LAW FIRM DIRECTORY

Legal Market

Receipt of Award

Business models followed by the leading law firms might serve as an excellent illustration of the processes taking place in the legal services market of Ukraine. Even in full-cycle law firms, only three or five practices could be regarded as income-generating. The practice of dispute resolution remains the undeniable leader on the legal market due to both its financial benefits and the high demand for its services

OLEKSIY NASADYUK

Despite a slight improvement in growth of financial proceeds, the legal market is still far from the level of 2012-2013. Besides, its structure is dominated by elements intrinsic to chaotic crisis times. A lack of demand and solvent customers is still a dominant trend, which inevitably results in increased competition, especially in the practices attributable to dispute resolution — this year it is litigation law firms that have shown the best dynamics.

Another trend of this crisis market is increasing specialization — even in full-cycle law firms, only three or five key practices can be regarded as income-generating. Dispute resolution should  be recognized as "the market-leading practice". Defense of businesses and individuals in criminal proceedings is also in demand, though it does not refer to the most lucrative practices. Considering the current market situation, it must be admitted that the corporate law practice (including maintenance of few M&A transactions) has shown quite good results. The practice has experienced some increase in the scope of work with distressed assets and debts (including maintenance of restructuring the debt on credit and Eurobond transactions), tax structuring and consulting, advising on banking and currency legislation. Experts, however, point out the almost complete absence of new funding projects — all the proceeds were received from institutional donors only.

Within the framework of the annual research Fifty Leading Law Firms of Ukraine 2016, the participants were asked to note the key fields of specialization, which account for the largest share of their law firm's revenue. Based on the data obtained it is possible to figure out both the most profitable practices and those in greatest demand (separating the share occupied by each single practice from the total firm's returns). A separate study was carried out of which customers from which particular economic sectors contributed to the income generated by the law firms practicing in Ukraine. And since the "Top 50" members are law firms representing all business-oriented sectors of the legal market with due account for both their scale and geography of operations, the data obtained is rather representative.

According to the methodology, the "income" of a law firm shall refer to the income obtained from the sale of legal services. In cases when the law firm's income includes the proceeds not related to the provision of legal services, we asked the respondents to specify only the amount of income derived directly from the provision of legal services. The period for which information on the income earned by the law firm was provided covers the first three quarters of 2016 and the fourth quarter of 2015. It gives the opportunity to determine the income of a legal firm for 12 calendar months. We compared the results to the same period of the previous year. Since not all the research participants agree to disclose the amount of their income, for the purposes of compiling the rating we usually employ the income recovery methodology — based on the comparable financial efficiency (defined as the ratio of the amount of revenue to the number of lawyers) of law firms specializing in the same field, we calculate indicators of the average group performance needed to estimate the profitability of a particular law firm.

 

Through the lens of legal practices

According to the findings, the practice in highest demand, predictably, became the resolution of disputes: this judicial practice accounted for 18.9% of the revenues earned by  law firms, while the international arbitration provided 4.8%, 89%, and 33% of our respondents, respectively, provide services within these practices. During the period studied, the practice of business protection contributed 4.1% to the total income generated by law firms. An increase in the scope of work with distressed assets has been noticed: for example, in 2016, the bankruptcy practice contributed 4.6% to the total earnings of law firms, while the debt restructuring practice accounted for 4.5%, 40% and 37% of our respondents, respectively, providing services within the mentioned practices. The corporate law practice (second highest in demand) has the third-highest level of income, which accounts for 7.3%. Even during a time of crisis there is still demand for both corporate-wide consulting and high level industry expertise. After all, most of the income generated by the corporate practice fell to the share of law firms that are the market leaders. It should be noted that corporate practice is the main practice area for 10% of market participants (providing more than 40% of revenues), while for 10% of all law firms it generates one third of annual turnover.

The three income-generating practices, just as in the previous year, include taxation law (8.6%). Services in this practice area are provided by 70% of market participants. The increase in the number of players while the share of the market remained unchanged is testimony of increasing competition. As a rule, the tax practice does not belong to the main areas of activities of law firms, while basic revenues are distributed among a few boutique law firms and major law firms that have strong tax practices. The rankings of the ‘Big Four’ companies, which are traditionally strong in tax matters (including transfer pricing), are considered separately. In the tax practice, ten law firms concentrate 60% of revenues. This practice area brings half of them only 10-15% of their total income. It means that most tax law firms operate in a rather low price range providing legal support for medium and small businesses.

The banking and finance law practice this year is again ranked fourth. Interestingly: the number of law firms specializing in these practice areas comes to 51%, while the revenue performance of the practice has dropped to 7%. The latter is distributed rather specifically — it involves major Ukrainian and international law firms with the practice share in the firm's budget never exceeding 30%. And only ten law firms received 80% of total income generated by the practice.

An interesting situation is observed in the land and real estate practice. Despite some stagnation observed in this area, 58% of market participants continue to make a profit by practicing in this area. Its profitability, however, is rather low — in 2016 it was 4.1%. This situation might be explained by the fact that law firms keep on providing legal support for a number of long-term projects. Interestingly, the companies that belong to the industry of real estate and construction are among the major legal services consumers.

As for M&A, 41% of respondents reported this area to be practiced in their law firms. While its financial performance accounts for 5.8%.

The practices of competition law and intellectual property are traditionally regarded as niche practices. They are presented by a relatively small number of law firms, only three or five of which are really profitable. As compared to the previous year, the number of law firms practicing in these areas has decreased, but the overall profitability of the intellectual property practice accounts for 6%.

The popularity of the criminal law practice can be confirmed by objective data: over the last year, a slight increase was observed in both the number of law firms providing services in this area and overall practice profitability. This law practice definitely remains a niche one and is far from top rankings: it occupies 5.3% of market share due to its profitability index, while 75% of total income is accounted for by only five law firms. This practice area is still characterized by strong positions of private-practice lawyers and bar associations, which try to handle their cases away from the public gaze. Criminal legal aid in Ukrainian law firms tends to be ancillary and linked to strong tax, litigation and bankruptcy practices. This is due to the specificity of white-collar crimes. In addition to classic situations such as detention, arrest of persons, summons to law-enforcement agencies for interrogation purposes, searches, seizure of property and documents, as well as arrest of property, criminal defense lawyers are also consulted when it is necessary to prevent and neutralize ­criminal law risks­ associated with a business structure or business processes, to provide legal assistance in criminal proceedings on tax crimes, to ensure criminal defense of creditor's rights against inappropriate actions of debtors and compensation of damages in criminal proceedings.

The employment and labor law practice is showing rapid development — its profitability accounts for 2.1%, while demand for this practice comes to 43%. This practice is likely to have good prospects for further development because the list of labor-related issues is very extensive (advising services for employers and development of local acts, labor disputes, staff transfer and relocation, development of individual employment models, including employment of foreigners), while the situation in some sectors of the Ukrainian economy (for example, in IT business) will stimulate demand for services of law firms practicing employment and labor law.

The international trade practice shall be classified among those as being in demand but low-income practices. At the same time, many experts refer this practice to one of the most prospective, hoping for more active development of trade relations with the EU.

Interestingly: 25% of law firms reported on providing services in the field of compliance. Despite its modest financial results, we can anticipate promising outlooks for this practice area. Indeed, a year earlier only 5% of law firms were engaged in providing the relevant services.

One of the features peculiar to this law practice is sectorial segmentation of the legal business: in addition to the corporate and land law, the most profitable law practices included power engineering, pharmaceuticals and the agricultural market. However, in spite of the declared adaptation of services to the specific industrial needs of customers, some market participants are still practicing industry structuring in their law firms — such positioning relates to marketing rather than to the financial sector and has no significant impact on the market structure. The law firms, which reported on profitability of the relevant industry practices, do belong to the leaders of the sectors in question, in some cases with a boutique specialization in pharmaceuticals or agriculture.

As far as the demand for some boutique practices is concerned, it is possible to identify a few certain patterns. Thus, in the transport law practice, sea law accounts for a significant fraction of revenue. Positions held by South Ukrainian law firms are objectively strong in this area. Boutique law firms are commonly involved in customs law issues, and in the vast majority of cases also provide services in the area of taxation and/or intellectual property. The bankruptcy practice is more popular among Ukrainian law firms, while restructuring practice is in high demand among international ones.

In general, we can ascertain that last year the market of legal services experienced configuration of practices, which is usually peculiar to a time of crisis. Law firms and lawyers, who managed to adjust themselves in key aspects of work focused on solving crisis situations of their clients, had a rather active year. While law practices are getting more and more specialized, the major legal market players retain reserves for quick re-orientation in favor of transactional practices, thinking of the future, rather than pursuing only immediate or short-term objectives.

 

Industrial cross-section

We asked respondents to indicate what share of the practice of their law firms was occupied by clients representing certain sectors of economy. Just as we expected, the banking sector turned out to be the principal employer of law firms (18.9%), with second place going to the agriculture and food industry sector (10.9%), real estate and construction sector was ranked third (8.4%) closely followed by the energy and natural resources sector (8.3%). The pharmaceuticals and cosmetics sector was the last of the top five ranked employers of law firms, accounting for 6.8%.

If we compare these findings to the structure of the law firm practices, it becomes obvious that the majority of clients' issues addressed by law firms are beyond the industrial plane. They somehow or other relate to dispute resolution, bankruptcy, restructuring, corporate law (including a few M&A transactions), and taxation.

 

Fee policy

The pricing policy for legal services is being reviewed on a global scale. In Ukraine, this trend is enhanced by economic crisis and the devaluation of the national currency. For many years already, lawyers have been considering alternative schemes for estimating the value of their services. Clients seek to control their expenditures and, thus, want to know the exact cost of the rendered services or at least the maximum amount of estimated costs. It is possible to establish both the fixed price of the fee and ceiling amount of the chargeable time needed to execute the whole of an assignment or part of it. In addition, all the customers expect to receive a discount, payment by installments or any other compensation bonus. In such circumstances, the previously popular hourly rate can only serve as a base or a guideline, rather than a proper measure to set a real price for legal services. At the same time, Ukrainian law firms, when answering the question of applicable methods for settling payments with clients, usually reported on the possibility to settle payments using any popular payment option.

It must be said that Ukrainian law firms prove to have a rather closed nature, preferring not to make public the actual rates, at which they work: the vast majority of participants in the Fifty Leading Law Firms of Ukraine 2016 study considered this information to be confidential. Information on the currency exchange rate used for settling payments with  clients is also withheld. Analysis of summarized and averaged data shows that the lowest tariffs are set for services rendered by ordinary lawyers working for small law firms in Kyiv and the regions. The highest rates, respectively, are offered by the partners of Ukrainian offices of the international law firms. The services provided by the partners of a middle-sized Ukrainian law firm (20-40 lawyers) are somewhat cheaper than those rendered by senior lawyers working for international companies. The greatest diversity of rates is observed in regional markets. In some cases, a five-fold difference between maximum and minimum rates can be seen.

Articles of expenditure

For many law firms, personnel costs are considered to be the most significant item of their expenditure. What it involves is not confined to salaries and social benefits (statutory and corporate). Such expenditures also include all possible bonuses, payment of educational, entertainment, marketing activities as well as other associated costs.

As in the previous year, we have asked law firms to indicate the range of the average monthly income level of partners and hired lawyers with reference to their positions (junior and senior legal personnel, advisors). Summing up the obtained results, we can state that the income of lawyers fluctuates in a rather wide range. Even in law firms belonging to the same level, there may arise situations, when the declared income of a partner of one law firm is lower than that of a senior lawyer from another firm (in some cases, such a situation might be observed even within a single law firm). If we compare small and especially regional law firms, to major legal market players, we can see that salaries of personnel on the same level of hierarchy differ significantly.

 

RANK COMPANY MARK

BANKING & FINANCE

 

1

 

Sayenko Kharenko

 

180

 

2

 

Asters

 

173

 

3

 

AVELLUM

 

136

 

4

 

Baker & McKenzie

 

135

 

5

 

Aequо

 

113

 

LITIGATION

 

1

 

Vasil Kisil & Partners

 

146

 

2

 

LCF

 

145

 

3

 

Asters

 

98

 

4

 

Iliashev & Partners

 

94

 

5

 

FCLEX

 

88

 

LABOR & EMPLOYMENT

 

1

 

Vasil Kisil & Partners

 

197

 

2

 

Baker & McKenzie

 

71

 

3

 

ILF

 

70

 

4

 

Spenser & Kauffmann

 

57

 

5

 

Asters

 

56

 

DEBT RESTRUCTURING

 

1

 

Sayenko Kharenko

 

147

 

2

 

AVELLUM

 

104

 

3

 

Asters

 

64

 

4

 

Baker & McKenzie

 

61

 

5

 

Trusted Advisors

 

52

 

ENERGY

 

1

 

Asters

 

171

 

2

 

CMS

 

168

 

3

 

Baker & McKenzie

 

89

 

4

 

Antika Law Firm

 

75

 

5

 

GOLAW

 

57

 

CORPORATE

 

1

 

Asters

 

194

 

2

 

Sayenko Kharenko

 

136

 

3

 

Aequo

 

108

 

4

 

Baker & McKenzie

 

99

 

5

 

Vasil Kisil & Partners

 

80

 

WHITE-COLLAR CRIME

 

1

 

AVER LEX

 

267

 

2

 

Solodko & Partners

 

103

 

3

 

GOLAW

 

95

 

4

 

VB PARTNERS

 

80

 

5

 

FCLEX

 

76

 

INTERNATIONAL ARBITRATION

 

1

 

Sayenko Kharenko

 

195

 

2

 

ENGARDE

 

86

 

3

 

Eterna Law

 

78

 

4

 

Integrites

 

65

 

5

 

AGA Partners

 

60

 

BANKRUPTCY

 

1

 

FCLEX

 

104

 

2

 

Alekseev Boyarchukov & Partners

 

78

 

3

 

LCF

 

63

 

4

 

Iliashev & Partners

 

54

 

5

 

Asters

 

54

 

AGRIBUSINESS

 

1

 

IMG Partners

 

122

 

2

 

Asters

 

109

 

3

 

ALEKSANDROV & PARTNERS

 

90

 

4

 

ОMP

 

82

 

5

 

AGA Partners

 

62

 

M&A

 

1

 

Sayenko Kharenko

 

176

 

2

 

Asters

 

146

 

3

 

AVELLUM

 

111

 

4

 

Baker & McKenzie

 

108

 

5

 

Aequo

 

105

 

INTELLECTUAL PROPERTY

 

1

 

DOUBINSKY & OSHAROVA

 

255

 

2

 

Pakharenko & Partners

 

142

 

3

 

Aequo

 

93

 

4

 

Asters

 

72

 

5

 

Baker & McKenzie

 

71

 

TAX

 

1

 

WTS Consulting

 

163

 

2

 

EUCON

 

154

 

3

 

GOLAW

 

98

 

4

 

Sokolovsky & Partners

 

77

 

5

 

Vasil Kisil & Partners

 

70

 

ANTITRUST/COMPETITION

 

1

 

Asters

 

218

 

2

 

Sayenko Kharenko

 

156

 

3

 

Aequo

 

97

 

4

 

Antika Law Firm

 

54

 

5

 

Arzinger

 

47

 

IT

 

1

 

Juscutum

 

165

 

2

 

Sayenko Kharenko

 

116

 

3

 

Axon Partners

 

105

 

4

 

Asters

 

79

 

5

 

Aequо

 

52