Spain: Madrid Annual Report 2017: Firm Re-Engineering

Last Updated: 16 August 2017
Article by Iberian Lawyer

The workflow for law firms in Madrid is looking much healthier than it did 12 months ago – however, this is posing difficulties for managing partners who now have to consider the best way to use their resources to meet rising demand

The good news for law firms in Madrid is that their workload is increasing. Transactional activity – especially in the real estate, financial services and renewable sectors – is on the rise and law firms report being much busier than they were a year ago, when political wrangling meant the country appeared to be in a state of paralysis. However, winning more mandates also brings considerable challenges, in particular that of how to best deploy resources in order to meet the surge in client demand. While there may be a temptation for some firms to go on a recruitment drive in an effort to increase headcount, memories of making layoffs during the crisis years mean that this is a strategy that can cause some concern among managing partners.

Among the problems currently plaguing law firm leaders is how to increase efficiency. One way of doing this is to hire project managers, but such roles – which may often be filled by non-lawyers – can be controversial. Though project managers may be highly effective in some firms, some managing partners acknowledge that partners can sometimes be reluctant to bow to their demands. Meanwhile, talent retention remains probably the biggest headache. With a new generation of lawyers that are less than keen to work 12-hour days – an expectation that previous generations may have reluctantly accepted was just part of the job – law firms have to find a magic formula to strike the right work-life balance, while also providing the right environment for women lawyers to flourish. There is a widely held view that one of the biggest failures of law firms is the fact that they allow many talented female lawyers to slip from their grasp before they break into the partnership.

Distressed assets attractive

Pedro Pérez-Llorca, managing partner at Pérez-Llorca, says that there is substantial interest from funds – as well as other investors – in relation to the Spanish real estate, financial services and media sectors. In addition, he says there has been notable M&A activity in the renewables sector. However, Pérez-Llorca says that one of the key challenges for law firms is satisfying client demand, which is becoming more difficult due to the increase in workload.

Funds are showing an increased interest in investing in the infrastructure, energy and real estate sectors, with distressed assets also proving to be attractive, according to Ashurst's Madrid office managing partner María José Menéndez. She adds that financial institutions continue to sell loan portfolios, including non-performing loans.

There will be further consolidation in the financial sector, says Linklaters' Madrid managing partner Iñigo Berricano. He continues: "There will be a concentration of financial sector platforms, as well as consolidation among insurance businesses, and with regard to private equity, there will be 'dual tracks' [in which a business pursues an IPO while simultaneously running a confidential, private auction to sell the company]. Meanwhile, Allen & Overy partner Ignacio Ruiz-Cámara says there has been considerable investment in "infrastructure and tariff-related assets" in the last year.

There was a notable increase in work for law firms in Spain in the early part of 2017 compared to the same period the previous year. "A year ago, after the election, there was little work in the first quarter of 2016, but now there is plenty of work," says Araoz & Rueda managing partner Pedro Rueda. "The challenge [for law firms] is how to cope with more work, for example, do you increase your number of lawyers? We are recruiting more and we are working more hours." Eversheds Sutherland Nicea managing partner Juan E. Díaz Hidalgo says that his firm's revenue grew in the last year despite the fact Spain has a very competitive market with many "very good law firms". He identifies banking and insurance-related work as potential growth areas in future.

Reacting badly

As law firms strive to increase efficiency, law firms "might need different lawyers in future", argues one Madrid-based managing partner. He adds: "We are becoming more efficient and are acting as project managers in some transactions." Another partner at a 'Magic Circle' firm in Madrid comments that, though his firm has a "special group" for project management tasks, partners often "react badly" to having to deal with them, though clients are very supportive of the concept of project managers. Another partner remarks that clients appreciate the high level of information and feedback they get from project managers.

However, some managing partners are less keen on the idea of project managers. "We believe we can cope without managers, I'm not sure about an extra level of bosses, we can grow without increasing the payroll," says one.

Increasing efficiency is one of the key tasks facing firms, according to Cuatrecasas' Madrid office managing partner Fernando Bernad. He adds that his firm records and measures lawyer utilisation and progress on personal skills to assure "efficiency and delivery". In addition to monitoring lawyer utilisation, measuring lawyers' career progression on a continuous basis is also important to ensure firms "grow adequately and also facilitate the swift access of the best lawyers to partnership", says Gómez-Acebo & Pombo managing partner Carlos Rueda. A managing partner of another firm in Madrid remarks that, in addition to "promptly" recording lawyers' billable hours, it is also important to measure how much business development and training they undertake.

Ensuring profitability is also identified as a key challenge. Carlos Blanco, managing partner of Roca Junyent's Madrid office, says that while there has been a recovery in the real estate market, this has not been linked to higher legal fees. He adds: "There has been an increase in M&A activity, but, while we may see higher fees in the near future, the billable hour is not the main and sole reference anymore; we need to design different billing solutions and we need to use project management more." Blanco adds that, firms need to successfully combine the market demand for specialists with an "efficient use of lawyers". In this sense, he says that junior lawyers now need to be more versatile: "For example, junior corporate lawyers need to know about loans as well as M&A transactions." In addition, Blanco says law firms need to understand and adapt to the values of new generations of lawyers. He continues: "Digitalisation is an ally in this challenge – young professionals are digital natives and their views can be very helpful for firms in this new digital era."

Class actions are expected to represent a significant opportunity for law firms in Spain in future, says Uría Menéndez senior partner José María Segovia. "Class action litigation will increase [in Spain], this will be a trend and it will be a long-standing opportunity," he adds. Segovia also believes that there will be an increase in smaller M&A deals. Freshfields Bruckhaus Deringer's Madrid managing partner David Franco says that a significant increase in consumer-led actions is expected in Spain in the future, but he adds "it will take more time to see other types of class actions". He adds that there is a growing trend in Europe to challenge regulators' decisions, particularly competition regulators. Franco continues: "In Spain, there has typically been respect for regulators, but this may change as the market gets more sophisticated."

Anglo-Saxons arriving?

Having an office in Madrid is becoming an increasingly attractive proposition for international law firms. In recent months, for example, UK firm Pinsent Masons opened in Madrid, while Andersen Global merged with Olleros Abogados. Meanwhile, there are rumours that two other US law firms, as well as a UK firm, are looking to open offices in the Spanish capital. However, some managing partners at law firms in Spain have doubts that US firms will actually take such a step. One says: "It's hard for me to see opportunities for more US firms in Spain, it's not a high-fee jurisdiction, I'm sceptical about what the business case is."

Franco says that the legal arms of the 'Big Four' are making an impact on the Spanish legal market. "They [the Big Four] have determined growth strategies and are investing a lot in technology," he adds. However, another partner remarks that there has been an "independence issue" affecting the ´Big Four', though this has "been diluted" in recent years. Berricano argues that the ´Big Four' could change the way law firms work in the sense that "clients are splitting up the work [they give to lawyers]". Meanwhile, Ruiz-Cámara predicts that there will be more consolidation among mid-sized law firms in Spain in future.

According to one managing partner, "it's bad news for law firms" that the 'Big Four' are winning a lot of due diligence work. He adds that the more profitable work for law firms is due diligence work for vendors. Another partner remarks that losing due diligence work to the ´Big Four' should be a concern for law firms because doing due diligence is "wonderful training" for young lawyers. He adds that more traditional law firms have to be careful because when it comes to fees, they are getting "smashed" by the 'Big Four'.

Bernad observes that, in Spain, the 'Big Four' have taken a share of big-ticket corporate tax work. He adds: "In addition to corporate, there are big areas of high value added in relation to tax, transfer pricing – which is way to enter into more strategic work – as well as private client, financial products or litigation." The 'Big Four' should not be dismissed and are serious competitors, according to one managing partner. "They are now seen on big deals, they're hiring talented people from investment banks – due diligence work done by the 'Big Four' can open the door for them to demonstrate to clients that they can do other work in a more profitable way." Another partner remarks that the 'Big Four' are well-funded and consequently they have an opportunity to "get in the door and show clients they can do work more profitably [than some competitors]".

One of the biggest challenges currently facing law firms is hiring and retaining lawyers, according to Segovia. "This is a profession of hard work, involving availability seven days a week – the difficulty is matching this requirement with the new concerns and interests of young generations of lawyers, such as work-life balance," he adds. "Every year, the Spanish legal sector needs a greater number of professionals, and it is sometimes difficult to find a sufficient number of excellent lawyers to meet such a demand." Ruiz-Cámara says, with regard to recruitment, law firms' human resources priorities have changed: "Not everyone wants to be a partner and law firms have to adapt their structures."

Losing the ladies

The retention of female lawyers, as well as lawyers from diverse backgrounds, is another key challenge facing law firms, according to Michael J. Willisch, head of Davis Polk & Wardwell's Madrid office. He continues: "A high number of incoming law firm associates are women, but we're losing them along the way. Law firms need to do better at retaining and promoting them – clients are more diverse than law firms are, the question is 'how do we better reflect our clients?'" Franco says "winning loyal new clients" is one of the most challenging tasks currently facing law firms given that there is significant competition in the market.

Dealing with increasing globalisation and retaining talent are other key issues facing law firms, according to Bernad. He adds that "improving the experience of clients, as well as lawyers, is also a major challenge". Bernad continues: "We have to make an attractive offer to young lawyers and get the share of junior women that we already have into the partnership." Carlos Rueda says a key challenge for law firms is to "create value" for partners and keep them motivated.

Firms have to focus on finding ways to differentiate themselves from their competition, according to Menéndez. She adds that there "is a need to provide outstanding service while coping with cost pressures and with younger lawyers not wanting to spend as many hours working as previous generations may have done". Menéndez continues: "We have to be sensible about human beings working in law firms and therefore achieving top quality and productivity requires an improvement in efficiency." With regard to the issue of flexible working, Díaz Hidalgo says that if lawyers are offered the opportunity to work from 9am to 5pm, for example, it is important that, in practice, "this is fulfilled" in the sense that law firms support lawyers who want to work such hours. "Flexible working is crucial to their career," he adds.

Berricano says given that the amount of work available to law firms will not grow substantially, they need to be more successful at "winning mandates and building relationships, particularly in competition with other firms". He adds: "We have very talented people, but the challenge is to make law firms a place where people want to work – we also have a problem with social diversity, our clients are diverse and we need to follow that path." Berricano adds that firms also need to ensure that partners "continue to be outward-looking and hungry for work".

Getting the level of recruitment right is an issue facing law firms, according to Pérez-Llorca: "We have to ensure it's not too much and not too little." Meanwhile, he adds that, with regard to artificial intelligence, for example, important considerations include ensuring the level of investment is right and making sure the firm partners with the right companies. In addition, Pérez-Llorca says cyberattacks are a major concern, as is having to recover from being potentially hacked. Such concerns also mean law firms need to ensure they have the correct level of insurance, according to Pérez-Llorca.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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