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The brave new Brazil

Alessandra Machado Gonçalves & Marco Antonio P. Gonçalves


Much has been published in the international media about how Brazil – forever deemed the “country of the future” – has finally “met its present” and, above all, during one of the most diffcult times in recent history. Brazil was one of the last countries to be hit by the global economic crisis and one of the first to emerge, commanding unprecedented momentum with the support of its strong internal consumer market.

Some consider that the change in fortunes began in the 1990s, with the privatisation of public services, and continued throughout the next decade. Before the economic crisis, the country had already experienced some very positive victories. These included:

  • Discovery of large quantities of oil in the pre-salt layer with potential to become a self-sufficient global energy producer.
  • Hosting the 2007 Pan-American Games in Rio de Janeiro.
  • Announcement of Brazil as the host country for the 2014 FIFA World Cup.
  • Raise of sovereign debt rating to investment grade (Standard & Poor’s).
  • Growth in foreign direct investments.
  • Growth in outward foreign investments due to continuous internationalization of many large Brazilian companies.

The positivity continued immediately after the “little wave” of the crisis had passed Brazil, with:

  • Announcement of Rio de Janeiro as the host city for the 2016 Olympic Games.
  • Confirmation of investment grade for sovereign debt ratings (Standard & Poor’s).
  • Increase of debt rating for the city of Rio de Janeiro to investment grade (Standard & Poor’s).

All of this has been complemented by the fact that Brazil is part of BRIC, a grouping acronym created by Goldman Sachs’ economist Jim O’Neil which also encompasses Russia, India and China. The four countries are considered emerging economies that are developing rapidly and which, combined together, might surpass the more powerful and richer economies of the world by 2050. No one initially understood why Brazil was included in the acronym, but following wide media coverage of developments within BRIC, Brazil is now considered by many as the foremost country of that group, with a growing source of sustainable business opportunities.

As one of the largest economies in the world – occupying 10th position on the gross domestic product (nominal) list, according to 2008 data from the International Monetary Fund – and the largest in Latin America, as well as having the fifth largestpopulation in the world, Brazil boasts a very solid and diverse economy, including farming and cattle raising, industry and the service sector.


The challenges of the Brazilian corporate legal market

With all of the above and much more on the way, and considering that law always follows the economy, what lies in store for the future of the Brazilian legal market? A lot happened over the past two decades, especially in the corporate legal market. Bearing in mind its position as the largest economy in Latin America, it is perhaps not surprising that Brazil boasts the largest and most dynamic legal market in the region.

A few relevant facts clearly confirm this:

  • More than 1,000 law schools.
  • More than 600,000 lawyers, of which more than 50% are based in Rio de Janeiro and São Paulo, the largest cities in the country.
  • More than 60,000 lawyers work in an estimated 21,000 firms, of which approximately 98% have between two and five partners (2006).
  • More than 35 corporate law firms with more than 100 lawyers, with two exceeding 400 lawyers.
  • Raw estimate of $3 billion in annual revenue for the whole market (2006).

With regard to the large number of lawyers outlined above, it is important to clarify that within the market a lot of lawyers work solo, many work in legal departments and some no longer practise law.

So, if Brazil is currently experiencing a unique period in its history generally, it can also be considered unique for its corporate legal market as it passes through an unprecedented transformation that will have a tangible impact on the profession as a whole. Different forces are coming together, some old and some new, and local law firms must position themselves strategically if they want to be successful in this brave new world of corporate legal services.

Among the many factors affecting change, the most important are:

  • Globalisation.
  • Technological development.
  • Varied economic crises.
  • Increasing restrictiveness of legislation.
  • Increasing competition with other firms.
  • Increasing sophistication of competition.
  • Increasing sophistication of clients.

Globalisation is already an old and much debated subject but nonetheless, it is here to stay and will not be diminished, even in the aftermath of the global crisis, and it has a massive part to play in the emerging Brazilian legal market. It is fundamental that we understand globalisation as the “big bang” that created the highly complex world in which we live and work.

More specific is the role played by the development of technology in the globalised world and its legal markets. Technology is undoubtedly the main catalyst of all the changes currently under way, evolving with ever increasing speed and intensity. Both are major forces that form the backdrop of the modern world and, specifically, the legal market. And both have, to some extent, been very positive to Brazilian law firms and the country as a whole.

As for economic crises, Brazil had its share of negative experiences in the past as it was not well prepared to handle problems that originated on the other side of the globe. The recent global crisis affected law firms badly in many different countries, but was felt less so in Brazil. This does not mean that Brazilian firms did not face problems, but that they had a completely different experience in comparison with firms in the US and UK. The Brazilian legal market did slow down towards the end of 2008 and beginning of 2009, but since then, it has rebounded strongly. Brazil escaped largely unscathed from the recent economic crisis, but will it be so fortunate next time?

We hope so, but regardless of how well a country can handle such tough times, a law firm must be well prepared to endure any crisis it faces to thrive successfully in an unpredictable world where there is no reliable roadmap to follow. This in part is related to how law frms organise themselves and apply business disciplines in their day-to-day operations. With a vast number of very small firms – those with up to 10 lawyers – operating in the market and dealing with matters such as management, finance, information technology and marketing, it is usually a path traversed more professionally only by larger firms, specifically those with more than 50 lawyers. The number of corporate law firms that fit such a description is only around 100 and they are all, to a greater or lesser extent, pushing hard to function as regular enterprises, mirroring those of their clients.


Evolution

This leads directly to one of the problems faced by firms that are evolving beyond the traditional Brazilian law firm model of the 20th century. Brazilian Bar legislation dates mostly from the last century and, with all the intense changes taking place, it is becoming increasingly restrictive to those law firms that are organising themselves as more typical businesses to better deal with a dynamic marketplace. Both the Bar lawyer statute and code of ethics are more than 15 years old (1994). Some of the latter was partially replicated and expanded by a new regulation in 2000, specifically aimed at promoting legal services.

Summarising the status quo of the Brazilian Bar legislation is quite simple. It did not evolve to follow the changes faced by the world in the past two decades and, as a result, larger law firms have to comply with an outdated set of rules that were created for smaller firms that usually deal with litigation matters. In other words, it does not matter if you are a lawyer who works solo or if you are a lawyer who works in the largest Brazilian corporate law firm. And it also does not matter if you are an in-house counsel or if you concentrate solely on consulting work. There is just one set of rules and it basically speaks to only one part of the legal market. Because of this, some corporate law firms, particularly the larger ones, face obstacles that prevent them from pursuing new avenues of business in a country that is increasingly booming with opportunity.

However, it is also true that these restrictions did not prevent the Brazilian corporate legal market from evolving and flourishing during the past two decades. Specifically, the last decade saw continuous growth, both in size and revenue, for many firms. Some started the new millenium as small firms and grew from fewer than 10 lawyers to more than 100, and some even grew to more than 200 lawyers. But all that growth was followed by an increase in competition that did not exist in the 20th century.

While a large number of smaller firms deal with more traditional demands, a small number of larger firms compete for more complex and financially attractive cases. The larger firms are usually based in the business axis of Brazil – São Paulo, Rio de Janeiro and Federal Capital Brasília – and, directly or indirectly, are also present in the other major cities across the country, where they usually face cultural differences and tough competition from local firms.


Competition + sophistication = merger

With the increasing competition and sophistication of its players, it is no surprise that mergers and acquisitions regularly take place in the Brazilian legal market, although they are not always successful and sometimes are never actually seen through to the end. Despite all the advances and current trends, the legal profession still remains very traditional and conservative in the country, which usually affects such “modern” operations. Despite this, mergers and acquisitions of all sizes will surely grow as Brazilian firms prepare themselves to face not only the local competition but also increasing overseas competition.


International elements

For those firms not willing to contemplate a merger, one alternative is the creation of local networks (aimed more at correspondence work) and alliances (aimed more at integrated work). For a long time Brazilian firms have participated in international networks and alliances, which are a very good way to develop a globalised knowledge of law, but just over five years ago some started to invest in the creation of local ones. Currently there are fewer than 10 Brazilian networks and alliances in operation – although new ones are on the way – some with connections with foreign firms, which somehow struggle to work together for mutual gain. For those that become successful in convincing the market that they are a good alternative to the other available options, a merger might be a goal to pursue in order to guarantee survival in an ever more complex and dynamic market.

Maybe the greatest competitive challenge of all lies in the continuous arrival of international firms to Brazil. These have been around for more than 20 years, following their clients’ business transactions in the country, but many more have arrived in recent years, attracted to the country’s positive momentum. They usually open their own offices or or establish some kind of cooperation with Brazilian firms, but must follow the specifc regulation from the Brazilian Bar which limits their work to foreign law consultancy. They cannot practise Brazilian law – even if they hire Brazilian lawyers. So, for now, local and foreign firms live together peacefully, usually working for different sides in many deals involving Brazil.

Will this situation with foreign firms remains the same forever? Probably not. The forces currently at play in Brazil and in global commerce are very strong and many believe that such restrictions will be suspended, or at least become more fexible in the medium to long term. And let’s not forget about the amazing possibilities that are brewing in the UK with the Legal Services Act.

All of the above means that there is a very tough, competitive period ahead. Local firms will not disappear because of the competition, but they will have to develop new ways and means of competing.

Some argue that the restrictions should only be suspended if Brazilian firms have similar advantages abroad, so that they can follow and serve their clients around the world. Even if that happens, it is important to bear in mind that the flow of business is many times greater in the direction of Brazil. Many large Brazilian companies are becoming global, but this is a very recent trend and one that has yet to achieve critical mass to justify law firms following their lead. One thing is certain – the internationalisation of the Brazilian legal market is inevitable.

All that competition occurs, in part, because of clients who have a greater number of options to choose from. Clients remain one of the major forces that impact and direct how corporate law firms should behave. It is like that in the US, in the UK and all over the world and it should not be any different in Brazil.

The world has changed profoundly over the past decades and so have the companies that inhabit it, their legal departments and, most of all, the relationships they maintain with their external counsel.


Legal departments vs law firms

It is interesting to note that much has changed and evolved in the relationship between in-house and outside counsel, but most of this happened because of demands made by the clients themselves. The clientele has always been a strong force, but has recently increased and diversifed its impact on Brazilian firms.

Today companies have all the information they need to choose and control the external firms with which they share their legal demands. The pressure is continuous and many legal departments follow the “religion” of convergence, which preaches the distribution of work between a reduced number of law firms. That, and much more, is exactly what happens in Brazil, as corroborated by the Brazilian Study on the Relationship Between Legal Departments and Law Firms, recently conducted with Lexis Nexis Martindale-Hubbell and Fórum de Departamentos Jurídicos, the first Brazilian association of in-house counsel.

The results of the study, in large part aligned with the results obtained from similar studies carried out abroad, confrm that Brazilian legal departments are becoming increasingly autonomous and strategic within their companies. Law firms need to ensure that they understand the market and keep up with the changes.

As shown by the study, the work of law firms must always be guided by more than having a distant focus on the client – they must go beyond that and comprehend exactly what is important to the client’s representative from the firm’s point of view. In other words, it is time to embrace the focus of the client. This welcomed behaviour by outside counsel is refected by the hiring criteria considered important or very important by the respondent companies, including:

  • Legal knowledge (99%).
  • Availability or client service (98%).
  • Experience in market sectors (97%).

When added to creative solutions and preventive counseling, these make up what is of the utmost importance to legal departments – the continuous success of their company in the market sectors in which it operates.

For law firms, this means the development of all their actions must demonstrate genuine understanding of what really matters to the client.


The road ahead

The current path of Brazil is being paved mostly by preparations for the 2014 FIFA World Cup, the 2016 Olympic Games and the Pre-Salt exploration – a triad of powerful factors that have the potential to forever change the face of the country. They all bring tremendous opportunities that translate into diversifed business possibilities for companies and law firms, both Brazilian and foreign.

But, most of all, if Brazil has indeed “met its present”, now it is time for Brazilian law firms, more than ever, to seize the opportunity that currently presents itself and accelerate in the direction of the 21st century.

 

Alessandra Machado Gonçalves (agoncalves@marketingjuridico.com.br) is executive partner of the legal marketing consultancy Gonçalves & Gonçalves Marketing Jurídico. Marco Antonio P. Gonçalves is a business administrator specialising in marketing and business development strategies for corporate law firms. Together they authored the Brazilian Study On The Relationship Between Legal Departments And Law Firms, commissioned by LexisNexis Martindale-Hubbell and the first research of its kind conducted in Brazil.

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  • Law Business Review [2010]

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