06 Sep 2016

UAE: Challenges faced by international firms

Authored by: Sadiq Jafar

UAE: Challenges faced by international firms

This article was written by Jonathon ManningThe Lawyer, 6 September 2016, where he interviews Sadiq Jafar, Managing Partner, Dubai, Hadef & Partners and Stephen Forster, Managing Partner, Abu Dhabi, Al Tamimi.

Once seen as the land of opportunity for international law firms, the United Arab Emirates (UAE) has become a tough market for those unprepared for its challenges. Before the financial crisis hit the global economy in 2007, law firms rushed to enter the UAE market to cash in on large-scale infrastructure work and an economy booming as a result of a strong oil price. Since then, however, oil prices have fallen and the same international firms have struggled to attract work from the major public bodies based in the capital, Abu Dhabi.

Many of these firms have been forced to re-assess their strategy and consolidate their offices, some shutting up shop in Abu Dhabi and moving staff to the more commercially focused Dubai. Herbert Smith Freehills (HSF) and Latham & Watkins were among the larger firms that closed their offices in Abu Dhabi last year.

Latham had originally opened a UAE base in 2008, as part of a three-pronged strategy which saw the firm set up in Dubai, Abu Dhabi and neighbouring Doha, capital of Qatar. After it closed its doors in Abu Dhabi and Doha, offering its fee earners relocation to Dubai, the firm’s chair Bill Voge admitted that the decision to open in those jurisdictions was based on incorrect market intelligence.

The decision by HSF and Latham to close their UAE outposts did not mark the end of the consolidation trend for international firms in the region. So far this year Simmons & Simmons and Vinson & Elkins have opted to close their Abu Dhabi offices. In a statement Simmons said that the closure had followed a detailed review of its work in the region.

While international firms have struggled in the UAE, local firms remain able to make connections with key decision makers. The market is built around relationships and while international law firms bring with them a wealth of expertise and overseas networks they often lack the right connections on the ground to win the big work they initially expect.

Speaking to The Lawyer, Al Tamimi & Company managing partner Abu Dhabi Stephen Forster and Hadef & Partners Dubai managing partner Sadiq Jafar discuss whether consolidation in the UAE legal market will benefit local firms.

Why do you believe international firms are moving out of Abu Dhabi?

Forster: With the current fall in the oil price, the UAE economy, in common with many other economies, has slowed down and the Abu Dhabi Government has taken a more cautious approach to development, cutting back or rescheduling many nice-to-have projects.

Consequently there’s not so much big-ticket work around and international firms that came to the region to do such work have probably decided that it is no longer efficient, or economic, to have offices in both Dubai and Abu Dhabi. As the office in Dubai has tended historically to be the larger of the two, it has therefore been the Abu Dhabi office that has been closed.

Jafar: Each international firm will have a strategy for its international offices. As large, modern businesses, firms regularly reassess their achievement of strategic objectives and the market outlook and amend their forward strategy accordingly. In determining why some firms may have closed their Abu Dhabi offices, the direct and indirect impact of the global financial crisis may still be relevant. Prior to the crisis, many international law firms expanded into global emerging markets, based on projected demand for their services. During that phase, a substantial number, including many that were already present in Dubai, elected to open offices in Abu Dhabi. Others chose to open in both cities at the same time. This led to a surge on the supply side in the UAE.

However, during and post crisis a number of firms may have faced unanticipated or unwelcome challenges, including external fee pressures, significant competition and internal profit pressures, all of which would have made an ongoing review of their global offerings and cost structures necessary. In some offices, revenues may not have met costs, or sufficiently exceeded them, especially where fee expectations were not met and future demand was less certain.

In other cases, global mergers led to planned office consolidation. Many firms appear to have decided that one Middle East office (most often in Dubai) is sufficient to service regional demand.

As more international firms close their doors in Abu Dhabi, are local firms benefiting from a less crowded market?

Jafar: The elite national law firms are knowledgeable, experienced and well resourced and perform effectively. As in other emerging market jurisdictions, the leading independent national law firms work in co-operation with international law firms in order to provide the full spectrum of legal services to top-tier clients. Indeed, we at Hadef & Partners have always worked closely with most of the leading international firms, whether or not they have offices in Dubai and/or Abu Dhabi.

In relatively complicated jurisdictions like the UAE, local firms benefit from their long-term commitment to the market and unique expertise. It should also be noted that only local firms are licensed to have full-service litigation departments, complete with advocates qualified to appear in all the relevant courts.

“Global firms that came to do big-ticket work may have decided it’s no longer economic to have offices in both Dubai and Abu Dhabi” Stephen Forster

Forster: Notwithstanding the withdrawal of international firms, clients (both international and local) still expect a high quality of service and so will look to the local law firms such as Al Tamimi, which provide international standards of service and advice. Consequently, we are certainly benefiting from the less crowded market, but it is probably also fair to say that the international firms that are still here are too.

Has the movement of international firms’ offices had any impact on the services offered by law firms or the price associated with legal work?

Jafar: The UAE is a relatively young jurisdiction and, to support domestic growth, there has been parallel development of laws and regulations, courts, arbitration centres and other soft infrastructure. The introduction of financial free zones (Dubai International Financial Centre and Abu Dhabi Global Market) has also contributed to changing demand patterns. The introduction of new legislation, such as the commercial companies law and competition law, also brings new requirements. Most recently, announcements on the imminent introduction of value added tax are giving rise to new practice aspects for some law firms.

Meanwhile, in line with global trends in the legal sector, pricing remains competitive. Many clients face cost pressures and some endeavour to pass these on down the supply chain to their professional service providers, among others. Government and quasi-government spending is a higher proportion of the overall legal spend in Abu Dhabi than Dubai, and therefore while the price of oil remains low, pricing pressures are more likely to continue.

Forster: As far as we’re aware, the movement of law firms’ offices has not had any impact on the services offered by the law firms that remain in Abu Dhabi, although where firms have cut back on lawyers here some services are now probably being carried out through the Dubai office.

While one would normally expect that a reduction of competition would give some scope for increasing fee rates, the economic downturn has counteracted that so that clients are still looking to get very competitive rates for their work.

What are your firm’s plans for expansion over the next three years and which practice areas and regions are you expecting to develop?

Forster: Despite the challenging economic times, we are looking to expand over the next three years as we expect the economy to begin to pick up in 2018. Despite government cutbacks around the region we expect the focus on key infrastructure projects necessary for long-term development to continue. These include education, healthcare, transport, power and housing projects. We therefore see opportunities in these sectors for ourselves and other firms with the right skill sets, connections and commitment to the region. In addition, there is of course the development of the Abu Dhabi Global Market, which we see gathering pace and which we expect to be an expanding source of work.

Jafar: Hadef & Partners has large and well-established offices in Abu Dhabi and Dubai, with more than 90 practising lawyers. Our focus for the next three years is to continue to enhance and develop our leading UAE reputation, together with our relationships with international and regional law firms.

In the UAE, we expect corporate and commercial to remain strong. Dispute resolution is an important priority – in addition to a large arbitration team, we have a full-service court litigation department, including a large team of advocates licensed to appear in all courts.

We are also seeing increased demand in specialised practice areas and business sectors such as regulatory; tax; technology, media and telecommunications; sports and entertainment; health and education; transport; projects; financial crime; and private client.

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.