Latin America correspondent Rani Mehta looks at the trend of law firm regionalisation in Central America
Will local firms focused on one market continue to exist in Central America, or will they be forced to regionalise to stay relevant in the market?
20 years ago, this question might have seemed absurd in a geographical region composed of seven distinct countries and dominated by local firms, but then El Salvador-based Arias & Muñoz became the first firm in Central America to regionalise, taking the decision to operate as one firm with offices throughout Central America. Consortium Legal soon followed suit and a quick glance at the market today shows that the strategy is now a common one, particularly across El Salvador, Costa Rica, Guatemala, Honduras, and Nicaragua.
The argument for regionalisation seems simple. Because of the size of many Central American countries, investors who are looking to do business in one country, often want to do business across the entire region. Instead of having to deal with five different styles of doing business and getting five different invoices, clients retain one Central American firm to meet their needs for the entire region. “Many of our multinational and international clients were doing business in the six Central American countries,” managing partner of Arias & Muñoz, Armando Arias says. “They began to tell us that they would really prefer to work with one law firm in all the countries because our economies are very small and it was difficult for them to do business and have to retain six different law firms.” (IFLR1000 Note: Since this interview, the Muñoz brothers in Costa Rica have left Arias & Muñoz. The firm that partner Armando Arias in charge of is now simply referred to as Arias. Arias still has offices in six Central American countries.)
Oscar Samour, a partner in Consortium Legal’ s El Salvador office, agrees. “I think that El Salvador is a small market and I think most firms have understood, except for boutique firms, that in order to continue growing their business they need to expand and regionalisation is probably the best way to do that. You see that there are still firms that belong to several networks and other associations that could allow them to grow their businesses, but still I think that from what I’ve seen and even talking to colleagues that are not in regionalised firms, they seem to believe that this is probably the way to go.”
The question remains though, if regionalization is so obvious, why hasn’t everyone already done it? What is clear that there are still local firms operating successfully solely in one country. Alvarado & Asociados in Nicaragua, Romero Pineda & Asociados in El Salvador and Carrillo & Asociados and Qil + 4 Abogados in Guatemala are all clear examples.
“We have been in practice for 25 years, and so far we have not found the need to become a ‘regional law firm,’” Gloria María de Alvarado, managing partner at Alvarado & Asociados says. “We are also the member firm for Lex Mundi in Nicaragua and feel that through Lex Mundi (an independent network) we can serve our clients with their global needs, going far beyond the regional aspect.”
Even some regional firms argue that local firms have and will continue to have a place in the market. “Regionalisation is a business model,” says David Gutiérrez, a Costa Rica-based partner from regional firm BLP. “So you either like it or not, you either adopt it or not. It doesn’t mean that if you don’t adopt it you will be left out of cross-border work. We work with individual law firms that are very good.”
Regionalisation is also not an easy process to pull off successfully. “One thing about regionalisation that has to be evaluated by any firm is whether you’re going to lose referrals from any law firms if you go regional. If you stay a local law firm, you can specialise in core law areas and become the best in those areas. It’s an ongoing analysis that you have to make,” says José Roberto Romero, managing partner at Romero Pineda & Asociados.
According to Gutiérrez, there are two primary challenges that come with regionalisation: cultural differences and conflict of interests. “Cultural fit doesn’t mean that everybody has to be the same, but the organisation has to have a culture. You [also] don’t want to have partners who are racist or homophobic or sexist, so that social aspect is important. Additionally, the professionals have to provide clients with the best service at an efficient cost – you can’t have a partner who wants to become a millionaire with one deal by abusing a client. If you have a partner who only wants to make money; you’re not a good cultural fit.”
When it comes to conflicts of interest, Gutiérrez says firms just have to face reality: “Law firms have to learn to assume the cost of losing clients because of certain conflicts.”
If a firm does choose the regionalisation route, there are essentially two models. In the first, the firm acts as a single entity. In the second, the firms act as a tight-knit alliance retaining a certain independence. Even within the alliance model, there is variation and nuance. Some firms make efforts to avoid conflicts of interests and to standardize their procedures, whereas others are less likely to do so.
Firms who adopt the first model will often enter new markets by cherry-picking individual lawyers to head their new offices. The advantage of the first model is that it is truly integrated and doesn’t run the risk off the network appearing to be mere window dressing.
On the other hand, the second model can allow individual firms to retain their independence. Firms can still take advantage of a network and refer work to one another, while holding on to their individual nuances and their market recognition in their individual markets.
Arias & Muñoz adopted the first model. “Our vision was to set a single standard for all of our offices throughout the six countries, in which we all share the same principles and have control and supervision over our team’s performance and client service, heading towards the same goals. We don’t have conflicts of interests within the same firm,” Arias says.
Consortium Legal, on the other hand, functions as an alliance, though the firm reports that it has been working towards becoming more integrated over the years. “The advantage that I see in the second model, in the alliance type of model, is that it’s the opportunity to partner with firms that are well-structured and reputable and have a good market share in that jurisdiction. If you go with the first model, it’s more difficult to get that market share,” Samour says.
Choosing a model that works for you is all very well but the most important consideration for any firm looking to regionalise is what clients and referral firms want from you.
For some, the structure is irrelevant if the machine works. “I don’t think we care which way it’s structured internally as long as the external presentation to us and to the clients has the same quality, the same uniformity, responsiveness and coordination among the various offices. The client just wants to be served. They don’t care about internal organisation,” Randy Bullard, an M&A, corporate and securities partner at Greenburg Trauig says.
Others hold a similar view and point out that the need for and success of a regional approach can be judged on a case by case basis. Marcelo Mottesi, head of Milbank Tweed Hadley & McCloy’s global capital markets group says: “I think what matters the most is having the person that is the most qualified for the specific transaction or the type of work that we’re doing. It really comes down to the individual and of course the type of transaction matters too. If it’s in only one country, you try to find the best person for that type of work. If it’s a pan-regional type of transaction, which we do here and there, it’s a lot easier to coordinate with one firm with offices in the different countries than with a bunch a different firms.”
Bullard also points out that it is always a balance between the ease of working with one firm and the need to ensure a quality delivery in every country. “If it’s a multijurisdictional deal, it becomes a conversation with clients to see if the regional firm has the expertise to be able to service the clients based on the nature of the subject matter. I do think there are advantages in one-stop shopping. The clients prefer to have one legal bill and one fee estimate. However, consistent quality and coordinated responsiveness is paramount.”
Sometimes it comes down to the type, and Bullard points out that in regional finance transactions one legal opinion for the region is desirable but in M&A it can go both ways, If the deal requires specific sector expertise, a local firm might have more expertise in that sector in a particular jurisdiction. However for regional deals with few local complications a regional firm might be more cost effective.
So will local firms continue to exist? It’s important to remember that while pan-regional transactions are common, each Central American country has its own unique market, and local financial and corporate transactions still thrive. Thus, as several partners have explained, firms and clients will continue to have incentive to rely on the best lawyers regardless of whether or not those lawyers belong to a regional firm.
For example, take one of the year’s prominent deals – the Aeris Holding $127 million debt issue in Costa Rica. The parties in this transaction were advised by a mix of local firms, firms who follow the alliance model and firms who follow single-entity model. Individual offices of regional firms can still play roles in these types of transactions but they do so on the basis of the individual merit of their lawyers, not on their regional model. This proves that even in a pan-regional transaction, depending on the level of sector expertise required, a client may prefer to handpick top lawyers from each jurisdiction, rather than prioritise the ease of working with a regional firm.
Firms that do regionalise will have to decide which kind of regional firm they want to be – a single entity or a tight knit alliance. Each comes with its own difficulties and advantages. The single entity firms tend to be more unified, but the tight knit alliance can allow individual offices to be more independent. Many believe that firms that are structured as a single entity (or at least are able to provide that same level of unified service) will be more advantageous to clients than firms who are only integrated in name.
Ultimately, the client experience and the strength of lawyers is more important to the survival of a firm than its regionalisation model. Still, in a market where pan-regional transactions are common, the option to use a single firm, instead of dealing with five different bills and five different legal strategies, is appealing. No one can know for sure what the market will bring, but regionalization remains an enticing strategy.
Where do regional and local firms rank in IFLR1000’s 2017 Financial and Corporate Rankings?
In Costa Rica, out of six firms in the top two tiers, five are regional firms, and one is local.
In Nicaragua, out of four firms in the top two tiers, three are regional firms and one is local.
In El Salvador, out of four firms in the two tiers, three are regional firms, and one is local.
In Guatemala, out of six firms in the top two tiers, three are regional firms and three are local.
In Honduras, out of five firms in the two tiers, three are regional firms, and two are local.