This post is based on recent research that provides pointers to change and opportunities for law firms in Hong Kong. Much is changing in the Hong Kong legal profession. Our research amongst law firms and their clients reveals several insightful trends.
This post is the first in a periodic series that will share key aspects of Beaton Capital’s industry analysis and our interviews with law firm leaders, general counsel and senior executives of major corporations.
The big picture for law firms in Hong Kong
To understand the ‘big picture’ we have used strategic group analysis (SGA) to describe and assess the dynamics of the profession in this market. SGA is a practical approach that clusters firms in an industry by the way they seek a competitive advantage.
This approach was popularised by Harvard’s Professor Michael Porter and is valuable in interpreting diverse competitive positions in complex industries like law.
There are ‘mobility barriers’ between one strategic group and the others. Thus identifying which firms are the most direct competitors and on what basis they compete, e.g. international capabilities, range of services, local knowledge, cultural affinity and price.
This raises the question of how feasible it is for a firm to move from one strategic group to another without needing to be acquired by or merged into a firm already in that group. SGA is also used to identify opportunities and identify strategic problems. As you read our view of the groups in Hong Kong we think you will agree that SGA points to many issues for these firms to address.
Beaton Capital has identified four main strategic groups. We also add a note on Australian law firms in Asia; these firms do not constitute a strategic group per se.
Here are the groups as we see them.
International firms whose dominant purpose is to serve international clients. There are two sub-groups, namely English firms like Slaughter and May and US firms like Paul Weiss. We gauge there are currently some half-a-dozen firms in this group with an average of fewer than 10 partners each, some of them itinerant.
2. International firms serving international clients and deliberately growing local practices, also possibly with two sub-groups. In this group, there are also ‘London’ firms like Clifford Chance and Allen & Overy and American firms like Jones Day and Baker & McKenzie. We gauge there are currently approximately 60 firms in this large group with a wide range of partner numbers, the biggest of which is Mayer Brown JSM with nearly 60 by our estimate.
3. Local firms with local law practices and growing international practices. Prominent among these are Deacons and Woo Kwan Lee & Lo. We gauge there are currently about a dozen major Hong Kong firms in this group with an average of 20 partners each; Deacons is the largest with some 60 partners.
4. PRC firms in two sub-groups, the first mainly serving local corporate and SOE clients in China such as the Grandall Law Firm and the second doing the same but also growing rapidly outside China, e.g. Jun He and Dacheng. We gauge there are currently about 10 PRC firms with an average of 12 lawyers each in their Hong Kong offices.
There are a number of Australian firms in Hong Kong. As recently as five years ago there were distinct sub-groups amongst these Australians:
- Those with a pan-Asian strategy such as Allens (now in a joint venture in Asia with Linklaters) and Blake Dawson (now with Ashurst).
- Those with a China strategy, such as Mallesons Stephen Jaques (now in a Verein with King & Wood as King & Wood Mallesons and joining with SJ Berwin).
- Those adopting a ‘funnel’ strategy to capture inbound work, such as Minter Ellison.
Implications of being in a particular strategic group
What does all this mean for firms either looking to enter the market or considering changing their strategy?
Market entry has thrown up some interesting statistics in the last few years, with at least 30. Foreign firms entering Hong Kong, and 15 exits. Firms must decide on what strategic group they will enter recognise. The success factors for competing in that group then be disciplined in staying within that group as it takes many years to establish a position recognised by the market.
The most obvious entry point is Group 1 at the invitation and commitment of their international clients. But it is when firms attempt to migrate to Group 2 that they may encounter difficulties.
Strategic re-direction for local firms in Group 3 can be equally fraught, particularly. If these firms start to see their referred income decline. It is in this group that we have witnessed the merry-go-round of alliances. Best-of-friends relationships change over the last few years.
The answer for many of these firms is probably to go deeper into their competitive advantage by growing and strengthening local relationships. Probably through local mergers rather than seeking a better international tie-up. It is crucial that firms in Group 3 understand, embrace and act strategically. The success factors for being a high-performing firm in this group.
In a manner of speaking, the elephant in the room is mainland China. The inevitable competition from that market. The disruption to the market dynamics of the whole of Asia in the future. It can only be assumed that more PRC work will go to more PRC firms as the economy increases in sophistication. It may resemble the old USA model, in that foreign firms gain little trucks. Of relevance may be announcements along these lines affecting the Big 4 in accountancy.
The situation in Hong Kong must also be examined in the global context. The a distinct possibility that there may only be 10 international or global firms of substance within the next decade or so. Our analysis suggests the probability of a global Big 10, akin to the Big 4 in accountancy. The rest will withdraw, be absorbed or downsize to defensible niche positions. We may end up seeing only three groups, not four or five:
1. Global firms with major international clients and major local clients
2. Local firms with local clients and some international clients
3. Those in transition not quite sure where they are going.
The lesson for those looking at Hong Kong is to decide now. Which of the three groups they will be a member. And then compete according to the ‘rules’ of the group.
Beaton Capital Blog originally published this article and granted permission for its reprint here. George Beaton, a director of Beaton Capital. Beaton Research + Consulting with research assistance from Eric Chin, Senior Analyst.