Spain's largest law firms rarely make the headlines with news of mass departures and strategy disputes. Solid and rapid growth has seen them become some of Europe's leading firms, but how long will they keep their home advantage against the Anglo-Saxon competition? Derek Bedlow reports

In contrast to their Italian neighbours across the Mediterranean sea, Spanish lawyers and law firms have been a model of stability over the years – particularly at the top end of legal practice. Despite the incursion of international firms, the entrance of the major accounting firms into the legal market and the breakneck growth of the Spanish economy, the legal sector has been characterised by the apparently serene progression of its leading law firms from small local players into some of continental Europe's largest and most successful independent law firms.

In 2007, according to Mergermarket, the three leading firms – Uria Menendez (advising on deals worth E99.8bn (£71.8bn)), Cuatrecasas, (E34.7bn (£24.9bn)) and Garrigues (E49.6bn (£35.6bn)) occupied the first three positions, with other local leaders Gomez-Acebo and Perez-Llorca not far behind.

This success, they say, has been partly down to cultural factors – the willingness of founding partners to share their equity more widely and the less individualistic nature of Spanish lawyers compared with some of their counterparts elsewhere in Europe. "The founding partners had a long view of the market and they were generous in their approach," says Luis de Carlos (pictured left), managing partner of Uria Menendez. "In Spain, we also have strong values such as loyalty, gratitude and the importance of personal relationships. These in themselves cannot explain the success of Spanish firms, but you cannot ignore them either."

Spain's domestic leaders have also been assisted in this growth by the relative lack of attention paid to Spain by global law firms. International firms in Spain moved in fairly early in the globalisation process (very early in the case of Clifford Chance), but did not take it as seriously as Germany, Italy or France until relatively recently, when Spanish companies started to expand abroad, giving local firms precious time to develop the size and expertise to play the magic circle at their own game in the Spanish market.

"The international firms arrived here later, which gave us time to build up our strength, attract the best lawyers, develop a full-service practice and get to the right size," says Jose Maria Alonso, managing partner of Garrigues.

Now, this hiatus is well and truly over. The development of so many Spanish companies from big domestic players to multinationals has spawned a high number of very large deals and created a new demand for high-end transactional and regulatory advice – one that many Anglo-Saxon firms are eager to satisfy, especially as the focus of leading Spanish companies' growth has switched from Latin America to Europe, the US and Asia. All the magic circle bar Slaughter and May have offices in Madrid which offer local law advice, as do Ashurst, Lovells, Jones Day, SJ Berwin, DLA Piper and Simmons and Simmons. They have been joined more recently by US firms Latham & Watkins and Howrey, which both set up shop in 2007.

While many of these have been in Spain for some time, many have more recently turned their attention to winning large domestic clients as well as providing Spanish advice for their clients from elsewhere. They claim that they are pushing on a half-open door as major Spanish clients become more open to using a range of law firms and their need for international legal advice and project management grows. In particular, they say, Spanish clients appreciate the need for high-end specialist advice and are not afraid to instruct a number of different law firms to get it, while greater concern about conflicts of interest is also creating opportunities for more recent entrants.

"There are a number of companies that have a significant need for premium legal advice in M&A, corporate finance, regulatory and antitrust law and there has been an explosion of private equity deals as some of the biggest names in the industry have seen opportunities in Spain," says Jose Luis Blanco (pictured below right), managing partner of Latham in Madrid.

"Spain is now a growth market in its own right, rather than just a being component of Europe-wide transactions. Part of the success of Spanish firms is that they are not reliant on one or two sources of business for their cash flow. To do this, you have to offer a very wide span of services. By being more focused like Latham, you can offer clients and prospective recruits a more focused approach. That is our competitive advantage."

Formal panels have yet to develop but companies now use a range of law firms rather than being 'owned' by just one. "We used to get upset if a client used somebody else, but all companies use more than one law firm now," says Rafael Fontana, managing partner of Cuatrecasas. "Now we are pleased because this enables us to get new clients."

Perhaps symbolic of the increasing power of foreign firms in the market were the leading roles taken by Freshfields Bruckhaus Deringer and Linklaters on the E4bn (£3bn) float of Spanish bank La Caixa's investment arm N one of the largest-ever initial public offerings (IPOs) in Spain – and some international lawyers suspect that the deal tables do not tell the whole story about the leading role that global firms are increasingly playing on big transactions.

"Five or 10 years ago, we were living off the network and doing the English law parts of Spanish transactions," says Miguel Klingenberg, managing partner of Freshfields in Spain. "We still do that, but we are also clearly taking the lead in helping Spanish companies abroad. We now send more work to our network than we receive from it and, as Spanish companies become multinational, this allows us to develop close links with them for domestic work."

Spanish firms now face a real challenge to their dominance of the market. While this has yet to feed through to the bottom line – strong deal activity in 2007 meant the leading firms all increased their turnover by around 16% – they are acutely aware that they cannot afford to stand still if they are to continue to operate at the premium end of the market. If – as widely predicted – the tide goes out a little in 2008, then some dangerous rocks are likely to be exposed for the leading domestic firms.

What domestic firms fear most of all is commoditisation. They have to hold on to premium work if they are not to be sucked into the mid-market, which in Spain is a very uncomfortable place to be. While the leading four or five firms have enjoyed many years of growth and stability, beneath that level the Spanish legal market has seen more than its fair share of woes, not least the high-profile demise of Barcelona-based Mullerat in 2006.

In response, domestic firms point to their size, strength-in-depth and domestic geographical reach as the means by which they can defend their position in the market against the international interlopers. Uria and Gomez-Acebo have different models to Cuatrecasas and Garrigues, having large tax practices which are the engines for attracting work in other areas, but all of the leading firms offer a wider range of services than their international competition which, they say, still puts them in a strong position with Spanish clients despite the drift toward the use of specialist firms. "We have a strong and diversified client base and a very strong domestic position," says de Carlos at Uria. "Foreign firms here are more like boutiques, exporting the UK model to Spain. We go much deeper into the Spanish economy."

Moreover, they say, they can still rely on long-established links with big companies, even if foreign firms are making some inroads, says Alonso.

"Spanish companies have become international quite recently," he adds. "Before that, they felt more comfortable if they had Spanish lawyers with them. That has changed for sure but we still retain the advantage from that situation and we are present in most Spanish companies and have an important share of the market."

Yet while the size of Spanish firms has to date been a strength in the battle for the best work, in a downturn it could prove to be a liability. Size might deliver strength-in-depth and diversification, but it leaves a lot of mouths to feed and can drag a firm into commoditised areas of work that their international competitors avoid. Despite the boom in the Spanish market, fee rates (typically E400-E450 (£300-£340)) for most areas of work have remained stubbornly resistant, but costs have increased markedly in the past two years.

Salaries have increased by almost a third, partly due to the reclassification of associates as employees rather than self-employed consultants, making law firms responsible for their social security payments and placing a cap on the number of hours they are able to work, while willingness of foreign firms to pay more than the going rate has fuelled wage inflation. Consequently, international firms claim their revenue per lawyer is twice that of Garrigues and Cuatrecasas, and ahead of Uria.

Spanish firms are not complacent about the threat to their businesses and these trends have prompted a round of introspection at Spanish law firms. Spanish firms have used their recent good fortune to bring on a round of restructuring, extending leverage and investing in IT to produce efficiency gains. "We want to increase the amount of value-added work that we do and concentrate on productivity and profitability," says Manuel Martin, managing partner of Gomez-Acebo & Pombo. "That is essential for us."

They have also been revisiting their international strategies as Spanish clients become evermore international. While Uria, as one of Slaughter and May's network of 'best friends' would seem to have this area well covered, others such as Garrigues, which has built a network of overseas offices in Eastern Europe and Asia, are happy to leave part of the market to the international firms and stick to areas where they retain an advantage. "We have to accept that some big companies, when they go abroad, prefer to work with an international law firm," says Alonso.

"There is no sense for us to try to compete with them in their own markers – we will lose for sure. The big companies are using us for national operations and for Latin American work, but turn to the Anglo-Saxon firms in other parts of the world. It is a different matter for mid-sized companies. They feel much more comfortable having local counsel helping them abroad. That is why we have opened in Shanghai, Casablanca and Warsaw – to help medium-sized companies in their internationalisation process."

Despite the pressures, none of the leading domestic firms express any interest in merging or entering exclusive alliances with foreign firms and, despite the well-chronicled links between Cuatrecasas and Herbert Smith and Garrigues with Norton Rose (the only top 10 London firms without a presence in Spain), neither firm is keen to formalise these connections.

"We are trying to become more international and we have no plans to stop being an independent firm," adds Alonso. "We feel that we have the strength and resources to become a more important international firm, especially in the Spanish-speaking world. If we were just focused on Spain, then it would make more sense to integrate with an Anglo-Saxon firm."

Instead, all the leading firms are targeting London, in part to enable them to co-ordinate foreign transactions on behalf of Spanish clients, but in the main to ensure that they are not bypassed when the major mandates are handed out. "On big transactions the legal teams are structured in London and we are one step behind in Madrid," says Fermin Garbayo Renouard, a partner at Gomez-Acebo & Pombo. "If institutions have direct access to an English-speaking Spanish lawyer in London who can act as the interface between them and the firm in Spain, they feel much more comfortable about using a domestic firm."

The key battleground, however, is in Spain where international firms are increasingly targeting premium domestic work as well as international transactions. International firms know their networks alone are not enough to guarantee the best clients – they need to be leading Spanish law firms as well. "The segment of the market we serve appreciates the global reach and resources that we have, but if you base your proposition only on what you can do abroad, you will fail," says Blanco. "Having local talent and transactional expertise are key. If you are strong in your local market, then you are strong, period."

At partner level, Spanish firms have managed to institutionalise their clients to some extent, but at the more rarified end of the market, personal relationships are key and losing a leading partner is likely to result in the loss of a considerable book of premium business. So far, high-profile lateral moves have been relatively rare, Latham's capture of the highly-rated Blanco from Cuatrecasas in 2007 was a bit of a coup. He was attracted he says, by the prospect of developing a highly-specialist practice from scratch.

The real action is further down the ranks. International firms are, in the main, playing the long game in the recruitment market and recruiting at mid- and newly-qualified level. However, the size of the Spanish legal profession has been growing at the rate of 1,000 lawyers a year and the rate of salary rises would suggest that good lawyers are an increasingly valuable and scarce resource. Moreover, the number of students studying law at university has dropped from 160,000 to 90,000 since the beginning of the decade as the improvement in the Spanish economy increases the popularity of careers in other areas of the economy.

International firms are offering higher salaries, more international opportunities and, they say, better training for Spanish lawyers and, for domestic firms, remaining attractive to the best lawyers is essential if they are to stay at the top of the market. Most important of all, Spanish lawyers need to maintain the quality of work they offer if they are to prevent the virtuous circle they presently enjoy turning into a vicious spiral.

"Unless you can offer them the opportunity to work with clients of the same calibre as the London firms, you will have problems," says Cuatrecasas' Fontana. "Good work attracts good people and provides them with opportunities. Everyone knows what everybody else earns and you cannot be out of the market. Everybody at the top firms is at the same level – the challenge now is to offer the same career."

Given their track record, nobody would bet against the Spanish firms meeting these challenges and beating the Anglo-Saxons at their own game, but it is a game in which having the home advantage would appear to be a diminishing factor.