The close of 2016 brought about unique patterns within Hong Kong’s legal sector, the effects of which we are still feeling. In this article, we will discuss the key trends and their impact on the legal industry from a commercial and recruitment standpoint.
Throughout 2015 and 2016, M&A activity remained very high, with 2015 being a record year with approximately US$3.8 trillion in M&A spending. Among other things, this is largely attributable to low interest rates globally, which made borrowing money more affordable. As a result, M&A specialists and corporate lawyers have, for the most part, remained in considerable demand. However, some US firms have been reluctant to hire in Q1 2017 as compared to Q3 2016. One reason is because of the increasing amount of geopolitical uncertainty, which has created a loss of investor confidence. This was most palpably reflected in Q4 2016 hiring patterns.
Investors’ loss of confidence is directly impacting the amount of business available in the market, and therefore creating a more competitive bidding process per deal. When scrutinising this landscape further, it becomes clear that the bulk of work undertaken thus far in 2017 is mostly regional, typically far less in terms of revenue-per-deal, and more focused on increasing the volume of transactions. This inherently creates numerous challenges for many US firms, who are typically designed to be satellite offices that assist with major cross-border Sino-US transactions. US law firms are generally not designed to compete in low-value, high-volume markets because their offerings are usually more bespoke and expensive. Furthermore, US headquarters generally will not allow their overseas colleagues to reduce rates to compete for this type of work, which significantly reduces their ability to take on the bulk of work currently available. All of these factors combined have resulted in a decreased appetite to hire within US firms, when compared to “local-international” firms that have more diversified and versatile practices.
Recruitment is often undertaken to replace outgoing lawyers rather than to expand one’s team. One trend affecting long-term candidate commitment is a general lack of clarity surrounding stability and career progression. The market remains very competitive in terms of options for quality associates, who are finding more transparent employment options elsewhere, and often with ease. Indeed, in-house opportunities are fast becoming the biggest threat to private practice, where candidates with over four years’ experience are seen to have accrued enough knowledge to move in-house. With an ever-increasing need for businesses to reduce legal spend, in-house options are becoming more common. Many private firms are unwilling to be more flexible in order to retain top talent, so the switch is often seen as painless by employees. The “grass is greener” mentality is creating both an imbalance in the market and an opportunity for local firms to supersede overseas investors.
As is clear to see, a trend of China-outbound work persists. Therefore, the demand for expat lawyers has decreased significantly, as without strong Mandarin skills they are not able to support the bulk of mid-size deals coming from China. In addition to the aforementioned changes in market conditions, fears surrounding the depreciation of the Renminbi have resulted in increased capital outflow regulations imposed by Beijing, which have further hindered some firms’ transaction pipeline. Many firms are therefore being more selective in hiring due to genuine fears of overstaffing. On a staffing level, there is not only rising demand for Mandarin-speaking applicants, but a feeling that each candidate now needs to be more “deployable” within the firm on different transactions. So depending on the firm, varied experience can be seen in a positive light.
Another trend we are seeing in the legal industry is inadequate job development for associates. Firms want their lawyers to be versatile and engaged at work, but do not monitor case allocation enough to prevent a silo effect from taking hold. Such a structure focuses on specialism, rather than ambition and progression, therefore increasing tedium and staff attrition. Candidates pigeon-holed into ECM (equity capital markets) practices are now favouring the mix of work provided by less-established firms. Disciplines that offer crossover for such candidates include corporate (M&A – public and private, general corporate, compliance), in conjunction with capital markets (IPO, spin-offs, pre-IPO fund raising); banking & finance and DCM (debt capital markets); corporate (M&A)/private equity and fund formation. Firms that genuinely monitor work allocation for associates report higher interest in roles, high levels of productivity and greater retention; those that choose not to address this issue often experience high attrition rates and lose a significant amount of time and money on recruiting, on-boarding and integrating new hires.
There is also the trend of growing demand for training. Despite being a key driver for some associates, knowledge management coordinators are light on the ground in Hong Kong, and the material that is being adapted for businesses in Asia is not always specific enough for that jurisdiction. Suitable memorandums, a library of templates and guidance notes related to legal principles in bank lending, HK listing rules, cross-border standardisation initiatives relating to legal opinion and transactional matters, and regular lectures on judicial changes are all significantly under par in comparison to that which are provided by a select number of leading UK and US firms.
Work-life balance has been another key topic of conversation in Q1, with numerous candidates looking to optimise their lifestyle. Employers are already becoming aware of this rising trend, and the need to address issues concerning operating hours. Monitored working hours and adjustments in the following months have ensured that people are not stretched as far, so do not look to exit. It would appear that flexible working arrangements may become more prominent as we move further into 2017. Firms in London have successfully trialled and implemented the concept of working from home when needed, on a one day per week/month basis. Though this may seem minor in another industry, with the hours lawyers work, it makes a clear difference. The reduction in working days per week is also offset by lower pay and part-time options, resulting in greater savings for the firms.
Red Circle Firms
Without a shadow of a doubt, the biggest trend we noted in 2016/2017 was the rise of The Red Circle firms: that is, more and more China-headquartered firms moving into the Hong Kong market, and the subsequent appeal to legal talent as a result. We believe this is mostly due to cultural, societal and economic shifts towards a more “Chinese”-way of doing business, but also attributable to international firms not responding effectively to conditions on the ground.
It is worth pointing out that most firms in Hong Kong are international regardless of their demographics, which means all decisions are made by executive boards in the UK or US. Whether operational, managerial or strategic, we have found that slow or overly bureaucratic processes are resulting in less-agile business conditions. Executive committees based in Beijing are able to make decisions much more quickly, so, from a practical perspective, international firms are already on the back foot.
All of the above factors are creating a more regionalised working culture, which is attracting candidates to Chinese firms, and those international firms who have assimilated Hong Kong offices. We are now visibly seeing the impact of a gradual shift in power. International firms continue to cover their specialisms, but the institutions winning a large proportion of today’s commercial legal work are the firms headquartered in the PRC. The remuneration on offer at PRC firms is also making them a more attractive option for candidates and adding to the interesting market dynamic. As these firms are growing organically, they have been able to manage their headcount effectively to ensure their revenue per lawyer remains high, ensuring they can re-invest these savings back into competitive remuneration packages for the Hong Kong market.
Overseas practices were not concerned about Chinese firms until five or six years ago, but as the landscape continues to change, there will be a point where Chinese law firms are able to compete on an international playing field. Already when we consider market share, there are a few areas where Chinese firms are penetrating deeply into their international competitor’s back yard, despite the traditional dominance of US and UK firms. Chinese firms, outside of Fangda, often choose to work purely within corporate and capital markets; as such, these seem to be the most hotly competed disciplines. Main board deals have wavered less so, as most Chinese firms are yet to genuinely compete outside of the GEM market for IPO transactions.
Interestingly, apart from King & Wood Mallesons, many of the Chinese firms in Hong Kong are actually quite new to the market, and the same goes for a number of US firms. The difference is, where US firms have no long-standing relationships to fall back on, Chinese firms have both the cultural advantage, and a mode of operating preferred by today’s clients. Another factor at play is that the majority of clients wanting to do deals within Hong Kong are Chinese, and therefore prefer to speak in Mandarin. It is unsurprising then that we are seeing US firms trying to undercut such firms in order to survive these market conditions.
In terms of talent, there is greater movement for candidates within a Chinese firm than within a US or UK alternative. They are seen as new and innovative firms with an abundance of opportunities, which add to their appeal. However, these firms are often less developed, in terms of lacking or having less sophisticated internal processes, administrative support, available databases, back-office knowledge, or operation functions than firms that have been in the region for a number of decades. These are often cited as sources of frustration. Nonetheless, the employment arena is being transformed by a new wave of opportunities, albeit operating and staying afloat will remain a tough balancing act for everyone in the market.
Looking into Our Crystal Ball
So what does the future hold for law firms in Hong Kong? We firmly believe that the dominance of international law firms is coming to an end. Fundamentally, if they don’t re-invent themselves, they will become unable to retain top talent, and unable to compete for business, as a new regionally-focused, cost-conscious perspective becomes the dominant view in the legal market.