Casa de herrero, cuchillo de palo

The Legal 500’s Latin America editor, Tim Girven, considers the contemporary market for legal services across the continent and whether they constitute a fit-for-purpose solution for modern business.

‘In the blacksmith’s house,
the knives are made of wood.’

A common saying in Central America, which quite accurately encapsulates a truth that remains an ongoing issue across legal markets in the region: that for all of the formal education, technical nous and practical experience which resides with their partners, all too often, firms fail to apply the same intelligence and detail that they afford their clients, to their own organisation.

The official reasons for this are as varied as they are hollow – volume of work, pace of development or the classic ‘if it ain’t broke, don’t fix it’ approach. But with an eye to the Latin American market in particular, organisational structure – particularly the prevalence of the family firm – is perhaps a far more pertinent consideration than given credit. Let me explain.

Now, first and foremost, there is nothing wrong per se with a family-run enterprise. In fact, a sizeable number of the clients who patronise these firms will themselves be family-owned and operated entities. But, given that it has yet to be proven that legal capability runs in the blood, there are issues apparent that in-house counsel should be considering when selecting and appointing external counsel.

Most importantly, do law firms with a family structure have the capability to continue to offer the most sophisticated legal counsel over time? Or on the contrary, is it more generally the case that such firms – by definition – will tend, over time, towards serving mid-market clients, instead of seeking the most sophisticated, cutting-edge legal services?

The argument could be made that there is never going to be a case for a ‘one size fits all’ approach.

Consider certain sub-sectors, particularly those which are highly specialised or in smaller jurisdictions. In such cases, it’s not uncommon that the most sophisticated legal knowledge resides with sole practitioners. Oftentimes this can be attributed to basic market forces – limited demand results in limited supply – affording the opportunity for said sole practitioner to carve out a defined niche. Generally, this isn’t an issue, because such specialist advice is necessary only on a case-by-case basis.

Instead, where this issue truly comes to the fore is regarding the appointment of a client’s standing counsel. A pair of the region’s final frontiers for legal market development offer apposite lessons in this regard.

Both Ecuador and Paraguay, unlike elsewhere in the region, have yet to experience the arrival of a major international player (although regional player Ferrere is present in both jurisdictions).

It’s not uncommon that the most sophisticated legal knowledge resides with sole practitioners.

Paraguay has been blessed with 4-5% growth for a number of years (although, it should be noted, departing from a particularly low base), which has spurred development at a time when the legal sector is undergoing a wholesale generational transition. Estudio Mersan, Estudio Olmedo, Estudio Riera and Estudio Vouga are all in the midst of a generational handover – a process that has involved significant steps towards greater institutionalisation – one which market leader Estudio Gross Brown has completed.

Ecuador has also seen significant disruption to its legal market over the last two-to-three years, primarily as a result of the entrance of Ferrere. There, competition for talent between a regional power and a market primarily comprising traditional family firms (with their often opaque career pathways – particularly for young lawyers), has spurred change. As a result, the market has become increasingly atomised. Major players including Bustamante & Bustamante, Coronel & Pérez, the former Corral Rosales Carmigniani Pérez (which has reverted to its two former constituent firms, in Quito and Guayaquil respectively), and Paz Horowitz, have all been among those affected.

In both jurisdictions, a myriad of small firms and specialist boutiques have formed as a result. But it remains to be seen if these outfits, with their relatively limited resource bases, can successfully take the next step to establish operations fit for purpose in the modern legal market. The pessimist (or perhaps the realist) would say that instead, these constitute attractive acquisition targets for more sizeable international players – the likes of CMS, Dentons, DLA Piper and Garrigues, for example – looking to establish a foothold in the market. The entrance of any such firms would of course detonate the market once more, likely leading to a further round of modernisation and maturation.

A glance at neighbouring Colombia, where the market has endured the full brunt of the arrival of international players, illustrates what could be ahead. There, the process of consolidation and maturation has resulted in the majority of formerly prominent family firms being either absorbed or suffering a process of gradual dismemberment as their talent is cherry picked by wealthier or more sizeable international players – the likes of Norton Rose Fulbright and Holland & Knight, or in more specialist sectors, DAC Beachcroft and Littler Mendelson.

For law firms, the message is clear: adapt or perish.

For clients, it becomes a case of caveat emptor. They must ask themselves: is the currently contracted service provider fit for purpose, both now and into the future?

The issue then becomes one of tension between adaptation to local market specificity and modern service provision. This is particularly evident in so called ‘secondary markets’ – cities such as Guayaquil in Ecuador or Santa Cruz in Bolivia, Cali and Medellín in Colombia and even perhaps Monterrey in Mexico – all economic powerhouses but which lack the administrative underpinnings found in national capitals, and subsequently tend to display a very different legal culture. Here, the predisposition has often been towards both the use of local practitioners cognizant of the city or region’s specificity, and the ‘lawyer as consigliere’, a mode that long accompanied the family firm organisational model. While this long constituted a barrier to entry (consider the lack of firms from Bogotá in Cali and Medellín, or from Quito in Guayaquil, for example), increasing legal specialisation and new administrative regulations and requirements (corporate governance, data privacy and anti-money laundering, for example – indeed, compliance in general), are now finally breaking down these barriers as clients find traditional firms increasingly unable to service these new requirements.

To remain relevant, law firms must be involved in a constant flight towards the most sophisticated work, a movement that involves not only the capacitation of its lawyers, but also the transformation of the platform from which they work. Such migration is the only insurance against the ongoing commodification of many types of legal work (from capital markets issues that have become a cut-and-paste process to mass trade mark filings), or indeed, their automation, which tend to erode law firm profitability. The ongoing transformation and constant fine-tuning of the law firm platform itself is similarly essential if legal service providers are not going to be left stranded by the changing tides of an economic and business environment, itself increasingly driven by innovation.