Barclays Corporate's Jane Galvin on the steps law firms need to take when planning international expansion

Global expansion is certainly on the top of the agenda of many firms, whether it is making their first move abroad or increasing their footprint as opportunities in emerging markets beckon. When it comes to taking the plunge, however, there are several factors that need to be considered when it comes to funding expansion and managing associated risks.

First, firms must consider their rationale for wanting to expand abroad. Is it because clients expect them to have offices abroad? If so, the firm must expect its existing customers to provide it with a substantial amount of business for the move to be worth it.

Alternatively, is the expansion attributed to the firm's growth strategy to grow the business abroad and achieve higher profitability through new clients? If so, the firm has to carry out sufficient due diligence to establish the market appetite and determine whether opening a new office will provide it with the opportunity to win new clients.

Funding for a new office when expanding internationally will depend on the overall requirement of the firm. The parent firm may use existing cash capability or a capital call on its partners to raise cash. Other options include bank working capital and external finance, post-Legal Services Act.

When it comes to bank finance, decisions need to be made about whether to borrow locally or from the UK. Generally, all funding will be done via the parent firm, which will raise the funds centrally and disseminate to the new firm. It is more difficult for the new firm to raise funds abroad, as the local bank may be unwilling to lend to a new start-up or require a guarantee from the UK bank. In addition, the UK bank will provide more competitive pricing – ie lower borrowing costs – if it knows the parent.

An immediate risk to consider from international expansion is currency exposure, as the new office is likely to be billing and incurring costs in the local currency. Exchange rate risk only occurs to the extent that the office is being subsidised by the parent firm. Therefore, currency risk will lie with the parent firm as it offsets the local costs and converts the remainder to sterling. The parent can implement hedging strategies to minimise its exposure, which will help smooth and remove unexpected currency movements. Forward contracts will set exchange rates and therefore allow the firm to budget for costs that it will incur when setting up abroad.

Barclays Corporate recently carried out a survey among the top 50 UK law firms looking at the importance of risk management for each firm and their attitudes towards hedging against foreign currency (FX) risks. The research shows that 23% of firms surveyed consider FX exposure a 'significant risk' to their firm, with 53% of firms stating they have been actively managing their exposure for more than a year.

When it comes to hedging, law firms are beginning to take a more portfolio-based approach, and we have seen the number of firms that hedge double in the last two years. When compared to corporates that are similar in size, however, this number is still small, with our research showing that 75% of the top UK firms do not currently hedge to mitigate their FX risks.

Further risks to consider when opening abroad include differing legal regulations. For example, employment law in Hong Kong requires firms to employ one local lawyer for every UK-based individual who is brought over. Some countries do not recognise limited liability partnerships and therefore such firms need to take this into consideration when setting up abroad. There also exists the possibility of setting up the local firm as a branch or as a separate entity.

In addition, firms need to decide how they plan to reward local partners – will it be based on local profits only or will it be dependent upon the global profits of the whole firm? These decisions can impact the culture of the firm and the partnership.

Overall, when considering expanding abroad, firms need to make sure they are clear about their strategy and that they carefully evaluate the options available, which will in turn help them to plan and budget accordingly.

Jane Galvin is the managing director and head of professional services at Barclays Corporate.