Marketing Asia

Leveraging Intellectual Capital to Enhance Performance

Using technology to enhance competitiveness and leverage intellectual cch aug 2011 - a copy of a presentation I have given to a few professional bodies in Asia

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Strategic Law Firm Expansion in Asia

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:

• Market orientation
• Learning orientation
• Entrepreneurial orientation
• Knowledge orientation

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:

 

• Entry mode choice and applicability
• Ability to learn and adapt
• Integration of new offices and firm culture
• Measure of success
• Top management commitment
• Firm resources
• Industry clusters, client base, and trends
• Local and international competitors
• Cultural distance of home and host country environments
• Business, cultural, economic, and regulatory conditions of host country
• Strategic choice and business strategy
• Degree of market orientation
• Access and retention of key talent
• Practice focus, marketing strategies and business development
• Application of knowledge to work product and client value
• Communication intensity and quality
• Differences in the systems of law (legal jurisdictions)
• Leadership and management practices
• Reputation and size
• Specialty

 

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 [1] 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 [2] 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.

 

1. Globalization and trade agreements – the increasing number of trade agreements (both in services and goods) between countries and regions open up and expanding base of opportunities. As clients move into international arenas then so do their professional service firm providers. Additionally, the opening up of legal markets provides opportunities for law firms to proactively enter foreign markets rather than being purely reactive.
2. ICT – the advances in information communication technology provide additional capabilities for law firms to deliver services and coordinate activities across geographic boundaries which are essential to the value of legal service delivery. Since legal services are knowledge intensive, the ability to interact on a face to face basis as well as deliver legal services through methods enabled by ICT gives law firms an expanding base of opportunities outside of their home markets.
3. Clients – following existing clients seems to be the most frequently cited reason for law firm internationalization. It should be noted that firms which do expand on a proactive basis tend to outperform firms which are purely reactive in their approach to international marketing activities.

 

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.

 

1. Path approach – in this approach, the firm starts off as a purely domestic entity and goes through various stages (i.e. exporting services remotely, by travelling, through alliances) and eventually sets up an overseas location. This approach gives the firm time to learn about the markets and opportunities available. The drawback tends to be the limited ability to interact with clients on a face to face basis as well as being a relatively slow entrant to the market.
2. FDI – many researchers and experts in the professional services field believe an 'all in' type of entry is needed whereby a firm should create a foreign presence through FDI in the form of green field investments or strategic alliances (such as a merger). The benefit of this approach is the relative speed with which the firm can enter the market and develop personal relationships which are integral to the performance of knowledge intensive businesses. Learning must occur quickly as the resource investments in this approach can negatively affect the overall performance of the firm.

 

Timing:

 

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:

 

1. Which markets should we enter?
2. How many markets should we enter?
3. Should we expand to where the work is or should we also be concerned about similarity of the market to our existing markets?
4. How will our performance and costs be affected by these different considerations?

 

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:

 

1. Entry to new markets increases coordination costs in large part due to the investment needs liability of foreignness. As firms become more familiar with the market and continue to expand, performance increases as do costs until a point whereby the benefits outweigh the costs. The time this takes to happen will depend upon the experience of the firm in managing growth, existing client bases, as well as its overall competitiveness and market conditions. Firm leaders must be prepared for the initial decrease in performance and be able to explain this to other partners who become concerned for the firm's and hence their own financial performance.
2. Learning about the market takes time and hence firm leaders must understand what capabilities are needed in the new market and invest the necessary resources to ensure the knowledge base within the firm is built, shared and integrated into the value producing processes of the firm.
3. There seems to be a point where excessive expansion leads to diminishing returns as the firm enters into peripheral markets where the returns are lower and/or the increasing coordination costs become diseconomies of scale and begin to outweigh the benefits of continued expansion. Firm leaders must be ready to question excessive expansion practices and be cognizant of when this point actually occurs. A solid understanding of revenues and profitability by region, country, office, client, and practice area become indispensable tools in the analysis process.
4. Strategy A, B and C – the three solid lines on figure 2 represent three alternative expansion strategies based on the geographic closeness of internationalization. The top line indicates the performance of a firm which expands close to its home market (or within Asia regionally) whilst the lower line indicates the performance of a firm whose expansion has a lower degree of orientation with its beginning base of internationalization. In other words, a firm which expands regionally within Asia is likely to experience better performance than a firm which may start of in Asia but then expand outside the region. This is due to the fact that coordination costs and liability of foreignness come to the fore again as a firm expands into a new market that it knows less about and is geographically further away (as well as culturally). A good example of this is the expansion of many law foreign firms (which came to Asia first) who have been expanding into the Middle East. A number of these firms have suffered weaker performance in these offices and one must question whether they expanded outside Asia too quickly without exploring alternative markets within the region carefully and putting performance at risk due to the failure to build an appropriate regional strategy and instead focused on a global approach which research suggests is less effective.

 

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.

 

Mind set:

 

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 [3] 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.

 

Key factors:

 

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 [4] 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.

 

References:

 

1. Michael A Hitt, L Bierman, K Uhlenbruck, K Shimizu, Academy of Mgt Best conference paper, 2003
2. Hitt, MA, Bierman, L., , Uhlenbruck, K., and Shimizu ,K. The importance of resources in the internationalization of professional service firms: The good, bad, and the ugly, Academy of Management Journal 2006, Vol. 49, No. 6, 1137–1157
3. Lywood, J, Stone, M., and Ekinci, Y. customer experience and profitability: the application of the empathy rating index in UK call centres. Journal of Database Marketing & Customer Strategy Management 16, 207-214, September 2009
4. 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).

 

40 things senior partners need to know about strategy and marketing…and the application to professional service firms

1. Yes, both need your full input as well as the input and buy in of others in the firm
2. No, you can't avoid discussing the issues with other partners
3. No, marketing is not BD and promotion, it is about creating a culture that excels at delivering client value
4. No, culture is not a gooey abstract that stinks of consultant speak-a marketing culture has the most significant impact on firm performance of any variable
5. No, you cannot fix your problems by hiring marketing or other admin staff
6. Yes, your clients do care about service and you should 'trouble' them to get systematic feedback
7. Yes, marketing is everyone's job, and no, that doesn't mean BD or promotion
8. No, one off training courses will not change people's behavior
9. Yes, strategy and marketing are closely intertwined and one without the other is like steering a ship without navigation
10. No, improving your presentation skills won't improve your firms 'marketing'
11. No, branding is not about a new logo and web site
12. Yes, branding is about values, mission, strategy etc and involves all professionals who interact with clients
13. No, strategy is not about positioning and the 'five forces model'
14. Yes, strategy is about value, clients, capabilities, today, the future, and change
15. No, you don't need a strategic plan
16. Yes, you do need a strategy
17. No, marketing is not a cost, it is an investment
18. No, you shouldn't make strategy and marketing decisions without sound knowledge of your internal and external market place
19. Yes, you should try to measure the ROI on discrete marketing activities
20. No, you cannot measure the ROI on marketing as whole (the ultimate measure being firm success)
21. Yes, strategy and marketing initiatives should make a difference
22. No, planning and execution cannot be separated
23. Yes, culture does matter in Asia
24. Yes, marketing and BD need to be integrated
25. Yes, marketing metrics will tell you how your firm will perform tomorrow, financial metrics tell you how you did yesterday
26. Yes, strategy and marketing should create differentiation
27. No, branding, strategy and marketing are not separate issues
28. No, strategy is not about finding a unique position in the market, it is about being change capable and responsive
29. Yes, marketing and innovation are empirically linked
30. Yes, marketing and knowledge are inextricably linked
31. No, KM is not the sole domain of KM people in the firm
32. Yes, strategy and marketing are about learning
33. No, a SWOT analysis is not the essence of strategy
34. No, coming up with a 'strategy' and then informing your people is not the way to go
35. No, using an ad agency is not the way to go about a re-branding process in a PSF
36. No, the people in your firm probably don't think as you do and don't know everything about the firm's purported strategy
37. Yes, research is an integral part of the strategy and marketing process
38. Yes, marketing and collaboration go hand in hand
39. Yes, if you want behavior change to align your strategy and marketing efforts, archaic remunerations systems and KPIs must change
40. No, the people in your firm won't care about any of this unless you give them a reason to!!!

Winning Legal Business from Medium Sized Companies

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:

• Chapter 1 – Introduction
• Chapter 2 – How do medium sized companies know what legal advice they need?
• Chapter 3 – How do medium sized companies search for law firms?
• Chapter 4 -How do medium sized companies evaluate law firms they don't know?
• Chapter 5 – How do medium sized companies select law firms?
• Chapter 6 - How do medium sized companies evaluate legal service delivery?
• Chapter 7 – Marketing to medium sized companies-strategy
• Chapter 8 - Marketing to medium sized companies-instruments

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!

Asian Legal Market Entry Strategy for Law Firms

Chapter 2 from my new book, Developing a Profitable Practice in Asia (Ark, 2010). Follow the link to read this chapter which describes:

• Various entry strategies and their pros and cons
• Examples of what other firms have done
• A decision making framework for entry choice
• Things to consider when entering the Asian market

Feedback always welcome!

Differentiating Your Audit Services and Achieving Premium Pricing

A copy of a presentation I gave at CCH Singapore in April 2011

 

Building client relationships in the Asian context - presentation to the HK Institute of CPAs

HKICPA building client relationships feb 2011

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How Do In House Counsel in China and Asia Select Law Firms?

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:

• Balancing act between accountability and integrity – GCs will need to adapt to the growing complexity of the business and legal environment on top of pressure to deal with risk management and governance practices. This will lead to a higher profile in the board room and a need for wide ranging skills.
• Corporate responsibility going beyond compliance – CSR and culture as important facets as firms think about responsible investment and business practices.
• Influencing responsible business practices – GCs are now expected to add value through pro active management. This goes beyond litigation and takes into account risk and reputation management. The role of the GC depends upon the CEO and is influenced by both country and firm culture. Firms are recognizing the need for early legal input into strategic decisions and GCs must have a more commercial mind set.
• Enablers of business outcomes – GCs will become a key member of the team setting the firm's strategic direction and having a business mind set and solid leadership skills is crucial.
• Top challenges – the forum identified changing business cycles, leadership development and talent shortage, as well as regulatory and compliance issues as either critical or challenging issues to be dealt with over the next five years.

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:

• Responsiveness
• Industry expertise
• Creative solutions
• Billing rates
• Reputation

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:

• Expertise in a specific area
• Responsiveness
• Fees
• Reputation of firm
• Relationship between company and firm (personal relationship with lawyer came in at number 7).

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.

Relationship Marketing & Service Quality in the Asian Context (excerpt from Developing a Profitable Practice in Asia, Ark Publishing 2010)

Relationship marketing is a relatively new domain of study within the services sector but is growing increasingly important. Firms from every industry are attempting to build closer, more collaborative relationships with clients to better understand their needs in order to provide greater value and hence a greater share of wallet from the customers spending. The landmark deals between Pfizer and its 17 law firm panel members is a pertinent example of the lengths that law firms will go to in order to retain key clients. A larger number of law firms now taking a serious look at their base of clients (and clients they would like to acquire) to gain a better understanding of which clients are more valuable than others and how the firm can strategically manage these clients to build closer relationships and generate additional revenues. This has led to significant growth in law firms using industry and client teams and developing their capabilities in client relationship management.

In order to benefit from relationship and retention strategies a law must be cognizant of a number of factors. One of these factors relates to client loyalty. Many firms believe that loyal clients are profitable clients and that retaining them is extremely important. There is certainly some truth to this supposition but research conducted by Werner Reinartz and V Kumar published in the Harvard Business Review showed that up to 40% of loyal client were barely profitable. Firms should be able to analyze and determine not only the current profitability of a client but also their potential lifetime value. Another factor is the idea that it costs substantially more to gain a new client than it does to keep existing clients. This extra cost is normally associated with pricing discounts, promotional efforts and other resources used to secure new business. Again, research supports this contention and hence law firms should not only be thrilled by the chase of new business but by the gratification of making existing clients more loyal, assuming they provide a certain level of value to the firm. Additionally, the ability to create satisfied clients adds to the likelihood of referral work and positive word of mouth. In the Asian context (of which most are collectivist societies), word of mouth is of particular importance because Asian's rely more heavily on finding information and providers through networks of contacts than is common in the west. This is one of the reasons that law firm advertising in Asia tends to be less effective as collectivist societies do not tend to seek information from such sources, or at least give less weighting to such promotional activities in the business to business context.

Value is a notion that is varied and should not focus solely on monetary issues. Clients maybe valuable for a number of reasons:

• Strategically valuable – some clients can help you gain access to key markets or other firms business through referrals. The work they do may help you build competencies that are of benefit in the longer run and can enhance your competitive advantage.
• Loyal – some clients are valuable because they supply a steady stream of work even if it is not highly challenging. They are moderately profitable and easy to serve.
• Significant – some clients can help raise your profile and reputation which can be of real value in building the brand of your firm and lead to premium pricing down the road.
• Revenue generating – some clients generate large revenues for your firm. They pay quickly and reliably and help maintain a healthy cash flow even if they are not the most profitable clients.

 

There are many aspects to the relationship marketing construct since one may be interested in the ability to measure strengths of client relationships as well as different aspects such as trust and communication. Additionally, there are many elements to relationships between client and firm such as links with individual actors, the firm itself, and the possible impact on external perceptions such as reputation or competitive position.

 

Research by Ndubisi and Chan identifies a number of possible factors that a firm could use to measure different aspects of a relationship it has with clients. Examples of these factors and possible measurement questions are listed below:

 

Trust

 

1. My law firm is very concerned with security for my transactions
2. My law firm fulfills its obligations to clients

 

Competence

 

1. My law firm has knowledge about market trends
2. My law firm makes adjustments to suit my needs

 

Commitment

 

1. My law firm offers personalized services
2. My law firm is flexible when services are changed

 

Communication

 

1. My law firm provides timely and trustworthy information
2. My law firm provides information if they have new services

 

Conflict handling

 

1. My law firm try's to solve manifest conflicts before they create problems
2. My law firm has the ability to openly discuss solutions when problems arise

 

Other research also identifies aspects such as minimal opportunism and satisfaction as key aspects of relationship marketing. It is probably more accurate to assume that relationship quality and client satisfaction are contingent upon a number of the factors identified above.

 

Figure 1 Relationship quality model in high credence services

(Source: Chen, ZX., Yizheng, S., and Da-Hai, D. An empirical study of relationship quality in a service setting, Marketing Intelliegence and Planning, Vol 26, No 1, 2008)

 

Figure 1 identifies the relationship between the antecedents of relationship quality and its outcomes in research conducted in Hong Kong by Chen and colleagues [6]. They studied this framework in the health care service sector in Hong Kong (a high credence service similar to professional services) and found that among the four antecedents, empathy, expertise, and communication effectiveness are positively correlated to trust, and communication effectiveness, empathy, and likeability are found to be significant predictors of customer satisfaction, while likeability and expertise of the service provider are not significant in influencing trust and customer satisfaction, respectively. It is interesting to note that expertise is a crucial indicator of trust but not satisfaction. The authors posit that satisfaction is likely to built after experiencing a service whereas expertise is knowledge that customers attempt to ascertain prior to purchase. This has important implications for law firms. Firstly, thought leadership is becoming an increasingly powerful way to demonstrate expertise and to some extent is indicative of the IQ of the firm. However, it is functional quality (service quality) which is a significant predictor of satisfaction because in many cases clients find it hard to judge the detailed technical quality of a law firm's product and hence use functional quality as an important indicator. To some degree, this is reflective of the firm's EQ and has been shown to be a key measure of relationship strength and client satisfaction. The findings in this study are similar to many found in other contexts and strongly suggest that law firms need to focus on building relationships through a deeper understanding of client value and needs. Additionally, research tools based on frameworks such as those depicted in the figure above can be extremely useful.

 

Service (Functional) Quality

 

Clients not only care that you do your job properly and that you are proficient at what you do, they also care how you deliver your services. It is reasonable to expect that in different professional service settings clients would give different weighting to the importance of service quality, at least in terms of their intention to continue doing business with a firm as well as whether they would recommend the firm to others. Satisfaction and client retention are strongly correlated and being able to identify the key variables that satisfy clients is worthwhile because a firm can then focus its efforts on those variables without wasting time on extraneous factors which are not so critical to the client.

Since the technical quality of some professionals is hard to judge due to the information asymmetry between provider and client (such as medicine, law, accountancy), clients are likely to look at service quality to judge the relationship with the service provider. In this case, it could be argued that in relationships were the client is less knowledgeable about the services being provided the law firm should stress the service quality and social aspects of the interaction in order to relay quality perceptions to the client. As clients become more familiar with professional services their expectations in terms of technical quality may increase and hence the firm should look to ways to communicate the technical quality of what it is doing. If a client is familiar with the technical jargon of professional speak then perhaps it isn't so bad to use technical language with the client.

Achieving service quality is not something that happens independently of the professionals within the firm and their attitude towards what they do. In his book Practice What You Preach, David Maister analyzed a number of professional firms and found that high standards and employee satisfaction had a direct impact on quality and client relationships. The attitudes that predicted these relationships were:

• I am highly satisfied with my job
• I get a great sense of accomplishment from my work
• The overwhelming majority of the work I am given is challenging rather than repetitive
• I am committed to this firm as a career opportunity

 

He also found that quality and client relationships had the largest impact on financial performance. Maister showed that quality and client relationships accounted for significant variations in the financial performance of lower and higher performing professional service firms, more than any other individual factor that he measured in his research. Service quality can generally be thought of as the relationship between client expectations and the perception of what was delivered (known as the perception gap). Additionally, one may breakdown service into a process component and outcome component. A client will judge the outcome of the service in terms of what was promised but also the process and how well the client and service provider worked together. The client may quite easily switch to another provider if he or was unhappy with the process even though the outcome exceeded expectations.

SERVQUAL and other Scales

Even though the SERVQUAL scale is the most widespread tool for analyzing service quality its application in non western cultures and business to business markets has been questioned. Some studies have found the five dimensions above to be poor predictors of service quality in the Asian context. For instance, reliability is often considered to be one of the most important predictors of service quality in the west but less so in Asia where customers often have lower expectations of services. There are also additional dimensions relevant to Asia (such as politeness) that are not covered in the SERVQUAL scale. Aside from the cultural issues with the scale, there are also problems associated with its applicability to the B2B market.

Gounaris proposes a model called INDSERV which in his study of B2B services was a better measure of service quality. The four dimensions combine to make up the industrial customer's perception of service quality:

 

1. Potential quality. This relates to the search attributes that customers use in order to evaluate the provider's ability to perform the service before the relationship has actually begun. Potential quality is particularly important for business-to-business services because of the increased complexity and degree of customization that characterizes them, which results in a greater degree of uncertainty regarding the performance of the service, even if the provider is selected from a list of existing providers.
2. Hard quality. This pertains to what is being performed in the service process. It refers to the service blueprint the provider uses, the accuracy with which the service is delivered and so on.
3. Soft quality. This is concerned with how the service is performed during the service process. It relates to the front-line personnel and the interaction they develop with the client's employees. It captures how open the service provider is to ideas and suggestions from the client, the service provider's benevolence and communicated willingness to watch the customer's best interest. These qualities help to develop a positive climate during the service encounter and facilitate the process of aligning the provider's service with the customer's specific requirements.
4. Output quality. This explains the customer's concern regarding the actual offering delivered. It captures not only the results of the technical efforts to deliver the service, but also the impact that the service delivered eventually produces for the buying organization.

 

Professional services firms which are serious about understanding their clients in Asia and developing comprehensive relationship marketing strategies should be prepared to question the tools they are currently using to measure client satisfaction since their applicability to the professional services market in Asia is under question.

 

A Note on Cultural Differences

 

Whilst it is tempting to look at Asian cultures as homogeneous and indeed that culture can be studied at the national level (as in the work of Geert Hofstede discussed in previous chapters) it is important to note that Asia is highly diverse and that the parsimonious either/or cultural analysis frameworks of western contexts may not fit altogether well in Asian contexts which exhibit a certain dualism. In addition, since many corporations in Asia have extremely diverse work forces it may be erroneous to attempt to treat all potential relationships the same way since an Asian national working in Singapore for example may well have been educated in the US and the impact of organizational culture could well take precedent over national cultural origins. Cultural differences and nuances should be kept in mind when developing a practice in Asia but caution should be used when making generalizations for the purposes of market segmentation considering the diversity within Asia and potential client firms. Firm leaders should be aware of these cultural differences but take a customized approach to different situations. For example, James Barry and his colleagues looked at relationships strength in B2B services by not only examining the different facets that affect the strength of a relationship but also by looking at the cultural differences. They found that perceived value and switching costs were key indicators of relationship quality and strength but found no differences based on cultural dimensions.

 

There are a few reasons for such outcomes and why some research based on national culture shows differences and other studies do not. Part of this can be explained by the level of analysis. National cultural analysis examines the nature of difference at a highly aggregate level while culture can manifest itself at different levels. For example, ethnic culture, regional culture, as well as firm culture can impact a persons perceptions and behaviours and in some cases prove a more powerful indicator than national culture. Law firm leaders in Asia wishing to use relationship tools to enhance their standing with clients should be prepared to delve more deeply into cultural variations within Asian countries as well as within different types of firms. This should better enable the development of relationship strategies and network formations than if the firm attempts to use a blanket approach.

 

 

 

 

Developing a Profitable Practice in Asia (an excerpt of my new book)

Developing a Profitable Practice in Asia (excerpt of the new book published by the Ark Group and written by Robert Sawhney of SRC Associates Ltd, Hong Kong)

Details of the 230 page report/book can be found at the Ark Group web site here.

Why Asian Legal Markets?

 

The onset of the global financial crisis (GFC) has been a wake up call for many law firms. The declining legal markets in the West are now making many Asian markets look very attractive for Western law firms. There has been a relative explosion in new law firms coming to Asia from the West, or those already here solidifying their position. For example:

 

• Uria Menendez became the first Iberian law firm to set up an office in China when it opened its Beijing office in early 2010
• Italian law firm Chiomenti formed a pre merger with Hong Kong firm CdB and JC & Co which it expects to complete after three years as required by the Hong Kong Law Society. They also opened an office in Singapore
• Clayton Utz from Australia opened an office in Hong Kong by associating with local firm Haley & Co
• As part of its stated Asia strategy, Norton Rose merged with Deacons Australia which led to the severing of ties with Deacons in Hong Kong, its sister firm
• Lang Michener LLP from Canada partnered with Angela Ho and Associates and can now practice Hong Kong law
• UK firm Eversheds opened offices in both Hong Kong and Singapore to supplement the office previously opened in Shanghai
• US firm Mayer Brown cemented its legal relationship with Hong Kong firm JSM on the 1^st May 2010
• US firm Russin Vecchi Berg and Bernstein LLP has offices or affiliations in China, Thailand, and Vietnam

 

Why Asia? The answer is relatively simple. Within the south, east and south east of Asia, economic recovery has been earlier and stronger than most other world regions and the economies proved more resilient during the down turn. FDI to, from and within these regions is spreading to more countries and more sectors. According to the World Investment Report 2010 recently released by the United Nations Conference on Trade and Development (UNCTAD):

 

• Flows to the region dropped a modest 17 percent in 2009
• The region now accounts for one fifth of global FDI flows
• The regions three largest recipients – China, Hong Kong, and India, now rank second, fourth, and ninth respectively in the world
• FDI started to recover as early as mid 2009
• China and India led the recovery
• Inflows likely to grow in 2011
• Outflows from the region only dropped by eight percent
• The regions sovereign wealth funds remain on a buying spree
• New policies are easing both outward and inward FDI
• Intraregional FDI now accounts for as much as half of the regions total inward FDI stock

 

The top ten FDI recipients for 2009 in the region were;

 

1. China
2. Hong Kong, China
3. India
4. Singapore
5. Thailand
6. Korea Republic of
7. Indonesia
8. Vietnam
9. Iran
10. Taiwan

 

The top ten FDI sources for 2009 in the region were;

 

1. Hong Kong, China
2. China
3. India
4. Korea, Republic of
5. Malaysia
6. Singapore
7. Taiwan
8. Thailand
9. Indonesia
10. Philippines

 

Entry Options

 

Essentially, foreign firms have three options. In markets that allow it (such as Hong Kong), firms can set up alone (either through representative offices or other investment forms) or create some sort of alliance (which is necessary to access the closed markets of India, Indonesia, or South Korea for example) These alliances may also involve the many law firm alliances such as Lex Mundi, Terralex, or Globalaw. In any case, some sort of alliance is almost always necessary to be able to provide local law advice to clients. The third option is for firms to engage in international work through a virtual office. Australian firms for example conduct work in a number of Asian markets but have often relied on their professionals flying in and out of a country based on project needs. Clayton Utz has been reliant on this approach for a number of years.

 

Going it alone – there are many advantages to setting up a representative office (RO) or other invested vehicle by oneself, autonomy being one of the key factors. The fact that so many alliances fail also inhibits foreign firms seeking out some sort of partnership with local firms. For instance, since six foreign firms were issued licenses in Singapore to practice local law (by hiring locally qualified lawyers), a number of the original alliances have been broken up. White & Case separated from its Singapore ally Venture Law whilst Clifford Chance broke from its joint venture with Wong Partnership. Although it is interesting to note that Linklaters did not attempt to win a local license and continues its relationship with Allen and Gledhill (one of the 'big 4' in Singapore).

 

When compared to having no local presence, the ability to build relationships and contacts on the ground in Asia is a massive advantage. In the Asian context, building trust between parties takes time and Asians do not separate business and social activities as clearly as Westerners do. Hence the ability to interact with key target audiences in various social functions can be a significant factor in the on going drive to build a local revenue stream. These types of business development activities can take time, firms without a local presence often face great challenges in building the right contacts that may yield work one, two, or three years down the line.

 

Firms that have taken the plunge in setting up Asian offices recently are not always ones you would expect. Italian firm NCTM is planning to open an office in Shanghai in the summer of 2010. This will be the first office outside of Europe for the firm. They follow another Italian firm, Chiomenti, which has a presence in both Beijing and Shanghai. NCTM is expected to have its license to set up in China approved in the next few months and according to the firm's managing partner Vittorio Noseda, the firm is looking to be recognized as a full Italian legal practice while maintaining a relationship with its current Chinese alliance partner, Allbright Law (which incidentally just acquired the services of former Lovells Beijing managing partner, Robert Lewis). Ashurst law firm opened in Hong Kong in 2008 and is making overtures towards opening a China office. Spanish firm Garrigues is also considering opening an office in Beijing in the near future. Boutique off shore firm, Thorp Alberga also set up a Hong Kong office in early 2010.

 

Setting up foreign offices can be time consuming and expensive. In China for example, foreign firms can only open a new office every three years subject to the fulfillment of a three year probationary period for a firm's first office opening. Additionally, Beijing is now starting to pressure foreign service firms in terms of setting up more investment heavy entry offices. According to the Wall Street Journal (May 10^th 2010), the central government wants service firms, including law firms, to increase capital commitments that will require a move towards a wholly foreign owned enterprise (WFOE) or a locally incorporated subsidiary. Such firms will then be plugged into the tax and pension systems. Forming legal entities in places like China can be expensive and complex requiring firms to make large pledges of investment capital, property rental, and employee size.

 

Law Firm Alliances and Culture

According to Fons Trompenaars and Peter Woolliams in their book Business Across Cultures, relational aspects like culture and trust account for 70 percent of alliance failures. These problems are caused by differences in both corporate cultures and national cultures. From an Asian perspective, there are key cultural considerations which need to be taken into when gauging the potential of alliance success. Although frameworks such as Geert Hofstedes [6] national cultural dimensions (including power distance, uncertainty avoidance, individualism vs collectivism, masculinity vs femininity) are well known and extensively cited, it is often criticized for failing to consider diversity within nations and firms themselves. Law firms engaged in international alliances are often manned by staff that come from various countries, have wide ranging work experience and have studied in countries outside of their birth place. Hence national cultural attributions of behavior can prove to be explanatory to the point where they in fact explain very little. These theories tend to be static whereas culture may in fact be changing and fluid depending upon a number of factors.

 

National cultural differences may also play a more limited role in alliance success when compared to firm or professional cultures. One of the few articles that has looked at the varying roles of culture on alliance performance was written by Simon and Lane and published in the Journal of International Business Studies. The authors posited the impact of national, organisational, and professional culture on alliance success and developed a framework in the professional services context that could easily be applied to law firms. The model identifies differences in national culture which are are likely to magnify differences in firm culture as well as professional culture. These differences will negatively affect the value creating activities of the alliance. Law firms can use such a model by using well accepted inventories of national, firm, and professional culture to measure the cultural compatibility of potential alliance firms.

 

The New Practice Creation Process

 

There is some belief that law firm work moves from high value to lower value over time as knowledge becomes increasingly ubiquitous. This leads to areas of work becoming commodities and hence law and other professional service firms are under some pressure to continually develop new or innovative knowledge structures that can be leveraged in delivering client value. One of these areas can clearly relate to international diversification. In the case of law firms, many foreign firms have entered Asia to escape the slow growth of their home markets and create additional value to existing and potential clients. As with the start of any new practice, firms will need to evaluate the market needs and potential in relation to their overall objectives, expertise, and capabilities. According to Tim Morris from the Said Business School at Oxford University in the UK, there are four generative elements that have to be place for the successful creation of a new practice in a professional services firm. Although he was not specifically referring to the development of international practices, his ideas provide valuable insights for any law firm looking at starting a practice in Asia. The four elements are:

 

• Social agency (partner champion) – as professionals become more senior, they are under increasing pressure to build their own client base and revenues in order to demonstrate their value to the firm. Professionals are compelled to align their career objectives with that of the firm and the start of a new international practice can signal the lawyer's readiness for more responsibility or enhance their overall standing in the firm.
• Differentiated expertise – the new knowledge or expertise needed to be successful in Asia may come from experiences the firm has had with clients or referral type work processes. Other firms may have to develop new knowledge and capabilities from a lower knowledge base.
• Defensible turf – this relates to the ability of the new practice creators to be able to demonstrate the importance of an Asian practice to other key firm partners whilst assuring them of the benefit without encroaching on their existing clients and practices. For example, a partner may use client demands for an Asian presence as leverage for the need to set up an office or strategic alliance
• Firm support – firm wide support is crucial as the need to use a variety of resources (both financial and human) is integral to the potential success of a new practice.

 

Strategic Law Firm Expansion in Asia

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:

 

• Entry mode choice and applicability
• Ability to learn and adapt
• Integration of new offices and firm culture
• Measure of success
• Top management commitment
• Firm resources
• Industry clusters, client base, and trends
• Local and international competitors
• Cultural distance of home and host country environments
• Business, cultural, economic, and regulatory conditions of host country
• Strategic choice and business strategy
• Degree of market orientation
• Access and retention of key talent
• Practice focus, marketing strategies and business development
• Application of knowledge to work product and client value
• Communication intensity and quality
• Differences in the systems of law (legal jurisdictions)
• Leadership and management practices
• Reputation and size
• Specialty

 

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.

 

Management Structures

 

As law firms do expand in Asia and grow in size then the complexity of managing the increased scale involved in a transnational business often leads to changes in management structure. Traditionally, law firms have been organized according to a P2 (professional partnership) configuration which focused on collegiality and consensus decision making. As Faulconbridge and his colleagues point out;

 

"The P2 ultimately merges ownership, management and work execution in the small number of

partners who collectively and informally govern the long term direction and everyday

administration of their firm. Over the last 20 years or so, exogenous changes including

de-regulation of professional services markets, globalisation of professional services and

technological development, have been said to conspire to push professional

organization down the route of radical structural transformation. This can be

characterised as an archetypal shift from the P2 archetype to a new configuration: the

Managerial Professional Business (MPB) which characterised by rising levels of

standardization, bureaucracy and centralization. Thus, a more hierarchical and

specialised division of labour emerges, decision making is expected to become more

concentrated, structures refocus around matrixes and multi-disciplinary groups, practices

become increasingly standardised and centrally coordinated rather than ad-hoc and

idiosyncratic whilst the emergence of a managerial structure with executive powers

signifies the demise of collegiality and beginning of the separation of ownership and

control".

 

The author also point out the development of hybrid configurations such as the Global Professional Network which is most relevant for the largest global law firms. As the work of law becomes more complex and the scale of law firms grow, we are beginning to see more traditional management structures within law firms which attempt to give formal authority to executive decision making whilst trying to maintain the philosophy, values and practice of a legal partnership. In Asia it is interesting to note that foreign firms which have set up here have used varying approaches to managing Asian offices, with the majority sending over senior partners to run the office (or finding suitable senior lawyers in the region) and a few (such as Eversheds) hiring an executive to build the office.

 

The adoption of LLP status by a number of firms is a sign of the move to more formal management structures although within Asia there are still limitations on this form of business organization for law firms (soon to become a reality in Hong Kong). Whilst many lawyers seem disapproving of this move to corporatization there seems little doubt that the scale and complexity of cross border legal work and the value demanded by clients has in many cases outgrown the ability of the P2 configuration to meet these changing conditions.

 

Law Firm Choice in Asia

 

There are a number of research studies from the west that identify the key factors that affect in house counsels choice of law firm but little that reflects Asian views, and the differing views within various Asian countries. One of the few studies that does take a look at various markets in Asia is conducted by Asian Counsel magazine. The key findings of their 2009 results are identified below:

 

 

Figure 1: The factors that most influence choice of external counsel in Asia (percentage of respondents)

(Source: Adapted from Asian Counsel In House Survey, Representing Corporate Asia, 3^rd Annual Survey of Asia's In House Counsel, Pacific Business Press 2009)

 

The figure shows that for most countries, expertise in a specific area, responsiveness, and fees are still the overriding factors that affect choice of external counsel. There is also some emphasis on relationships and reputation of both the individual lawyer as well as the law firm. The only four countries which rated personal relationships as important factors were Thailand, Japan, Singapore, and South Korea.

 

There are a few key points to consider from these findings. Relationships have always been important in the marketing context in most Asian countries and the results here suggest this to be no different in the legal sector. Building relationships in the Asian context works on both a personal and business level and foreign lawyers should be prepared to spend a considerable amount of time investing in relationships and often being involved in social functions prior to any business dealings. For law firms, there is a need to balance and integrate the branding of an individual lawyer and the law firm so that consistency of the brand for both entities is built hand in hand over time. In many domestic law firms in Asia, there is a significant difference among partners even within the same firm and hence reputation of the individual lawyer plays an important role in business development.

 

In terms of expertise, there is a general trend globally for law firms to become industry experts and develop strong thought leadership and this approach is gaining ground in Asia. Demonstrating knowledge in both a practice and industry is becoming an increasingly important component of law firm strategy which requires a cultural change for most firms. Thought leadership is also becoming a valuable mechanism for firms to demonstrate their industry capability. The fact that responsiveness ranks as highly as expertise demonstrates the importance of both functional and technical quality. The issue for most law firms is their inability to build a market driven culture and knowledge based firm which can imbed responsiveness as a firm wide competence as opposed to relying on a few partners who seem to have a natural tendency towards proper client servicing.

 

Relationship Marketing - An Asian View

 

Customer relationship management (CRM) is a marketing buzz word that conjures up all sorts of images. Ask ten people about CRM and you will get ten different answers. Some will say CRM is a database, others will say CRM is about customer loyalty and programs that maintain it. Unfortunately, it is that kind of thinking that has led to CRM initiatives being some of the biggest failures in recent business history. What these organizations fail to realize is that CRM is none of the things described above. It is a business philosophy, an entire way of thinking about yourself and your clients. It is about recognizing that your firm is a client satisfying organism that must live and breathe a marketing culture in order to benefit from any of the technicalities involved in building a systematic CRM program. According to Edmund Thompson of the Gartner Group [2], A CRM program is typically 45% dependent on the right leadership, 40% on project management implementation, and 15% on technology. Perhaps one could go even further and replace that 15% technology with the same percentage but of the professional's mindset.

 

Much has been written about relationship marketing in the Western context both for services and consumer goods. Unfortunately, very little work has been done in the professional services context and none in the Asian context. One must consider whether relationship strategies which are prevalent in the west are transferable to the Chinese or Asian context and if so to what degree. In their book, Marketing of Professional Services, Philip Kotler, Thomas Hayes and Paul Bloom suggest four building blocks to developing stronger client relationships. We will look at these building blocks and view from them from the perspective of what is known about relationship marketing and guanxi in the Chinese context.

 

Trust

 

Trust is certainly a key variable in building and maintaining relationships and has been the study of much empirical research. According to Kotler and colleagues, trust can be built by helping clients with contacts and referring business to them, sending articles of interest to them about their industry, providing free seminars etc. One can view these acts as types of favours and this fits well with the idea of trust and building reciprocity in Chinese society. Oliver Yau and colleagues in their paper, Relationship Marketing the Chinese Way, state that Chinese seek to determine whether another party can be trusted and if favours are received they are morally bound to return these favours. Such reciprocity may be long term and firms should not act in a manner that shows them to expect quick reciprocal acts but be patient in building social bonds. Trust can be built through direct service experiences and through the recommendations of the others. In collectivist cultures like those in many Asian countries, building networks of contacts and talking the time to develop trusted relationships can be very beneficial since buyers rely so heavily on word of mouth and also tend to be more loyal once they are in satisfying exchange relationships.

 

Client Knowledge

 

According to Kotler and colleagues, client knowledge involves research to understand clients and their operating environments, developing an organizational memory through appropriate databases and procedures, and to then make use of that information it obtains. Certainly, as part of an overall CRM program these suggestions are excellent. In the Asian or Chinese context however we can extend these concepts. According to Yau and colleagues, empathy must be developed in order to see situations from another perspective. Understanding clients and their business more deeply can help in developing empathy but in the Chinese context one must attempt to develop a relationship first before attempting to develop a transaction, which is often what occurs in the Western context. Informal discussions and not only business related discussions is key as a firm can more deeply understand the factual and inner feelings of clients. If one can reach this deeper level of relationship it may be beneficial in developing complex service strategies. Sharing information is also a common occurrence in the Chinese context and helps widen the network of firms. Sharing information is a sign of bonding and trust and not collusion as viewed from a Western perspective.

 

Client Access

 

This is the process of making the firm easy to do business with and involves giving clients every opportunity to communicate with members of the firm. In the Chinese context we can extend this beyond traditional business meetings and client contacts. According to Yau and colleagues, social interactions can be a meaningful way of building bonds between business people and events such as attending a Chinese dinner can help extend a relationship from the social level to the business level. Building such relationships and networks should be seen as an investment and form of social capital. Aside from direct clients, it will be important to initiate access for other stakeholders. Building personal relationships with gatekeepers or administrators can help smooth business transactions and extend ones network, this can be highly beneficial since bonding in certain social bases can be transferable. Intermediaries, which act as bridges between parties can also be a guarantor of trustworthiness.

 

Technology

 

Here, Kotler and colleagues talk about the importance of software and hardware that can be used to better understand, communicate, and serve clients. In the Asian context, the importance of technology in building client relationships is no less important but perhaps the information can be used in ways that reach beyond the traditional thinking of Western professionals. The ideas of bonding, reciprocity, trust, and empathy discussed in the previous sections can all be enhanced by collecting and utilizing information for acts such as gift giving or favours which may be used with a number of different stakeholders in order to build the network social capital that is of real use when doing business in Asian contexts.

 

Mutual benefit and building shared goals is an important element of doing business in Asian societies and hence fundamental to relationship marketing strategies for law firms. The relationships identified in the box below provide a framework for developing marketing relationships in the Chinese context. The relationship building and maintenance variables are aimed at building dimensions such as trust and reciprocity and should not only be targeted at persons in charge but at a wider network of business associates in order to smooth the business process. It takes time to build trust levels that are bonding in nature and Western professionals should be patient in waiting for a return on relationship marketing activities. People in Asian societies do not distinguish between business and personal relationships as clearly as Westerners and are more likely to develop business from personal relationships.

 

Working within the Context of Strategic Alliances – Creating Value

 

Many law firms choose to enter the emerging markets of Asia through some type of strategic alliance. Alliances can be beneficial in Asia due to the regulatory restrictions placed on law firms in many Asian countries and the difficulties firms face in learning about the culture and business environment. In many cases, an alliance can provide a law firm a relatively low cost and quick way to enter a foreign market. Such alliances can be informal or formal, exclusive or non exclusive, but in all cases successful outcomes rest on the ability of the alliance firms to engage in some degree of cooperation. The degree of cooperation will depend upon the alliance type and the work it involves yet all alliances should share the same objectives; the building of mutually cooperative relationships.

 

The rate of alliance failure is often reported to be over 50 percent which highlights the importance of careful alliance planning and implementation since alliance formation can be a resource consuming process. The high profile alliance failure between two power house Asian law firms (Allen & Gledhill of Singapore and Azmi & Associates of Malaysia) is a prime example of the problems that can occur even between firms of close cultural and geographic proximity. These two firms signed an agreement in order to take advantage of the increasing intraregional trade within Asia but the differing objectives of the two firms led to the demise of the alliance less than 18 months after it was signed. Firms wishing to avoid the ignominy of failed alliances and wasted investment should consider a number of factors including fit between alliance firms cultures and objectives.

 

Costs and benefits of alliances:

 

Given the complex business environments in Asia and the restrictions placed on practicing local law in many Asian legal jurisdictions, an alliance can provide a number of benefits for a foreign law firm wishing to access the Asian market;

 

• Enhanced access to local markets, clients, and local law practice
• Shared resources, knowledge, and IT
• Shared costs and risks
• Speed of access
• Reduced competition
• Gradual learning and knowledge accumulation about foreign markets
• Possible ease of market exit

 

The benefits of alliances are in many ways their weaknesses. By gaining access to a new market through an alliance partner one automatically gives up a certain degree of control and revenue potential in return for the reduced investment and risk associated with entering an unfamiliar market. Should the market prove not to be viable, the foreign firm should have a relatively easy exit assuming the alliance contract is not overly rigid. The costs associated with alliances are;

 

• Coordination costs of integration and administration
• Potential knowledge leakage and appropriation
• Loss of independence
• Potential slowdown in decision making and responsiveness
• Risk to reputation and quality of work
• Opportunistic behavior by alliance partner

 

The deeper the level of integration between the alliance partners, the greater the need of knowledge sharing and integration which can be both beneficial and problematic. Knowledge sharing between the parties can significantly add to the capabilities of the alliance firms and hence develop their competitive advantage. Building the trust and integration necessary to leverage knowledge sharing to this degree takes time and there is always the risk that the law firm alliance partner in Asia will appropriate technical and client knowledge and then attempt to dissolve the alliance and carry out the work independently. Ensuring the compatibility of a potential alliance partner and the scope of work that the two firms will share is an important part of the alliance building process.

 

Law firms have, and continue to build, a multitude of alliances and referral networks across Asia. Firms have the option to develop any number of alliances and flexibly reconstitute their alliance networks based on needs and changing conditions. Small firms can gain access to international markets that their limited resources would often restrict and these types of relationships can be assuring to potential clients who require international support. Of course, whether these alliances really do add value to what the firm does and provide benefits above what the client could achieve by instructing firms independently will very much depend upon the governance and management of the alliance.