could be a “flight to quality” in difficult economic times - a theory which, to the extent that it implied that certain firms were not “quality”, drew a sour response from firms outside the Bell Gully – Chapman Tripp – Russell McVeagh triumvirate. Some, such as Simpson Grierson’s Kevin Jaffe, felt that ALB was demonstrating an entrenched bias. Peter Chemis also delivered his customary broadside at the top tier concept: “It’s part of the myth they like to perpetuate – but we take work off the top tier all the time. They are losing work to all the other majors - “flight to quality “ - it’s self-serving nonsense. The market doesn’t care anymore what you say about yourself - it cares about what you deliver and what you deliver it for.”
Government and infrastructure
Infrastructure projects are offering a measure of certainty in an unpredictable environment. “We’re not as much looking at GDP and the dollar as looking at where the government and business activity is,” says Clayton Kimpton. He says that the infrastructure workflow from the government’s ambitious plans is well underway, with projects requiring extensive and diverse advice covering front end documentation, risk management, property, litigation and even IT. Kensington Swan, Chapman Tripp and Buddle Findlay have recently been appointed to the panel of the newly formed New Zealand Transport Agency and will be in a good position to assist with the many billion dollars worth of road projects on the table. However as Kimpton points out, local government authorities and the contractors themselves will also be major players in this work.
The other big story in the government space is the Auckland Super City project, which will see the amalgamation of several local government bodies, many of whom are significant consumers of legal services. The new Auckland City Council, in its final form, is likely to have an annual legal spend of about NZ$20m. Some rationalisation of legal spend looks to be an inevitable result of the consolidation, but in the meantime the merger process is generating a large amount of work for external advisors. “There is a huge amount of transition work to be done which is way beyond the resource and timeframe that the transition agency has been afforded – for example, integrating huge contractual obligations around the region and integration of technology – those are projects which will be ongoing for a few more years to come,” says Buddle Findlay partner David Thomson.
Trans-Tasman drift
A perennial story in the Australian-New Zealand dynamic is the relocation of work from New Zealand to Australia, either through the movement of head offices across the Tasman or through the acquisition of NZ companies by Australians. Mark Weenink draws a link between these trends and what he says is a shrinking in the overall size of the New Zealand legal services market. However, there is no consensus on what impact, if any, this pattern will have on the business of law. Gary McDiarmid, for example, says that while some impact is likely for lawyers in certain areas, there has not been any impact on his firm: “The move of head offices removes a certain kind of work – not a huge amount of top tier work. It hasn’t had a discernable impact for us.”
CLANZ president Rebecca Holbrook notes that the trend of companies relocating from NZ to Australia does appear to be slowing. However, she says that trans-Tasman drift is still making itself felt: “For those companies that have relocated or are part of trans-Tasman or multi-national entities, the level of oversight, scrutiny and involvement from parent companies is increasing,” she says. “This off-shore oversight may have an impact on NZ law firms, with processes and agreements being driven centrally from off-shore.”
A new factor is the prospect of Australia acting as a vital conduit for legal work from Asian investors interested in New Zealand. In last month’s Sydney feature, ALB reported on claims that Sydney firms were experiencing an increase in queries from Asian investors who, unfettered by traditional ties with centres such as Melbourne, were drawn to the bright lights of what is arguably the region’s best known city. Is it possible that the same effect would see New Zealand-bound investors look to Sydney or Australia for guidance?
“Work [originating from Asia] seems to come to us via Australia, whereas US work still comes to us directly,” says Mark Weenink. “Perhaps Asia views New Zealand as part of Australia much more than the rest of the world.” He says that links with big Australian firms will be more important than international links: “International work will come through Australia.”
Roger Partridge is another to take the view that trans-Tasman relationships have a new significance in the post-GFC environment. “It’s certainly a significant phenomenon – I’m conscious of the importance of referrals from Australian firms,” he says. Partridge would not go so far as to say that the majority of Asia-based work comes through Australia, but he says that the matter comes down to one of profile and size. “Australian firms are significantly more visible on the world stage – they have a presence in Asia which NZ firms don’t,” he observes. “They are well known and respected in Asia.”
Gary McDiarmid agrees that there may be situations where an Asian investor may find it helpful to carry out a transaction via an Australian firm – for example, where an investment relates to Australasian assets containing both an NZ and an Australian component and this the most efficient way of achieving a result. However, he baulks at the suggestion that this approach is a blueprint for how all Asia - New Zealand transactions will occur: “The Asian investor in our view will invest directly in NZ business, commercial property and similar ventures if that is perceived as being the most efficient way to go about it. That is common sense and entirely logical,” he says.
Duncan Cotterill’s Janice Fredic affirms this viewpoint, saying that her firm has had direct approaches from China. “It depends on where the communications channels are,” she says.
Simpson Grierson acted for China-based Haier Group on its recent cornerstone investment in Fisher & Paykel. Chairman Kevin Jaffe says that the manner in which this kind of work flows to NZ firms is a question of existing relationships and he says that he has not detected any recent change in the manner in which work is directed to NZ.
Whether true or not, the hypothesis underlines the importance for New Zealand firms to maintain good relationships with Australian firms – something which McDiarmid says should always be a goal: “We have always believed that quality relationships with the top tier Australian firms is very important given Australia is an important market for NZ business - there is nothing new in that,” he says. “To the extent that there is a need to involve a NZ law firm [in an Asia transaction] then the Australian firm will no doubt brief a firm or person where they have a relationship.”
But if you don’t have any formal relationships, you don’t have anything to lose. That was the reasoning process at Duncan Cotterill when it took the decision several years ago to open a Sydney office. CEO Janice Fredic says that the move has helped build relationships with Australian firms. She says that despite the common assumptions of Australian-Kiwi cultural homogeneity, there are significant differences between the two countries and the firm’s presence in Australia has afforded an enhanced perspective into how business is done there.
Trans-Tasman harmonisation
Plans to integrate Australia and New Zealand into a single economic market are hardly fresh news – the concept has been existence in one form or another for many years. Last year Australian Prime Minister Kevin Rudd and his NZ counterpart John Key agreed to a joint statement of intent which expressed inter alia a general desire to“deliver substantively the same regulatory outcomes in both countries in the most efficient manner.”
“Harmonisation will take some time to achieve, but over the next ten years the legislation will align more and more,” says Mark Weenink. “Financial services, insolvency and bankruptcy are all well on the way there, as is competition law.” Weenink says that there is a real possibility of Australian firms encroaching further on New Zealand turf as harmonisation occurs. This already does happen to some extent, with Australian firms such as Truman Hoyle accepting briefs from international clients to advise on New Zealand laws, either providing the advice themselves or outsourcing the work to a local firm as appropriate.
Whether or not this is a new trend, or a pattern that is likely to become more prevalent in the near future is debatable. Alastair Carruthers points out that the eventual goal of common regulation is a long way off and there are more pressing issues to occupy government – and particularly the New Zealand government – in the meantime. “The game has changed from 18 months ago. The pressing issue is how we can get growth back to three to five percent and [economic] harmonisation is unlikely to add much to GDP. It does make sense, it will make life easier for business, but there are bigger fish to fry.”
One lawyer who has had more cause than most to ponder the trans-Tasman divide is McDonalds NZ senior counsel Michele Sang. For many years, McDonalds had no in-house lawyer in New Zealand, preferring to coordinate NZ work from Australia - an approach which was found wanting. “A lawyer from Australia could not deal with all the legal issues in NZ and vice versa - even though conceptually the issues are the same, you still need to have an understanding of the local laws,” explains Sang. “That is why I was appointed for the NZ market. The Australian team could have possibly done the legal work out of NZ but they would have required a lot more external legal assistance.”
As an example, Sang cites major differences in Australian and NZ leasing laws and overseas investment legislation. “For instance, in NZ if we purchase land that is either over a certain size, is situated near water or a historical site or a Maori burial ground, then we have to apply for overseas investment consent - this can take up to six months to obtain and costs us $20k in filing fees! Australia is able to get an exemption under their equivalent legislation. At the beginning of each year, they can file a list of all potential sites they are looking at and at the end of each year, they do a reconciliation. Their process is very simple and is inexpensive.” Sang also cites franchising and trademark laws as another area of significant difference. McDonalds recently applied to trademark a new coffee brand in both Australia and New Zealand. The Australian filing has already been successful, but in New Zealand the company is still waiting for a result, having filed statutory declarations on evidence of use.
Outsourcing
Some firms have reported an increase in the number of queries relating to outsourcing of work from international firms, particularly in the UK. “These opportunities are driven by the need for big UK firms to provide lower cost solutions,” says Carruthers. “There’s been more interest recently but not necessarily something that we would call a trend. We haven’t seen enough of it to comment.” With its strategic alliance with Clifford Chance, Chapman Tripp is well placed to take advantage of any magic circle outsourcing should it decide to pursue this path.
Mark Weenink says he has seen a rise in outsourcing queries and says that it appears to be client driven. He says that New Zealand firms are particularly well placed to provide these services: “New Zealand lawyers are particularly well travelled and are able to assist in relationships and they know what the magic circle firms expect because quite often they have done a stint there,” he observes.
But others remain unconvinced. “I wonder to what extent it really is happening – it might be a case of firms agreeing to something in the abstract rather than anything real,” said one managing partner. “It doesn’t square with me – if the magic circle firms are quieter than normal, wouldn’t they keep that work to keep the juniors busy?”
Kevin Jaffe shares this scepticism: “It’s something that’s been talked about for years. It is something which could work in theory, but is quite logistically challenging. There are a lot of potential complications and you need the right sort of work and the right sort of timing. We’re always in contact with magic circle firms, but I don’t see it as ever being a substantial part of the practice.”
The other challenge for firms is the quality of work which is likely to be associated with such an arrangement. “It perhaps might be suitable as an entrée to something of more interest – but it’s not exactly attractive being someone’s backroom,” one commentator observed.
It is important to draw a distinction between the outsourcing of low level process work, which is likely to be sent to developing markets such as India, and the outsourcing of higher level work where the experience of New Zealand lawyers is likely to be an attraction. Kensington Swan is a well known example of a firm which has used a lower cost base to attract work both in the UAE and from magic circle firms. However, the firm does not actively chase bottom end work. “The nature of the work we’re doing in the Middle East is big, exciting – our lawyers feel that it’s really something special,” says Clayton Kimpton. He says that in his observation, lower end work seems to be more likely to be directed to South Africa for time zone reasons and that he has not seen a great deal of such work in New Zealand.
Talent drain
Despite having to negotiate tougher economic conditions, NZ firms have generally done a better job than their Australian counterparts in retaining staff and maintaining morale during the downturn – nearly all large firms managed to avoid redundancies and salary freezes. The fragile state of the economy notwithstanding, firms have been anxious to shore up their ranks in anticipation of better times. “We grew headcount last year – partly as a result of staff not travelling to the UK and overseas,” says Roger Partridge. “We also made a conscious decision to recruit [expatriate New Zealanders] – you don’t want to waste a good recession.” Partridge says that he has noticed the market is starting to become a little tighter and UK firms are beginning to re-engage with the Australian and NZ markets. “We’ve had staff approached for interviews and we recently lost someone to a magic circle firm,” he says. Gary McDiarmid has also seen the same trend: “We are actively recruiting at all levels - we think that demand will outstrip supply quite soon.”
Clayton Kimpton says that Kensington Swan has not had any trouble finding good people. “London has not been hiring in a big way yet – but a couple of our people are testing out the market and there must be some reason for that level of confidence.”
Simpson Grierson’s Kevin Jaffe has also observed this renewed confidence: “Last year there was almost zero movement – whereas now people are starting to take their chances. We’re starting to see people travel, take time out, even if they don’t have a job to go to - fewer people seem to have something concrete lined up compared to the past.”
Kimpton also notes that there is likely to be an increase in salary pressure for firms owing to perceptions that the downturn has passed and also as a result of employees seeking compensation for a widely anticipated increase in GST later this year. Janice Fredic says that Duncan Cotterill has managed to garner some “really good candidates” but she is expecting this to be a short-lived luxury: “We are expecting [market tightening] to happen, especially since Australia is so far ahead of New Zealand in terms of recovery.”