Consolidation is Hitting the Canadian Legal Market

Editor’s Note: This post is authored by a strategic consultant to law firms.

By Jordan Furlong, Principal, Edge International

Anytime an American law firm announces a move into Canada, the locals sit up and take notice. When two American firms show up on the same day — one in the NewLaw space and the other in, well, OldLaw — then people like me start writing analyses like this, because something is definitely up.

To the specifics: labor defense giant Ogletree Deakins announced this week it was opening its first Canadian office in Toronto , landing the former chair of the labor and employment law group at a national law firm as its managing partner along with two other lawyers. The very same day, managed legal services platform Axiom Law announced what amounts to an acquisition of thegeneral counsel business side of Canadian NewLaw pioneer Cognition LLP .

By my count, these are the sixth and seventh large legal enterprises from the U.S. or the U.K. to enter Canada in the space of little more than five years. Before that time, the number of foreign firms entering Canada to practice Canadian law had been exactly one: Baker & McKenzie in 1962. When Norton Rose (as it then was) acquired Ogilvy Renault in 2010 and became the first global firm to breach our borders, it sent shock waves throughout the Canadian legal community. Today, Ogletree and Axiom are arriving to the corporate equivalent of how you doin’, welcome to Canada, the closest Timmies is over there.

We’ve been trying to figure out what all this foreign interest in the Canadian legal market means. When Norton Rose first walked through the door, there was an easy narrative to explain it: Canada was the world’s calm and reliable lumberyard. We had emerged from the financial crisis with only minor injuries, thanks to a cautious and well-regulated banking sector, and we were sitting on all the oil, gas, potash and forestry products that anyone (read: China) could want. The global law firms wanted a front-row seat to all the action, hence all the foreign direct investment in the legal supply sector.

That, as they say, was then. Today, Canada is in recession, whether or not everyone here is ready to admit that. The price of oil has collapsed, taking with it the economy of Alberta , Canada’s economic engine. President Obama recently put the Keystone Pipeline project out of its lengthy misery. The TSX has dropped to levels last seen in 2006. Several major Canadian cities are sitting on housing bubbles, some of them every bit as ugly as Florida once offered. And so forth.

So much, you would think, for foreign interest in Canada’s legal sector. Yet this week’s announcements from Ogletree and Axiom are just the latest in what has been a pretty steady stream of cross-border activity. And it’s becoming clear that the health or distress of the Canadian economy has little to do with it.

Here’s a list of all the major cross-border mergers or acquisitions in the legal sector since 2010 (plus Canada’s one major law firm collapse), along with the value of the Canadian dollar against the U.S. greenback on the day each move was announced:

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You can build a case that foreign law firms are interested in Canada because our economy is strong and our resources are in demand. You can build a case that foreign law firms are interested in Canada because our economy is weak and assets are undervalued. But it’s difficult to build both cases at once and ask them to co-exist. There’s something else going on here.

I’m not yet certain what that “something else” is. But I’m coming to suspect that what much of this amounts to is simply the consolidation of providers in a very mature market whose incumbents have few clear growth or exit strategies.

The total Canadian legal market, valued at about C$26 billion, has been effectively stagnant for the last five years or so. In BigLaw, major rainmakers and practice group leaders inch closer to retirement every day, and Canadian firms have proven little better than their American counterparts at succession planning. The fall of Heenan Blaikie was a traumatizing event, and the collapse in oil prices has further spooked law firms. Corporate law departments, traditionally somnabulent in Canada, are waking up grouchy and demanding different and better service. Outside of a few promising outposts such as Gowlings and McCarthy Tétrault , visible innovation has been extremely rare.

In short, serious market upheaval is finally here, and predictably, the supply side of the legal services sector appears mostly unprepared. I’ve been saying for awhile that although Canada is not over-lawyered, it is “over-firmed.” There are too many large firms for such a modest population and capital base. Combine all that with the development of truly sharp and businesslike management in a small but growing number of aggressive law firms worldwide, constantly on the lookout for expansion opportunities. The end result is a situation where, regardless of the local fiscal weather, the underlying economics and demographics of Canada’s legal sector suggest that consolidation and reorganization are right on time.

Perhaps most illuminating in all these developments is the arrival of Axiom, which will effectively wind down the Cognition brand over time (many Cognition lawyers will shift to Caravel Law, which serves midsize businesses that need “outside” inside counsel). It’s one thing for established firms to enter Canada; it’s another for one of the world’s largest “alternative” legal services providers, whose business is predicated on exploiting the many inefficiencies in the BigLaw model, to set up shop as well. Axiom thinks the Canadian legal market is now ready for the serious application of legal resourcing efficiencies. That should cause every BigLaw lawyer in this country to take a very deep breath.