International law firm networks: strategic partnership in the global competitive environment

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International law firm networks: strategic partnership in the global competitive environment

Development of professional partnership is a global tendency of a modern market of legal services. Lawyers of leading countries of the world form business (professional, entrepreneurial) networks, associations, and strategic alliances. At the same time, many researchers confirm that the very network organizations based on partnership are the most effective form of interaction between economic entities in the global competitive environment.

Contemporary scientific literature encompasses theoretical and applied research of business partnership and its importance for development of network business. Boddi and Peyton (1999) think that partnership is business relations based on the desire of parties for common activity according to single vision of ways for enhancement of meeting consumers' demand at all levels. They enable each of partners to benefit from chosen spheres of business. Partnership contemplates recognition of complementary opportunities of parties, search for ways of coordination of information and logistic flows, common long-term investments (p. 726). Gordon (2001) considers partner relations as the main asset of entrepreneurship, which guarantees a long life term for a company, a low level of risk, and an opportunity of the increase of incomes and profits (p. 18).

Izhevskyi (2016) substantiates theoretical frameworks of formation of business networks based on the transaction cost theory. Masiuk and Kulik (2014) examine the content of entrepreneurial networks. They delineate European and American approaches to creation and managing networks. Chertoryzhskyi (2013) analyzes variants of formation and usage of business networks in the cross-border environment. Kanaieva (2005) studies the role of European innovative networks in activation of innovative activity. Radaiev (2001) discloses the sense, types, functions, and operational parameters of business networks in his scientific papers.

There are discussions among Ukrainian practicing lawyers regarding expediency of entering into international law firm networks for law firms (Ruzhentseva, 2013). In previous publications, the article author has begun to analyze professional partnership of law firms in the form of foundation of international strategic alliances and associations (Shevchenko, 2017a, 2017b). Nevertheless, many theoretical problems have not been researched.

The article purpose is to analyze economic nature of international business networks, preconditions of formation, and consequences for legal service business in Ukraine and the world.

The main hypothesis of research: a law firm can form a competitive advantage at the expense of optimization or coordination of own relations with other law firms, including foreign ones, since their professional and economic activity closely interrelated.

Network organizations, which considerably differ from market and hierarchic organizations, spread around the contemporary business world.

Kurkina and Kniazeva (2017) define a network as a complex of nodes connected by information, knowledge, transport, financial, commodity, and other flows. Any person or a social unit that accepts, accumulates, converts, and creates new information (a group, link, laboratory, firm, enterprise, organization, country, etc.) can be a node. Network organizations combine equal entities in order to cooperate and collaborate for achievement of common goals. They rely on new communication and computer technologies that allow urgently disseminating and converting information, fundamentally changing traditional institutions, organizations, and practices of the modern world. The networks can be easily configured, extend in different directions, encompass large spaces or, conversely, diminish. These capacities stipulate sustainability of the very network. Entering into a new network, a social subject may become a new node of the network as well as an element connecting this network with another one.

A business (professional, entrepreneurial) network is a group of firms (network partners), which join their activity for common usage of own competitive advantages in the process of common implementation of a business strategy and entrepreneurial projects. Becoming members of a business network and relying on trust to own business partners, firms apply a relational or partnership approach to doing business. The latter means that members of the network aim at common activity, which occurs in conformity with single vision of ways of meeting consumers' demand in markets. In many cases, they purposefully abandon the competitive contraposition and harmonize their behavior to protect own production, to decrease competitive risks, and to provide sustainability of economic conjuncture. Firms substitute relative contracts for non-recurrent contracts. Such operations facilitate horizontal integration of the firms. As a result, an information resource becomes a network good.

The main features of business network organizations include:

- strategic interdependence of entities in contrast to strategic independence under a market mechanism and strategic dependence of a periphery on a center under a hierarchic mechanism;

- the significant role of informal relations and personal relations under a high level of responsibility and mutual obligations of parties that influence results of joint ventures;

- mainly horizontal relations of network entities and collaboration between them. Network enterprises of different levels (firms with project, matrix, or program and target structure as well as corporations and global alliances) connect activity of various entities on a temporary contractual basis. Depending upon an industry, firms may create vertically integrated business networks (according to the principle of a technological chain), virtually integrated networks (clusters), in which all financial decisions are made collectively and on the basis of local compromises, and combined networks (they combine peculiarities of horizontal and vertical networks) (Masiuk & Kulik, 2014);

- coordination as a basic principle of managing in contrast to self-organizing under a market mechanism and the combination of centralization with decentralization under a hierarchic mechanism (Kurkina & Kniazeva, 2017; Katenev, 2007).

Scientists delineate the European and American approaches to creation a business network. The European model contemplates the flexible structure, members of which collaborate for achievement of competitive edges. In the American model, networks are sustainable organizations with similar interests, which interact between each other and maintain informal contacts. Simultaneously, networks in the American model are controlled by a single center (a network integrator), which concentrates the main managerial functions such as development of a strategy, managing technological and economic development of a network, financial and marketing functions, activity coordination, etc. In practice, members of a business network remain completely independent in a majority of cases. Therefore, scientists define networks as one of complex forms of meta-corporation, which is referred to as a combination of a particular number of business entities that does not have legal personality (Masiuk & Kulik, 2014).

There is a need to agree with those researchers, who note that network interaction of entrepreneurs contemplates a rejection of the utility maximization principle and diminishes economic efficiency of their activity. Instability of the economic order, which deforms social institutions of regulation and compels an entrepreneur to consciously refuse a part of own profit in favor of maintaining relations with business partners (Svetunkov, 2011). Form the standpoint of transactional analysis, the frequent change of business partners leads to the significant increase of transactional costs of each market participators (costs for search of new partners, negotiations and conclusion of agreements, costs for observation and control over fulfillment of agreements). The mentioned operations are not directly related with production or providing customers with services. However, their existence is inevitable. It may be long-term and considerably increase transactional costs of a firm. Subsequently, a current situation is estimated every time at each new negotiation and conclusion of agreements between the same firms. The situation can change under the influence of competition. Any previously concluded contract «connects» partners and makes it difficult for them to find the same one oriented towards achievement of similar purposes and goals after the expiry of the contract. Hence, the change of a market partner is sometimes impossible. Eventually there is a need to form a union of partners within a single organization such as a business network instead of recurrent search of necessary market agents and conclusion of new agreements. Establishment of relations between one pair of business partners contemplates emergence of relations between other business partners in the network. Contributions in network relations have a long payback period and benefit a firm for a long time, diminishing transactional costs and impeding other firms to enter an industry and a market.

An international business network combines entrepreneurial organizations of various countries. Economic globalization is the main motivational factor of its formation. Demand and supply for goods and services becomes global rather than local. Therefore, their producers should have an opportunity to render them all around the world, servicing customers in various countries, and interact with other members of the network, which are aware of local economic, political, and legal factors of business development. Any profession, which functions at the local level but have customers in different places, is a potential member of professional services networks. For instance, in the sphere of professional services, business networks in legal services business, accounting, and auditing are the most widespread. Separate networks are created in the spheres of investment and banking, insurance activity, and real estate.

International networks of law firms have begun to form at the end of 1980s long after than networks of auditors and accountants. Analysts think that quite slow processes of internationalization of legal services business, which only in 1990s have transformed into globalization, are the main reason for this. In addition, the very legal profession is more restricted than accounting because of the necessity of obtaining a license for doing legal services business in other countries or a requirement regarding presence of a partner name in a law firm's name. In any case, only in 1949 American law firm Baker & MCKenzie began to exploit legal services markets, which are not related to the USA, to help its customers to work in other countries.

The first international law firm networks have been called clubs and usually included no more than ten law firms in various countries. Their activity has consisted in holding several meetings of managing partners per year for alignment of the main matters of doing business. Business relations have developed with a word of caution about possible competitive actions on the part of each member of the club. In 1980s, the clubs have transformed into networks. The first official data on their activity have arisen («Law Firm Network», 2017).

Researchers distinguish four network and association levels of the law firms (McGarry, 2017, p. 7-8). Now the international law firm networks are horizontal level 3 networks. In the organizational context, they are based on the following principles:

a) voluntary membership (with payment of a membership fee), when all the members ensure their administrative, financial, and operational integrity and can leave the network (suspend the membership in the next year) at any time; nevertheless, the network members can exclude a particular firm, which is not able to maintain a necessary level of services or has been infringed internal rules, from the network. Law firms, which try to maintain their independence and extend opportunities of servicing customers in the world legal services markets, are most frequently involved in the networks (to have the positive effect of economies of scale);

b) accessibility of resources and services of each legal services firm included into the network for customers, particularly in other jurisdictions;

c) accessibility of network resources for each participating law firm with simultaneous assumption of financial and reputational risks related to obligations of other members of the network in all the countries;

d) territorial exclusivity: if a customer of a law firm in one country needs legal services in other country, there will be only one law firm (a network member) servicing this customer. Such peculiarity excludes competition (Lakhuti, 2013).

Members of a legal services network share some characteristics:

usage of a single brand - the same name, corporate style, single approaches to presentation of information, etc.;

following rules of the head office (usually, it is located at a large commercial center) and managing bodies. However, companies included into a network are mainly independent legal entities. A person being responsible for managing a network may be called an executive director or president. The network may be regulated by a board of directors consulting on general matters of business development («Law Firm Network», 2017);

single standards and methodical instruments for rendering services being very beneficial in the process of servicing international customers;

a single system for control of service quality (Boiko, 2017).

Nowadays, there are the following types of networks:

international universal law firms, which accept only large law firms with a corresponding business reputation. The most universal networks are Lex Mundi, Terra Lex, World Law Group, etc. (Table 1);

specialized networks created on the basis of professional specialization. They encompass: Biolegis (includes independent European law firms specialized in the areas of biological sciences, biotechnologies, pharmaceutics, medical equipment, and related areas of law); L2B Aviation (members of the network provide consultations on aviation law for producers, financial institutions, aviation companies, and airports all around the world); ISFIN (functions in the area of Islamic investment products). Many lawyers think that specialized networks have considerable competitive advantages if they are created owing to combining the best representatives of the certain practice (specialization). In any case, customers believe that law firms are professionals of their business (Official site of Asters, 2017);

inter-professional networks founded by law firms as well as auditing and accounting firms. For instance, World Services Group joins firms providing services in the area of jurisprudence, investment and banking, and accounting services (Official site of World Services Group, 2017). Significant benefit for customers requiring a wide range of consultants, especially in case of large transactions, is considered as an advantage of such collaboration. Nevertheless, simultaneous involvement of lawyers and accountants does not create the multi-disciplinary practice because all the firms are separate legal entities. In addition, the multidisciplinary practices are still regulated or even prohibited in many countries and jurisdictions («Law Firm Network», 2017).

10 largest international law firm networks in 2017

The generalized statistics on the law firm networks are shown in the table 2.

Law Firm Networks Statistics in 2017

1. Formation of international business networks is one of organizational forms for internationalization of legal service business. Although such processes occur at a slow pace compared to areas of accounting and auditing, formation of stable economic relations between law firms of various countries is an established fact. Entering a business network, a law firm is encouraged by own business needs and interests and orients towards the increase of own competitiveness in world markets of legal services. Nevertheless, the economic interests of the very law firm, which may differ from interests of network subjects, form over time.

2. Ukrainian law firms gain experience of participation in international legal services networks. For example, the law firm Asters in a member of the world interprofessional network World Services Group, the law firm Vasil Kisil & Partners and Arzinger, Attorneys at Law participate in the universal law firm networks TerraLex і State Capital Group (SCG Legal) respectively. In order to enter international legal service markets and to access to law firm networks, Ukrainian law firms need thorough managerial preparation such as economic analysis of an international legal services market, formation of prognostications for development of the legal services industry, implementation of principles of strategic management and marketing, particularly formation of own strategy of internationalization by each entity of the legal services market.

3. In theory, matters of managing the legal service business under competition and globalization need further research. This is related to liberalization of legislation of certain countries regarding the access of foreign lawyers and law firms to internal markets of legal services as well as world processes of globalization in general. Examination of nature of international business networks, substantiation of the economic, organizational and legal content of interaction between members of international business networks is of considerable importance.

References

network entrepreneur law

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