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.

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