Law firms won’t totally pivot their international strategies based on the fluctuating value of currency. But the dollar’s increased strength may influence how U.S. law firms manage certain expenses, set billing rates and perhaps give them a boost when they’re trying to attract laterals around the globe, say law firm leaders and industry analysts.
The U.S. dollar has gained significantly against other world currencies this year and is close to level with the euro for the first time in roughly two decades, due to a mix of aggressive rate increases, comparably less exposure to the war in Ukraine, and the perception that it’s a safe bet for investors.
It gives firms something else to think about when they set their prices. Will Shields, a partner in the private equity practice at Ropes & Gray and a member of the firm’s policy committee, said it “certainly” becomes an issue for firms to manage when they consider their billing rates.
“Most of us bill in dollars, and in a global practice you have to think about your cost and how it’s spread across the world,” Shields said.
Exchange rates also matter when setting lawyer compensation. Law firms sometimes strike deals with partners in foreign offices about which currency they want to be paid in, said Shields. In that case, the lawyers themselves are taking on the risk of volatility.
And with large practices in the U.K. and Japan, Ropes has some amount of expenses payable every year in pounds and yen, Shields said. He said law firms in general can hedge against costs by diversifying which currencies they pay.
Overall, law firms “really aren’t in the FX [foreign exchange] business, if they can help it,” said Tony Williams, a London-based principal at Jomati Consultants who advises firms around the globe. So, he said firms generally try to match the currency of their income and expenditures as much as possible to hedge against big price swings.
“If you’re paying a lot of rent in yen, you want a certain amount of yen income to pay that rent and those other expenses,” Williams said. “Because the more aligned the income and expenditures are, the less currency risk you’re taking.”
While the euro and the pound have dropped significantly relative to the dollar this year, partners in U.S. firms based in Europe “are happy here because they’re getting more money,” Williams noted.
But firms also use average exchange rates, rather than the rate at a given moment in time, to head off those kinds of discrepancies. Firms may also want to wait until the dollar weakens before converting and bringing revenue from an international office into the U.S.
Even then, there are tax regulations in the U.S. that level out gains from such an exchange.
“It can impact timing,” Williams said, of firms’ strategy on converting foreign-office revenue. “But I think most firms for their accounts purposes would use average exchange rates over the years to manage the peaks and troughs a bit.”
Just as American tourists might be able to get more bang for their bucks on vacation in Europe right now, U.S. law firms could also get a boost from the greenback’s extra purchasing power on the lateral market, analysts said.
“Because they can pay more based on the strength of the dollar, it might allow those big firms, those firms that already have a presence, to acquire firms or lawyers or groups of lawyers that they might not otherwise be able to, because they might be able to offer more attractive compensation packages,” said Marci Taylor, a law firm consultant and principal at Withum advisory firm.
Even that advantage can be a squishy one to press, though. Especially in a talent-rich, competitive foreign market like London, for example, firms are probably chasing each other more than they’re chasing foreign exchanges.
Kent Zimmermann, a law firm consultant at Zeughauser Group, said it’s true that exchange rates “incrementally” affect compensation packages. But even if one particular firm has the inside track on a talented lateral, they’ll probably be hesitant to bid in a way that’s too dependent on the value of currency at a given moment in time.
“I think a firm would be reluctant to set a floor —which is what they’re doing when they make someone a compensation offer — that’s too much influenced by exchange rates when they’re going to fluctuate in the future,” Zimmermann said.
Those offers can set the trajectory of a person’s compensation going forward, he said, and firms may not want to make them based on such a transient variable, especially if they’re battling against other offers. “It’s really more what that person commands on the open market,” he added.
U.S.-based law firms also aren’t going out of their way to open new offices or expand their market share across borders based on the new exchange rates.
If a firm is already considering opening an office in Europe, for example, that extra purchasing power could make the decision and timing more attractive on the margins, Taylor noted. But that kind of strategic choice is usually based more on immutable factors, like its core competencies, the needs of its clients and whether it complements the firm’s long-term focus.
Meanwhile, foreign law firms may benefit from the dollar’s increased strength by influencing how companies put together deals and how they choose their lawyers.
Sanjay Thapar, a partner at Winston & Strawn and co-chair of its global leveraged finance team, said in his practice, fluctuating exchange rates can influence how lenders like banks and private equity firms evaluate a company’s cash flow.
He also said those types of financial institutions may be more inclined to use law firms outside the U.S. right now because their prices are relatively cheaper.
“If the U.S. dollar is stronger, and someone is doing a deal in the U.S. with a foreign client, and they’re billing in their local currency — let’s say it’s the Euro — it actually is cheaper for the lender right now to use foreign legal counsel,” Thapar said.