Fighting the centralization tide

Companies are coalescing their decision-making authority around places like Montreal, Toronto, and Calgary, with the result that local or regional offices are being stripped of their independence and the ability to divvy out legal work in favour of the head office.

It’s upsetting traditional relationships local law firms have with their larger clients and is forcing lawyers at firms to reach out to parts unknown in a bid to rebuild ties with those clients.

But that’s not the only challenge they face. The “Wal-Marting” of the economy and the creation of big box retail centres, featuring national chains, has largely homogenized the retail sector and ended the days of the local, independent store owners, who would simply call up the lawyer down the street to iron out their legal hassles.

That work is now done from afar. Factor in the rise of national law firms and the changing mobility rules, which allow lawyers to practise outside their normal jurisdiction, and it is squeezing local business law firms.

Babcock notes that Toronto-based lawyers can arrive in Thunder Bay in the morning, advise a client, and be back in their office before the end of the day for $300 in airfare.  He says the shift has been gradual and “started about 10 years ago but has accelerated over the last five.”

It’s something that Don Douglas, a Winnipeg lawyer at Thompson Dorfman Sweatman LLP, has also noticed. “There’s no question it has had an impact. We feel it.”

But not everyone is feeling the pain. John Hannah, a corporate lawyer at Berge Horn in Kelowna, B.C., says “to the limited extent that we’ve seen it, we are not concerned. We would be concerned if we perceived it to be a growing problem. We’re not sensing an increase, it’s simply always been that way.”

It also depends on how vibrant the local economy is.

Judson Whiteside, managing partner at national law firm Miller Thomson LLP, notes that some municipal centres “have their own economy. They look after themselves,” he says, citing areas such as Kitchener-Waterloo and Guelph, Ont., where there is a lot of manufacturing and a growing technology base. Cities like Ottawa, Vancouver, Halifax, and Edmonton also have strong standalone local economies.

But for areas that are seeing regional decision-making moved to a larger urban centre, it can be painful. Paul Kuttner, a law firm marketing expert, says when corporations centralize their decision-making, the impact on law firms can be “quite dramatic.” He cites the case of one law firm: “Virtually overnight, a substantial portion of revenue evaporated because the regional office of the local banking centre no longer had the authority to hand work out. It took a better part of eight months for one lawyer to get his practice back on its feet.”

Babcock says in his firm’s case, “it is affecting almost every sector of practice.” Take real estate, for example. “Mortgage enforcement used to be a routine thing we did to supplement our conveyancing. Banks have centralized decision-making and the flow of legal work,” he says. Now it’s done by a handful of law firms that have developed specialized mortgage enforcement units that Babcock says are “light on lawyers and heavy on clerks.”

The same applies to commercial mortgage processing. “It was frequently done in the town where the real estate was located.” Now with technology and title insurance, he says, financial institutions believe it can be “done by remote control.”

Commercial lending is another example, where the decision-making and accompanying legal work is taking place in ivory towers on Bay Street and Howe Street, as opposed to Main Street, and it’s the local business community that suffers, he says. “We’re not getting enough complex commercial work. What happens is as the higher end, knowledge-driven work is removed from local law firms, maintaining that expertise becomes less cost effective. Therefore it becomes difficult to offer the service to local clients. You may decide you are not going to do commercial real estate at all . . . it is no longer convenient for your practice.”

However, some financial institutions are better than others, when it comes to local autonomy and law firm selection, says Hannah. For example, B.C. credit unions allow more flexibility, while chartered banks tend to work from a roster of approved lawyers. It’s like that for most banks and insurers, which now have a roster of firms they work with locally.

However, one lawyer, who asked not to be named, says there appears to be an official and an unofficial roster at some banks and says just because a firm’s name is on the list doesn’t mean it will get work. The lawyer believes that some law firms are put on the roster to placate local management and to make the bank look good in the eyes of the local legal community.

Douglas says he understands why companies want to centralize their decision-making or use a limited roster of law firms. It provides for more effective management. If you have four to five people sitting in an office studying a problem, they will develop options that “result in better risk-management than if people make a decision in isolation.”

However, he says, local law firms are vulnerable in that transition as they could find themselves on the wrong end of a decision made thousands of kilometres away.

Even if a firm retains the work, it remains isolated and at risk. “There can be a shift in decision-making that you don’t know about,” notes Douglas. For example, he cites the case of a chartered bank that manages its legal business out of Toronto. Without any fanfare it created a special loans unit, which needed local counsel. His firm scrambled to find out who was in charge of the new unit and pitched that person on their services. It got the business, but he notes it was “entirely possible that the person could have picked up the phone and called somebody new at another firm. Keeping close to customers is important.”

Babcock adds that “once a decision is made to remove work from a local marketplace to get somebody to reverse that decision is psychologically difficult.”

As corporations shift decision-making to a central location it means that law firms must also reach out and establish new relationships, either with general counsel or the company’s primary law firms, which is often one of the national law firms. The result is that the approach to managing the file likely changes. “What we are seeing is that in-house counsel will frequently manage files from head office,” says Babcock. The work being tasked locally “tends not to be the knowledge-based work. “We’re doing the legwork, not the brainwork.”

On a positive note, general counsel who manage their own files are more likely to use a local firm, Babcock says, but there is a “reluctance to assign local counsel they don’t know. If somebody is coming to Thunder Bay or the region to establish operations, it’s hard for us to get a foot in the door.”

National law firms are also having an impact on local markets outside the core urban centres. In Babcock’s case, an ownership change at a major client saw the new management shift its labour and relations work to a national law firm in Toronto. “We lost $200,000 worth of work.” He says the firm was able to replace it with smaller clients, but the work isn’t as sophisticated and they are more price sensitive. “You are no longer as competitive to get the next $200,000 client that comes along.”

Oddly the new economic climate is also impacting the large firms that feed on it. As corporations centralize operations, they are also consolidating within industries in a bid to build scale and be more efficient and grow their businesses. So on one hand Canada’s economic pie is growing, but at the same time the number of clients are shrinking thanks to mergers and acquisitions and that’s impacting law firms big and small, because consolidation means there are fewer clients to go around.

M&A activity has never been higher. According to a September 2006 study by Blake Cassels & Graydon LLP, M&A activity in 2005 hit a historical high, with 457 deals worth US$88 billion. In the first eight months of 2006, there were 293 deals involving US$106 billion, and the investment bankers surveyed expect more in 2007.
That activity is taking its toll on large firms. Douglas notes that “there will be a lot of unhappy lawyers in Toronto if control of Inco is moved outside of Canada.”

Even if you are a law firm in one of the coveted central locations where power is coalescing, it doesn’t mean you get a free ride to instant clients. Jeffrey Selby, a partner in the real estate development practice at Parlee McLaws LLP in Calgary, notes that his city is one of the most competitive legal markets in Canada. Not only are there local firms, but there are also a growing number of national firms, and regional firms from Edmonton, Vancouver, and neighboring Saskatchewan have all moved into the market there. “There’s a tremendous level of competition that other cities and municipalities don’t face.” 

In fact, the national firms face a similar problem in their own market that regional firms face, so take solace that you are not alone. Ed Waitzer, chairman of Stikeman Elliott LLP,  says that “as companies go global, the language of global legal services, or the currency, tends to be primarily U.S. law or U.K. law. As markets become increasingly global, local law tends to become less relevant. Canadian law is being diminished.”

He notes that Canada’s capital markets account for less than two per cent of global value and will shrink to one per cent over time; not because the market here is getting smaller, but because “other markets are growing much more rapidly.” He says there will always be a need for two to three Canadian firms in an international deal involving our companies. The challenge for firms like Waitzer’s is to “make sure we get one of the calls.”

Fighting back

The shifting business sands mean that business law firms in local centres have had to change the way they do business. For example, Babcock’s firm has “become a lot more aggressive trying to capture more of the local market.” He says the firm has also boosted its marketing budget and lawyers in the firm are now speaking at conferences 1,400 kilometres away in Toronto, “which gives us the large platforms we’re looking for outside Thunder Bay.”

The firm is also aggressively targeting general counsel with businesses that operate in the area and are presenting them with information about the firm and flying to Toronto to meet them. “Five years ago, we would never have done cold calls.” Now, he notes, “we can also get to Toronto for $300 in airfare, do meetings, and fly back that evening.” As well the Internet and electronic communications mean they can send out a lot more marketing packages and touch more people.

Babcock says “it’s a hard sell to get that first file,” but once a firm does, the second usually follows.

It also means thinking outside of the box to land business. The Weiler firm recently teamed with labour law firm Filion Wakely Thorup & Angeletti LLP, whose Toronto presence gives it quick access to the Ontario Labour Relations Board, to pitch the Ontario Northern School of Medicine, and win an RFP. “I think we are going to see more of that form of partnership.”

Another area that firms from outside the core can compete with is on price. Hannah notes that “I think it’s probably accepted that we’re not going to be as expensive as the Vancouver firms, but in a lot of cases that doesn’t seem to have as much impact with the larger clients.” Selby adds that a local firm has an edge on a national firm. “Some people don’t like the perceived arrogance (of national law firms). Local guys don’t want big shots telling them how to do business.”

By the same token firms can look for ways to leverage lawyers from the core regions where the power is coalescing to keep their clients happy and dissuade them from abandoning the firm for a national firm or a law firm in a bigger city. For example, Selby, an expert in condominium legal issues, is often contacted and retained by lawyers in smaller centres to advise on local projects. He also acts for national retailers that might be setting-up shop in a neighborhood. He says the national retailers’ use of law firms varies, but “many tend to have lawyers by regions.”

Remember, too, that national law firms are national in name only and seldom cover more than a handful of cities, so they also need legal contacts in outlying regions. The enemy today can be the ally of tomorrow.

Waitzer says don’t overlook the value of agency work. National firms are looking for the top end of deals. In the provinces where they have offices, they are covered off on legal opinions, but in those areas where they don’t, there is some opportunity. “If we need an opinion that an offering complied with Saskatchewan law, we will use Saskatchewan counsel.”

Ken Mills, managing partner of the Calgary office of Blake Cassels, says law school kinship still goes a long way and decisions on which law firm a national firm may choose to send work to are often based on personal relationships. “When you are referring your client to somebody, you want to make sure they’re pretty good. People who are successful in small centres working for larger clients recognize that contact has to be part of the relationship.”

By the same token, he says, smaller firms need to invest in technology to maximize efforts. He says voice over Internet protocol makes communications seamless and much can be done using the Internet. “It doesn’t matter whether you are in the same city or 200 miles away. There isn’t much of a gap.”

Babcock remains optimistic that firms such as his can thrive and survive and he wonders whether the move to more centralized decision-making and the accompanying use of national law firms by local clients is permanent or simply a cycle. He predicts that “eventually, large firms will become so bureaucratic that general counsel will again start to look at options and will look at expertise local counsel brings.”