Asian advances

By Robert Sawhney

Long before the current global financial crisis, Western law firms had considered Asia an attractive market for expanding their operations. Magic-circle firms have traditionally been ahead of their US counterparts and created practices that could be considered global given their geographic reach and practice-management approaches. Aside from Slaughter and May, the largest law firms in the world have preferred to expand through heavily integrated structures, either by setting up their own offices or by engaging in exclusive alliances with foreign firms. For a number of years, however, firms outside this group have also entered Asian markets, and we have seen a gradual increase in mid-sized and smaller firms seeking opportunities in emerging markets.

Who has done what – not just Asia

As the Western legal market matures, many law firms have been creating a presence in other emerging markets through a number of entry strategies. In American Lawyer it was recently reported that Shook, Hardy and Bacon had set up a formal alliance with its long-time partner firm, Araque Reyna Sosa Viso and Pittier, a 25-lawyer firm in Caracas (which is where most other law firms are located) in Venezuela. The US firm has not yet set up an office there, although two other large US law firms have (Hogan and Hartson, and Squire, Sanders, and Dempsey). A recent report in Top Legal International, meanwhile, states that Blake Cassels and Graydon has become the first Canadian law firm to set up in Saudi Arabia through a joint venture with a local firm. In Hong Kong there has been a spate of activity too, including the merger between Mayer Brown and Johnson Stokes Master, as well as Reed Smith acquiring Richards Butler in 2007, a year after merging with Richards Butler’s UK operation.

UK firms have not been shy either. Probably the most high-profile push into Asia recently is that of Norton Rose in merging with Australian law firm Deacons. This merger caught the surprise of many, as Norton Rose has stated that the rationale behind the deal is to solidify the firm’s Asia practice. Whether this works out remains to be seen as a number of commentators have suggested that another base, Deacons Hong Kong, would have been a better target.

Entry strategy in Asia

Asia is a complicated place to do business. While open markets such as Hong Kong have a fairly straightforward regulatory environment and business context, emerging legal markets such as China, India, South Korea and Indonesia have varying degrees of transparency. In addition, while markets such as India remain closed, its importance in terms of legal process outsourcing (LPO) is significant, and law firms will have to be cognisant of this trend as a cost-saving mechanism for both themselves and their clients. Rio Tinto is one prominent example of a recent company willing to send legal work to India to cut back on their UK legal bill.

Essentially, firms have two choices of entry strategy into Asia: setting up a representative office (RO) or entering into some sort of alliance. This creates a number of potential scenarios.

Representative offices (ROs)

Open markets such as Hong Kong are home to numerous foreign law firms. They practise in Hong Kong and serve other regional practices. Firms also base themselves in Singapore, although the practising of local law is limited to the six firms that have been granted licences by the Singaporean government (including Clifford Chance and Allen & Overy). Previously these firms could only practise local law through joint ventures with Singaporean firms, and Linklaters still follows this format in its tie up with Allen and Gledhill. An RO gives a firm solid presence on the ground but it can be expensive to set up and maintain. A number of law firms are also readying themselves for the opening of the South Korean market although local law practice will still be beyond reach.

RO and alliances

A number of firms have local offices and also engage in alliances to practice local law. The depth of alliance depends on country regulations. China is a good example of where larger law firms have both RO and alliances when the practice of local law is needed. Alliances vary but they can be problematic between firms of different cultures. However, in markets such as China, Thailand and Indonesia, which have varying degrees of openness, an appropriate alliance strategy is crucial to success.

Alliances

International alliances range from ‘best friends’ networks to exclusive arrangements. They are often the only way a firm can practise in a specific locale. The linking up of Clifford Chance and AZB in India is an example of a loosely-based relationship in the hope of a market opening. Without a presence on the ground, alliances can
be difficult to manage, however, with quality of work always an issue. Slaughter and May seems to be very good at this. Some firms send their lawyers into an alliance firm on an intermittent basis to deepen the relationship and ensure standard work practices. Whether this is official or not will depend on the regulatory environment.

Virtual practices

In some other cases firms opt for a hub-and-spokes system, whereby they set up in one location and serve other regional practices either by working in the hub office, or by sending lawyers over to the locale in question for the duration of a project. Australian law firms have often favoured this approach, which can work if the projects are of finite duration. If projects are complex and/or recurring, however, some type of full-time presence would probably be preferred by the client. Smaller firms might use this approach quite effectively if local law practice is not crucial to a project or if the client can find their own advisors for local law issues.

Capability building

Whether firms have a RO or an alliance doesn’t prevent them from building capabilities to serve foreign markets. The impending opening of the South Korean market has seen a number of firms hiring lawyers with relevant backgrounds and language skills in order to bolster their ability to serve clients engaged in Korean business.

Consultancy firms

In places such as China some law firms have even opted for a consultancy role, which does not fall under the regulatory restrictions faced by law firms. They can provide advice to clients and work with local law firms, who then provide local legal advice and practice. This can be a viable alternative for smaller firms, but it is unlikely to be attractive to larger firms that want to establish their legal brand in the region and work under the clear direction of being a law firm.

Strategic alliances: making them work

Creating an Asia strategy and implementing market entry is not easy given the complexities of legal markets in the region and the need, often, to create such alliances. They are necessary, however, due to the restrictions of foreign law firm practice as well as the impact of cultural differences when doing business. It is ironic that these cultural differences create many of the problems in law firm alliances.

Additionally, it is somewhat difficult to assess the quality of law firms in emerging markets. The problem arises as there is a lack of objective and reliable data on which to accurately judge firms or the quality of the legal talent in any specific locale. In China there are over 12,500 law firms, with 130,000 licensed Chinese lawyers. How many would be truly competitive on an international basis? Moreover, full integration in the case of a merger is very hard to achieve between partners of disparate size and profits per equity partner (PEP), not to mention the cultural issues involved.

Figure 1 highlights various collaboration forms for law firms. We don’t tend to see many consortiums or licensing agreements involving law firms, although according to the Wall Street Journal, US law firm McDermott licensed its name to a Chinese law firm (Yuen Da) for a fee, and presumably to claim it has a office on the ground in China.

Strategic alliances are the most common form of arrangement between law firms, but their use is surrounded by failure and disillusionment. Research suggests up to 50 per cent of alliances fail. In an article published in the MIT Sloan Management Review (2008), Bettina Buchel highlights a number of minefields that can impair alliance performance, including unclear partner roles; unequal sharing of risks and benefits; not being prepared for the inevitable crisis; and not having formal exit mechanisms.

Similarly, Patricia Anslinger and Justin Jenk (consultants at Accenture) suggest six key factors for enhancing the chances of alliance success:

Develop clear, common objectives and a definition of success;
Ensure proper alliance form;
Determine appropriate governance models with clear decision-making;
Anticipate the most likely conflicts;
Plan for evolution; and
Establish clear metrics to track and measure success.

What these factors suggest, and indeed what research shows, is that a marketing mindset is crucial to the outcome of an alliance. Being client and market-focused must be part of your thinking, especially considering recent research that demonstrates social capital is not a good indicator of firm performance from an internationalisation perspective (that is, making following your clients the main basis of your decision does not produce optimal outcomes). Intellectual capital was thought a much better predictor
of success.

As mentioned, a major hurdle for UK and other Western-based firms seeking out alliances or joint ventures in emerging markets such as Asia is that of culture. National cultural characteristics can have a major impact on alliance success because it is the individual interactions between the players that determine the quality of such alliances. For example, research conducted by Yadong Luo (Administrative Science Quarterly, 2001) shows that attachment between parties is impeded by cultural distance.

Unfortunately the UK and US are highly individualistic societies, whereas most Asian societies are collectivist. This means that the different values brought by each party in terms of relationship building and the sharing of information are rooted in varying perspectives. In other words, UK firms are likely to look at the alliance from a transaction basis (time and costs), whereas Asian firms are likely to look at it from a resource basis (building capability) perspective. This can cause fundamental conflicts as each party expects something different from the other.

If you assign people from either firm to regularly interact it might be worthwhile looking at the possibility of choosing people who are from similar national cultural backgrounds. If the relationship is closer (joint venture or merger, for example), the firm leaders and their goals will have a major impact on the outcomes, and hence finding partners with compatible goals and beliefs becomes even more important.

Asia and other emerging economies are proving attractive destinations for law firms from the West, but how you reach that destination has a major impact on the potential benefit and future viability of your firm’s international strategy.

Firm leadership

Much research demonstrates the importance of leadership in internationalisation success, and indeed, in the success of strategic alliances. For example, knowledge management (KM) and strategy success are heavily intertwined for law firms, as use of knowledge leads to innovation and the delivery of greater client value. Chen Li Yueh and Barry Barnes examined the impact of leadership style on knowledge sharing in alliances in US and Taiwanese accounting firms, and found transformational leadership behaviours were strongly correlated with internal and external knowledge sharing. Conversely, a hands-off approach (laissez faire style) was found to have a negative impact. Transformational leadership is about vision, motivation, intellectual challenge and personal attention. Unfortunately it seems that many managing partners are less than fully engaged in what their people are doing, and that has serious implications for firm performance in general and alliance success in particular.

Robert C. Sawhney is the founder and managing director of SRC Associates Ltd.
He can be contacted at: bob@srchk.com