Germany is seeing a resurgence in independent law firms with growth in the sector outstripping the increasingly stagnant international firms, explains Dominic Carman

It is 23 years since international firms were first allowed to practise local law in Germany. Glance down the list of today's top 20 German firms (by number of lawyers and by revenue) and 75% of them are familiar magic circle names and Wall Street powerhouses, supplemented by a range of UK and US firms with global ambitions. 

It goes deeper: of the top 50 firms, barely a third are independent. But something interesting has been happening in Germany – from Frankfurt to Stuttgart, the independents are fighting back. Recent data shows that independent firms' annual revenues have increased by 6%-7%, the best figures among independents in all European jurisdictions, while their international counterparts have flatlined.

Andreas Urban, managing partner at mid-size independent Heuking Kuhn, says: "There is stagnation among the top law firms – if you look at the top 10, many of them have relatively low growth rates, very flat. A lot of firms below that are developing higher growth rates. There is a shift by clients going to these firms."

'Semi independent'

At CMS Hasche Sigle, managing partner Hubertus Kolster describes Germany's largest firm as "semi independent" because they retain control over "main issues such as new partners, market positioning and profit distribution to partners" while benefiting from strong global branding under the CMS tag. 

After two straight years of 6% revenue growth, he identifies German corporates developing their in-house lawyers. He says DAX and MDAX companies have increased the size of their legal departments, which are keeping more legal work in-house. He adds: "For the smaller portion of outside work, they are trying to get a lower price. For a London or New York firm that has more standard UK or US rates, it can be more difficult."

As evidence, local lawyers do not express schadenfreude in this year's downsizing by Shearman & Sterling, which closed its Duesseldorf and Munich offices and shed two-thirds of its lawyers, leaving a single German operation in Frankfurt: the facts speak for themselves. 

"Maybe this is a symptom of problems some of the foreign firms face if they do not really have German practices which are doing business in Germany with German clients," says Urban.

Rainer Loges, managing partner of Gleiss Lutz (pictured, below), develops the point: "The crisis after Lehman didn't really affect us. First, because we are not only finance and transaction-driven. Second, because there was a lot of clean-up work – all the firms in Germany with a broader practice did pretty well. And they are still doing well."

In their second full year since breaking their partnership with Herbert Smith Freehills, Loges says that so far, 2013 is "significantly ahead" of 2012 revenues. "Being a fully independent firm on the international legal scene is easier," he says. "I'm not saying that the alliance was bad, but it is easier to sell our position without having to make reference to the alliance all the time. 

"Most of our clients told us 'we like you even though you are not a global firm'. Many more said 'we like you because you are not a global firm'." 

Herbert Smith Freehills, meanwhile, re-opened a Frankfurt office in August.

 

 

Volume and value

Competition is being driven further by a strong recovery in deal volume and value: 2013 is looking much better than 2012, which was "pretty dire", according to Loges. 

It is good news for the transaction-driven Hengeler Mueller, best friend of Slaughter and May, and Germany's leading independent in big-ticket finance and corporate work. "The market is improving again on the transactional side. Public M&A has picked up, we've seen large transactions now. Vodafone's €7.7bn (£6.5bn) takeover of Kabel Deutschland, as an example, that certainly has some quite challenging elements," says co-managing partner, Matthias Hentzen, whose team is advising Kabel. Linklaters is advising Vodafone. 

"There is a buyers' market, to some extent," Hentzen adds, "but it's less at the top end because clients recognise that, without experience, you can't resolve new issues or devise new structures."

In more commoditised products, he argues, there has been an erosion of prices. Hentzen points to the quality of lawyers in international firms. "Some German labels have disappeared, replaced by English or US labels, but the lawyers behind them were there before. Lawyers that had been in a second or third-level firm and were not noticeable beforehand, have been hired by these labels, so they have a better platform to offer their services."

It is not a charge he levels at Freshfields Bruckhaus Deringer – their number one competitor: "We also have Linklaters in the game and on the opposite side quite frequently."

Outside the transactional hub of Frankfurt, CMS sees itself being in competition with Gleiss in Stuttgart, where it has 120 lawyers, focusing on TMT energy, real estate and insurance as the standout areas. No other international firm has an office there.

Tobias Buergers, co-managing partner at Munich-based Noerr, points to his firm's 7% growth being driven by the fact that it is industry focused: "We understand the automotive industry, the energy industry, the media industry, the IT industry, and in many of these fields we are market leaders. We have also benefited increasingly from the improving M&A market."

Cross-border

Buergers points to an inevitable rise in cross-border litigation – culturally anathema to German corporates – which has been one of the largest growth areas for several firms. 

Like other German independents, Noerr's focus has largely been among the Mittelstand: companies with a turnover up to €1bn (£800m). It operates in the same five German cities as Gleiss: Berlin, Duesseldorf, Frankfurt, Munich and Stuttgart. Gleiss also has a Hamburg office, its most recent.

At 60 lawyers, a smaller independent with an historic big brand name is Cologne-based Oppenhoff & Partner, which has recently re-opened in Frankfurt. According to managing partner Michael Oppenhoff, his firm has also "expanded consistently into the family owned and owner-controlled businesses – some of them are very large market leaders".

Beyond geography and their broader relationships with the Mittelstandt, how have the independents struck back so successfully against the international firms when the battle seemed nearly lost?

One suggestion is culture. Hengeler's Hentzen believes in the importance of "independence, not only of the firm, but also of the individual partner in his approach, the atmosphere of trust that we keep, and a very lean management, effectively no interference by management". 

He labels it "organising the swarm intelligence", suggesting "that gives you the freedom and power, the creativity, the room to give your best at work".

Loges points to leverage: "At Gleiss, in the past 15 years, it has been roughly one to two or a little more. This not only creates more partner opportunities, it means that the partner really does client work and is not just supervising."

Observers suggest that some international firms – some of which were establishing leverage of one to five or more – have been trying to come closer to the independent firms in their leverage ratio.

With an eye on the future, Kolster identifies "the aspirations of Generation Y" as key: "It is about quality of life. Fewer lawyers are willing to come to the large firms. The competition for recruitment in the hiring of future lawyers among the top 20 to 30 firms will increase significantly."