I recently delivered a seminar at the HKICPA in Hong Kong which discussed the roles of marketing and branding within PSFs and how they should be implemented. The slides can be seen below.
By Robert Sawhney, managing director, SRC Associates Ltd
I recently delivered a seminar at the HKICPA in Hong Kong which discussed the roles of marketing and branding within PSFs and how they should be implemented. The slides can be seen below.
We have revised and added to this white paper which was originally published in 2010. This 25 page paper addresses the key issues of competitiveness for accounting firms.
There seems to be a never ending slew of articles in various publications of late highlighting the internationalization/expansion of one law firm or another. Given the patchy record many firms have had in internalization success, I thought the timing right to share an excerpt of a chapter on law firm expansion and internationalization from my recent book: Developing a Profitable Practice in Asia (Ark, 2010). Comments as always welcome.
Winners and Losers in Internationalizing Professional Services Firms:
Overall, much evidence shows that the degree of success a firm will have is related to its degree of the following key strategic orientations:
Generally, there are numerous factors that affect the degree of success firms will have when entering foreign markets and of course, measures of success vary among different firms. Some firms will look at short term revenue generation and base strategic decisions around these factors whilst other firms may have a longer term view and consider the building of firm capabilities and social capital as key elements to their longer term success in a market. The range of factors that separate winners and losers in internationalization efforts are numerous whilst the choice of location for international law firm offices is a mixture of market demand and regulation. There are also movements over time that impact outcomes. In more liberal legal markets (as Asian markets gradually move in that direction), foreign law firms are increasingly staffed by local lawyers and this provides the firm the ability to practice local law in some cases. This is evident in the comparison of Hong Kong and China whereby foreign law offices in Hong Kong are heavily staffed by local lawyers where the regulated legal market of China seems to predicate the use of foreign lawyers (who may in fact be Chinese but studied overseas) who cannot advise on domestic law. Additionally, the longer a firm has been in a location the more it tends to staff the office locally and integrate itself into the local legal and business community.
Possible factors that impact law firm success in foreign market entry:
The list is far from exhaustive but it does highlight the number of factors that can influence the success of an internationalizing law firm entering Asia. It is important to point out that success in international markets is not only a function of objective outcomes and choices. When law firms enter foreign markets they frequently lead the office with an expatriate that has come from the home office. That individual will have pre set cognitions about the potential for success and hence it is crucial for the firm leaders to educate the relocating partner regarding the abilities of the firm in foreign markets related to the value of its services, resources, and pricing strategy.
For law firms, success is largely determined by their knowledge since value is created through the leveraging of intellectual capital. The role of face to face interaction for knowledge sharing and integrating lawyers across offices has already been discussed above. Research conducted by Hitt and colleagues  who examined the largest 100 US based law firms, found that both social capital and human capital had a positive effect on performance but not in the anticipated ways. Human capital (which was measured by education and experience) was found to be a better predictor of success. They found that human capital had a positive effect on international diversification as well as financial performance. Level of international diversification was only positively related to financial performance when human capital was appropriately leveraged. This suggests that law firms which expand into too many countries without a clear strategy on how they will utilize human capital to build new work may experience lower performance levels than their peers. The research also found that weaker levels of human capital led to lower returns on international diversification. Many law firms follow existing clients into international markets and these clients are considered to be part of the firm's social capital. It is interesting to note that the authors found that social capital had a negative impact on the relationship between international diversification and firm performance. This may highlight the perennial problem for many law firms who perhaps over rely on existing clients to build international revenues whilst failing to learn about new markets and hence lacking the capabilities to build sustainable revenues on the ground. Overall, the results suggest that law firms entering Asia should be cautious about relying too heavily on existing clients and ensure they are able to develop a strategy based on human capital to leverage knowledge in order to build a local client base.
Additional research by Hitt and colleagues  also takes into account government client relational capital. They found that firms which relied on government clients to break into international markets experienced a negative impact on their performance. This suggests that firms should be wary of delivering services for government clients at lower fees than they might normally charge on the basis such an arrangement will enhance later performance. Although government clients drive and facilitate international law firm expansion, basing an expansion strategy on this form of relational capital may be an inappropriate strategic move.
It should be noted that social capital takes on other implications aside from a firm's existing client base. Social capital resides in the relationships and networks the firm develops within the business community and these can be extremely beneficial to building lasting client contacts in the Asian context. Key contacts are often protected by gatekeepers in Asia and building a network of contacts can help facilitate relationships with key decision makers even though at first glance, the gatekeeper may seem unimportant to a foreign law firm. Additionally, networks of relationships help embed the firm in the business environment which enables learning about the market as well as establishing a position among the main players and potential clients.
There seems to be a number of key drivers for the international expansion of professional service firms.
Moreover, firms that high degrees of human capital but are not expanding internationally are limiting their profitability potential since they are not optimally leveraging their intellectual capital. Firm leaders can measure their degree of international readiness by taking stock of human and relational capital in order to more closely examine the imperative to go international.
In addition to these drivers, there are essentially two views of how law and other professional service firms may enter a market.
Timing of entry to a market can have a significant impact on the overall success of the venture. Early movers might gain what is known as first mover advantage and build a market presence that forms some sort of entry barrier for other firms (in the form of client base, talent pool, referral networks and alliance partners). The risk associated with being an early entrant are often associated with limited market information and the need to build demand for what might be a relatively immature market.
Late entrants can benefit from the work of early entrants since the market has been developed to some extent. Additionally, more developed markets provide more intelligence and information. This makes it easier for late entrants to evaluate the market potential and create a strategy which will require less adaptation than early movers may have been able to do. For example, the booming energy and resources sector in Asian markets such as China and Indonesia (frequently involving Australia) requires law firms to build capabilities in knowledge and alliances in order to tap this market. Foreign firms in Asia with entrenched capabilities and alliances in other practices may find it harder than new firms entering the market to create a new alliance strategy targeting this sector since their existing alliances preclude them from linking up with other firms. This can be a problem if their existing alliance firm does not have a capable practice in the sector the foreign firm wishes to target.
The timing of entry will also depend upon the firm's strengths and practice areas. As new opportunities emerge in the market place which match the capabilities of the firm, firm leaders may wish to enter that market irrespective of whether they would be an early or late entrant. Timing however does not play a sole role in determining the outcomes of the firm. Coudert Brothers was one of the earliest foreign law firms into the Asian market (if not the first) and was extremely successful during the first 15 years or so. The firm dissolved in 2005 due to poor performance, inability to find a merger partner, and a host of management related issues.
Managing foreign market entry and regional expansion:
Manufacturing firms have often expanded globally to benefit from new markets and the cost advantages of economies of scale and scope, within a law firm, these advantages are tenuous. Whether law firm can benefit from cost economies to the same degree as other firms is subject to debate and there is enough evidence to suggest that as law firms become increasingly large in scale, they suffer from diseconomies of scale as the coordination costs across international offices become increasingly difficult to manage. Improvements in firm performance through international expansion are certainly not linear and law firm leaders must be prepared for the initial dip in performance that law firms face even with the right human resources and relational capital in place.
One of the key issues facing foreign law firms entering Asia or expanding regionally throughout Asia is known as liability of foreignness. Local human capital tends to have an advantage over foreign law firms as they know and understand the market intimately. In Asia, where relationships in government and client organizations are so important, this local knowledge plays a major role in the likely success of expansion efforts. Over time, the liability of foreignness decreases as the foreign firm becomes more familiar with the market and builds the relationships needed to sustain the business. The problem for many law firms is the compelling desire for growth and expansion. As the firm becomes successful in a new market it inevitably looks at further markets for growth, believing that growth in and of itself is a viable strategy. There are many arguments against this. Since clients expect a certain degree of uniformity and quality in the services they receive, the more offices the firm opens the greater the coordination costs in managing the resources needed to deliver these services. The unique aspects of knowledge intensive services such as law (i.e. customized, people centred) makes the challenge of managing across borders even greater. Whilst many firms claim to be able to deliver seamless services between offices, the reality can be very different as firms expand into peripheral markets where revenue potential declines and access to top tier human capital is diminished.
There are certainly advantages to international expansion. Despite the arguments regarding scale and scope economies, there are benefits related to experiential knowledge. As firms move into a greater number of markets, they gain knowledge about how to expand effectively and this knowledge can be used to lower the opportunity costs of further expansion. Of course, the firm faces the problem of institutionalizing this knowledge and leveraging across the entire firm. This issue comes back to the costs of coordination and whether the firm can share knowledge gained from experiences in one market that may benefit other markets.
It should be noted that law firms from different countries are likely to engage in differing paces and styles of international expansion. US law firms have managed to build critical mass in clients through domestic expansion and thus be able to have a solid client base when opening foreign offices. They then have the time to learn about local markets as they build business on the ground and hence not being overly reliant on existing client relationships in the medium to longer term. They are also careful to maintain an existing mass in the US to maintain institutional relationships which are critical to the maintenance of those clients in their international markets (something Coudert Brothers apparently did not do). Law firms from smaller European nations are likely to have entered international markets with less experience in domestic growth and hence a lesser client base to kick of their foreign practices.
Firms entering Asia, or those already here and planning to expand regionally should be concerned with the following questions when thinking strategically about expansion and wishing to gain commitment to a new practice/office:
Figure 1 identifies the relationship between international expansion and knowledge firm performance. It highlights a number of strategic issues that law firm leaders must take into account as they engage in international diversification. Crucially, firm performance is likely to be negative during the early stages of expansion as the firm incurs the traditional costs in setting up an overseas office and learning about the new market. During the intermediate stages of internationalization, performance will start to improve as the firm builds business and makes great leaps in its knowledge and understanding of the market. Although coordination costs increase, the benefits far outweigh the additional costs as liabilities of foreignness decrease. In the very mature stages of international/regional expansion, firms run the risk of over expansion into peripheral markets which see diminishing returns and diseconomies of scale that make coordination across geographies overwhelmingly complex to manage. There are also additional challenges for law firms from small countries as they are likely to face key internationalization challenges before they have faced key growth stages (as their home market is too small to support large scale growth) and hence face the simultaneous challenge of managing growth generally and managing international growth specifically.
Figure 1: Knowledge firm performance and costs in relation to international expansion
(This figure comes from the ideas of: Delios, A., and Singh, K (2005) Mastering Business in Asia: Strategy for success in Asia. John Wiley & Sons Asia PTE Ltd and Is Regional Strategy More Effective than Global Strategy in the US Service Industries?Lei Li. Management International Review. Wiesbaden: 2005. Vol. 45, Iss. 1; pg. 37, 21 pgs).
There are several key strategic implications that can be gleaned from the figure above:
Once the decision to enter Asia has been made irrespective of the current growth status and position of the firm in its home market, the discussion and evidence presented above does suggest an expansion strategy which is more regional in nature as opposed to global. That is, a foreign law firm should probably limit its expansion geographically but plan on a deeper entry into the market to build the requisite capabilities and expected performance. The fact that many foreign law firms which do come to Asia initially launch in either Singapore or Hong Kong is a good indicator that international cities attract foreign firms due to the similarity in business environment to a firm's home country. Once in Asia, a firm should consider building its regional capabilities prior to thinking about global markets in order to reduce the risk of decreased performance that may be unacceptable to the majority of partners and other key stakeholders.
International Integration, Differentiation and Competitive Advantage:
The ability of a law firm to share and leverage intellectual capital is at the heart of its ability to create and deliver client value. Standing out on technical knowledge alone no longer seems to be a differentiated strategy with sustainability as many clients perceive well known law firms as having very similar technical capabilities. It is the mixture of technical ability and service quality which has the real potential to elevate a firm above its peers. In the Asian expansion context, the ability of a firm to integrate key management, cultural, and human resource processes across international offices is absolutely crucial for the firm to create the value of a seamless operation that is demanded by clients. Sharing knowledge about practices, clients, and industries which cover the scope of technical ability and service quality components is the key part of a process that leads to a client centred and responsive firm. If a firm is not able to achieve a certain degree of integration across international practices, then what would be the benefit for a client in using a firm which bases part of its selling point on an international presence? The answer would seem to be very little and the client may in fact be better off seeking independent law firms in each of the jurisdictions it seeks help. The onus is then on the law firm to create differentiation based on the idiosyncratic resources of the firm (skills, knowledge, communication, culture) which would enable the seamless service delivery expected from clients.
Differentiation is essentially an extension of the firm's strategy and basis for competitive advantage. Differentiation can be defined as:
'the set of meaningful differences that define and set apart a law firm from its competitors which are recognized and valued by its target markets'
This definition highlights a few key issues when it comes to deciding a differentiation strategy. The differences that a firm chooses should be valued and meaningful to the market place and allow it stand out from competitors. Moreover, these differences should be recognized by clients and not easily imitated by other firms or they cease to provide a competitive advantage. In other words, differentiation is strongly related to how clients buy and the attributes they value from providers. For example, global law firms such as Allen & Overy differentiate themselves by offering a variety of services on a worldwide basis through a fully owned global network that provides them unmatched access to local knowledge and expertise that few firms could hope to achieve. The key point is in the substance and not the rhetoric. Any law firm can list a host if international offices on its web site and claim that it offers global coverage and unmatched responsiveness. The determination of whether this creates differentiation will be in processes and practices that the firm has embedded to make these claims a reality. Since law firms rely on client retention and loyalty to build profitable practices, these claims cannot be faked.
The idea of an international law firm with local responsiveness is based on the concept of a transnational corporation. Firms must achieve some balance between the integration of a HQ and the local needs of the market in which clients are being served. Much of this is a mind set. Firm leaders will want to maintain sufficient consistency and control over the work product without inhibiting the degree of decentralized decision making that is needed to respond to the needs of clients in the local market. This is particularly so in Asian markets where fee levels tend to be lower than US or UK legal fees and cultural differences impacts how clients perceive both work and service quality.
There will also be cases where knowledge and practice from the Asian office may be of value in adjusting or informing the practice of the home location. Firm leaders must resist the temptation of ethnocentric thinking and realize that a more open approach to managing relationships between firm offices is more appropriate. Building an internationally responsive firm will require a collaborative network based environment where knowledge and resources are shared according to client problems and not according to hierarchy. This type of thinking is less about inputs and outputs (as in traditional value chain) and more about processes. The firm is configured around solving problems for clients and an understanding that differentiation is achieved through a multitude of processes that create high quality work delivered through exceptional service quality mechanisms.
In Asia, client surveys show the number one reason why a client defects to another law firm is responsiveness. This is hardly surprising as a number of studies in different service sectors highlight responsiveness as the key factor. On the other hand, research identifies that expertise and understanding of clients business are the key factors in selecting a provider. This is important because it identifies empathy as a key construct in client satisfaction. Empathy can be defined as the ability to understand another person's situation, circumstances and point of view. This idea and its impact on firm performance is gaining new traction. Recent research from Oxford Brookes University  shows that for every one point on a scale a firm can increase its empathy score, it delivers a ROCE of over 16 percent. Responsiveness and empathy can become key differentiators then since most clients complain about lack of responsiveness from their PSFs and cite industry/business knowledge as one of the key factors in choosing a provider. Since many professional service firms structure around practice groups and train their people in technical skills almost to the exclusion of client skills (such as EQ, communication, business acumen), there is a massive gap here for law firms to become more client focused and hence create meaningful differentiation.
There are a number of key areas that law firms need to consider when striving for integration across geographies in order to create a competitive advantage. Research by Segal-Horn and Dean of large UK law firms internationalizing  identifies the key processes and considerations they have gone through in order to create internal consistency for the delivery of cross border client services.
Figure 2: Integrating Asian practices
(Source: based on Segal-Horn, Susan and Dean, Alison (2009). Delivering 'effortless experience' across borders: Managing internal consistency in professional service firms. Journal of World Business, 44(1), pp. 41–50).
It is important to view the elements in figure 3 from the perspective of client value. For example, a firm which is willing to develop a matrix type structure and allow the predominance of client/practice teams above geographic location is far more likely to develop a shared understanding of client needs and be responsive to these needs over time. Additionally, as the firm grows and becomes more complex, there seems to be a need to create a more formal management structure where non lawyers comes in as professional managers in order to provide key management support in international initiatives. A shared culture of trust and client value is absolutely crucial to the effective functioning of the growing firm and this will be supported by the relevant management processes being developed, such as a firm wide intranet for knowledge sharing. It is also important to point out the need for balance. In some respects, the degree of partner autonomy decreases as the firm centralizes aspects of its operations. On the other hand, autonomy is crucial in dealing with clients in the immediate geography, especially if clients are demanding work to be completed on short notice. The lawyers doing this work are much more likely to meet firm wide expectations if the relevant firm structure and processes are in place. This will allow lawyers in foreign offices to learn at a faster pace than might be possible in a more centralized environment where risk taking is not tolerated and information is hoarded by senior partners in order to control power and impart their influence over all types of decision making. In many ways, international integration is the management of paradoxes and there is certainly no one size fits all approach.
Recently, I was fortunate enough to be given a review copy of my good friends new book: Winning Legal Business from Medium Sized Companies (Ark, 2011). Silvia Hodges, PhD, teaches marketing and management at Fordham Law School in New York and in fact, based this book on her PhD research into the legal buying behavior of medium sized companies. The book covers 8 chapters:
The book also has some useful appendices, such as a sample marketing plan and marketing assessment checklist.
There are several things which I really like about this book. Firstly, it is based upon rigorous academic research into the preferences and behaviors of medium sized companies, an area of study sorely lacking for what is such an important market for many law firms. Too many publications you see on the marketing of law firms rely too heavily on anecdotes or strategies aimed at large legal buyers which as Hodges shows, may not be appropriate to the medium sized company who couldn't care less about the size of your promotional budget. It was interesting to note the number of top management involved in the purchase of legal services despite these companies having in house legal departments, especially when compared to the buying behavior of larger companies. Another aspect I wholeheartedly agree with is the focus on strategy and making sure marketing and BD are embedded within the firm. This is something I go on endlessly about as it seems far too many law firms jump straight to marketing tactics without any real consideration of their value proposition and how they can truly differentiate themselves. It seems to be more of a 'business is not great, we better get out there a bit more, I know – let's give our partners some sales training'!
Chapter 8 is a particularly insightful chapter as it explains the various tactics available to a law firm. It explains the problems with many common law firm marketing tools (such as lunches, newsletters, brochures, sponsorship etc) particularly in the light of trying to reach decision makers in medium sized companies.
Overall this book offers a distinct and unique approach to law firm marketing, in terms of targeting medium sized companies, that is rarely seen in other similar publications. It is pragmatic whilst mixing in academic theory judicially and seeing whether the existing views support the research carried out by Hodges. If the medium sized market is important for you, I suggest you digest what this book has to say!
Chapter 2 from my new book, Developing a Profitable Practice in Asia (Ark, 2010). Follow the link to read this chapter which describes:
Feedback always welcome!
A copy of a presentation I gave at CCH Singapore in April 2011
Part of this post is excerpted from my new book: Developing a Profitable Practice in Asia
There is a growing base of in house counsel within Asia and the greater influence of this group in the purchasing of legal services is certainly growing as the key role they play as a business partner is more widely accepted by organizations of Asian origin. In China recently, the profession has gained considerably more credibility through the instigation of formal associations and training programs. An increasing number of companies have more in-house counsel as part of their senior management teams, and some companies have promoted senior in-house counsel to lead their business units. For example, former head of legal at Haier Group, Su Xiaoxi, is now a vice president and taking a lead role in the group's global operation department; and Sinochem International's legal manager Liu Wenzhao has recently been elected to be deputy general manager of the company's logistics business unit.
For the many multinational firms in Asia, a large number of in house counsel are located in either China, Hong Kong, or Singapore. An increasing number of these are of Asian descent and play an expanding role in the choice of legal provider, often in collaboration with the chief legal officer from the home market HQ. Both in house counsel of MNCs as well as local firms are gaining greater responsibility for the operations of their organizations across Asia as corporations continue to expand their geographic coverage.
According to a 2009 General Counsel Forum (and subsequent report) held by Korn/Ferry International with GCs across Asia, they are facing a number of key issues:
It is interesting to note the differences in the key factors that in house counsel in the west and Asia consider when choosing a law firm. For example, Inside Counsel's annual survey of GCs in 2008 (US based) showed the following factors to be most important:
In a survey sent to over 15,000 in house counsel throughout Asia (including Hong Kong, China, Singapore) in 2009, Asian Counsel magazine found the following factors to be most important:
The fact that relationships score highly in the Asian survey is not surprising given the collectivist nature of Asian cultures and the importance of relationships (Guanxi in China). There is a general consensus that an increasing number of in house counsel in Asia local, with a number of these coming back from work experiences in the west. With the growing emphasis on external counsel to become business partners to their clients, law firms who can add value by helping in house counsel fulfill their expanding role as internal strategic business partner can certainly get a leg up on the competition. In a culture where social bonding and reciprocity are so important in building marketing relationships, this can be a key differentiator between one firm and another. The problem for many international firms is the often the lack of patience partners show in building these relationships and firms lack of willingness to engage in client research to better understand how they are perceived and what clients really value.
While in Europe and North America there is constant talk about in house legal departments reducing their budgets and moving more work in house, that doesn't seem to be the trend in Asia. In the 2010 Asian Legal Business study of China's in house lawyers, less than 20% of respondents said their external legal spend had reduced over the preceding 12 months whilst nearly 50% stated their legal budgets had increased when compared to the previous year. The troubling statistic for international law firms is that nearly 70% of the respondents said they will increase their use of domestic firms. This is not altogether surprising given the growing competitiveness of local firms and their ability to attract foreign lawyers of considerable repute.
Another survey by Lexis Nexis of in house counsel in China (2010) also presents some interesting results. Surveying over 100 corporate counsel (mostly from large publicly traded companies), the research found that foreign firms were seen to have expertise that local firms did not although Chinese law firms were thought to have better local market knowledge and contacts. Organizations preferred boutique firms for complex, high profile, or non recurring matters and full service firms for routine and commodity matters. For matters which were recurring and complex, there was less of a distinction. In terms of pricing, the research suggested that Chinese in house counsel prefer to instruct law firms on either a fixed fee basis, or on an hourly rate basis with a fee cap. Of great interest was the fact that most survey respondents had never been asked to participate in formal client satisfaction surveys, 95% would welcome the opportunity. This is noteworthy as recent research that identifies the difference in market oriented behaviours between high and low performing professional service firms shows that higher performing firms are much more likely to engage in formal client research.
As the Asian legal markets continue to burgeon, foreign firms will increasingly have to take notice of the value that clients seek and no longer rely on the fact that since activity levels are high, they can get work no matter what approach they use. Competition is fierce and the need to be truly differentiated is growing every day. The fact that local law firms were preferred by in house counsel in China (as identified in the Lexis Nexis research cited above) for most matters demonstrates the growing competitiveness of the sector.