Keeping SME Firms Relevant in an Era of Globalisation

Tony Williams, Principal, Jomati Consultants LLP

It is tempting to assume that cross﹣ border matters are the preserve of the major global law firms or at best of the leading national firms with high international reputations and a strong network of similar best friends. In an era of continued globalisation this is an unnecessarily restrictive and potentially defeatist view for a smaller law firm to take.

Background

Since the 2008 financial crisis, the world has changed in many ways. The major economies of Europe and the US have encountered recession, low growth and strained government finances. Many developing countries have continued to grow with some achieving GDP growth rates in excess of 5 percent despite the market turbulence. Developing economies now account for about 30 percent of global outbound foreign direct investment and for the first time there is now more inbound foreign direct investment into the developing world than into the developed world. In 2008, 67 percent of the Global Fortune 500 companies were based in the US or EU but in 2014 that figure shrunk to 52 percent. Accordingly, the developing world, now the recipient of more inbound investment than the developed world, accounts for 30 percent of global outbound foreign direct investment and is home to a growing number of the world’s largest companies. In addition, trade routes for investment are now far more complex with investments from Asia to Africa, the Middle East to Asia and so on. It is no longer the case that every major investment has to be routed through the once dominant centres of London and New York. Clearly many emerging markets face some stiff headwinds with the reduction in commodity prices, the slowdown in China, expected increases in US interest rates and local currency weakness. But while these may impact short﹣term activity levels the current development of an inter-connected world seems unstoppable.

The Opportunity

This change provides a magnificent opportunity for smaller law firms especially in a thriving international business centre such as Hong Kong. Many domestic clients are getting larger; are looking to invest internationally; and foreign companies are looking to invest in Hong Kong and the Asia Pacific. But, in order to grasp this opportunity for not only more, but potentially more interesting and profitable, work, firms need to position themselves in order to demonstrate their capability and relevance to clients (existing and potential).

The Global Approach

The traditional approach to globalisation of the larger firms has been quite simply to “follow the money” and to either open offices or merge with local law firms in countries experiencing significant inbound or outbound work. This has resulted in over 30 law firms with revenues over US$1 billion of which about 10 have revenues near or in excess of US$2 billion. Indeed, as globalisation continues it is quite likely that we will see US$5 billion revenue law firms before too long.

The opening of many international offices is not a credible option for most smaller firms as it is simply too expensive, time consuming and difficult to compete in new markets against larger firms that have deep pockets. Many firms will also not wish to contemplate mergers as they value their independence, autonomy and culture too highly to allow themselves to be subsumed into a global firm.

The Options for SME Firms

But, there are other available options that smaller firms in Hong Kong should consider to remain competitive in the global economy.

The first issue is to understand what is happening in the Hong Kong marketplace, specifically, in relation to existing and potential clients. To what extent are these clients looking to invest abroad; if so, where and in which sectors? Are foreign investors looking to invest in Hong Kong, if so where are they from and what are they looking to invest in? This is not a one-off exercise. Investment trends and fashions can change quite quickly as perceptions of particular countries and specific industries are impacted by political, economic and regulatory issues. Current areas of interest could be ASEAN, with the ASEAN Economic Community now a reality, or the Chinese Government’s “Belt and Road Initiative”, which is focused on a range of infrastructure and trade initiatives.

Armed with this information a firm can identify jurisdictions where investment is going to or coming from, the likely sectors for such investment and the local and international clients that are likely to be involved in such transactions.

A firm then has a number of options to pursue. It can contact firms in the relevant countries with a view to establishing some sort of working relationship or “best friends” arrangement. It can join one or more of a number of law firm networks, some of which are general and global and others of which are related to a specific practice area or geographic region. A best friend’s type arrangement can be private or publicly promoted.

Although it may sound counter intuitive, there may also be significant benefit in establishing a relationship with a number of major international firms if they do not have a significant presence in Hong Kong. These firms are likely to have clients looking to invest in the region and are likely to have the capability to assist your clients internationally. Even foreign firms with a Hong Kong presence may not have a broad offering and may look to small local firms for assistance in such areas as real estate, employment and the like. Some international firms (although perhaps not the largest), have a relatively limited or even nonexistent Asian presence. Some also offer training and secondment opportunities that may be appealing to your lawyers. The potential disadvantage of working with them is that some will seek to dominate the matter and relegate you to a Hong Kong law role or even take the client altogether. Also, if they subsequently decide to open or expand an office in Hong Kong, they may seek to staff their new or expanded office by hiring the lawyers at your firm that they have worked with. These are not reasons to avoid working with such firms, but it is prudent to clearly understand the advantages and disadvantages of doing so. These risks may be mitigated (but not totally excluded) by entering into a “no poaching” agreement relating to clients, partners and staff with the “best friend”.

Making It Work

Regardless of the route (or routes) that are chosen, smaller firms should appreciate that relationships only work and develop if there is a level of commitment and energy on both sides. A “best friend” who you never meet, phone or email from one year to the next is in reality only a passing acquaintance. Unless you really get to know your counterparts your chances of delivering the level of service that clients need, expect and demand are low.

Many clients working on cross border matters are indifferent as to their law firm’s legal structure – whether that be a fully financially integrated international firm, a Swiss verein (ie, effectively an association of law firms operating under a common brand and with a level of management, and strategic co-ordination but usually without full profit sharing between the member firms), an association, a network or as best friends. However, clients are generally unforgiving about lack of co-ordination, point scoring between lawyers, turf wars as to who should be doing what and when, and blame shifting if things go wrong. Quite simply many clients want one key point of contact, preferably one bill, an efficient, commercial and ethical service, no unpleasant surprises and to ensure that their lawyers help them look good to their bosses. Getting the law right is a pre-requisite but so too is a responsive and efficient service, a problem solving rather than problem making approach and a clear understanding of the client’s commercial objectives and how to achieve them.

This sort of service is not achieved by accident. It can only be achieved by investing time and energy in the relationships with the other law firms. This does mean the relationships have to be prioritised, with the most attention given to the countries from which or to which the investment flows are going to occur. It also means that some relationships will fail or will not develop as expected and an alternative firm may need to be found. In relation to larger economies such as China, it may be appropriate to have a range of relationships across a number of firms to address different geographic and practice area expertise, to mitigate potential client conflict risks and to maximise the flow of referrals.

These relationships work most effectively where a number of lawyers are involved from each firm. A “gatekeeper” who keeps such relationships to himself is unlikely to benefit the firm as a whole. Many firms pool information as to their international contacts so that they are readily available to all in the firm. Such lists are most useful if they include details of work referred each way, comments on the firm’s performance and even client comments. This feedback also enables you to review how the relationship is working. For example, are you referring work to them but never getting anything back, how responsive and client﹣friendly are they and did they keep to the fee arrangement agreed?

It is also particularly helpful if you can demonstrate your capability to clients and potential clients. Joint visits can be particularly useful (but only if you prepare properly beforehand). Briefings or seminars on issues and opportunities in relation to another country which involve lawyers from that country are also beneficial. This helps to demonstrate to your client or potential client that you are investing in your relationship so your firm can provide them with the services that they need.

As a way of developing and deepening the relationship some firms arrange for lawyers in a particular practice area or sector to meet regularly (in person or by conference call) to discuss current trends, legal developments and business opportunities. This can result in the sharing of experience and the development of best practice. Other firms arrange secondments or training programmes between their firms. It can also be worthwhile to prepare information about each firm’s relevant expertise and experience, as client presentations often need to be prepared at short notice.

Conclusions

Much of this may appear quite daunting to a relatively small law firm. However if efforts are properly focused and prioritised they can achieve significant results. Instant gratification may be unreasonable to expect, but our clients, who have adopted this approach, have been able to demonstrate their relevance to inbound and outbound investors and to build long term and profitable client relationships, which have significantly improved both their financial performance and how they are perceived in their local market. This is not to suggest that developing international relationships is easy or trouble free but there are real opportunities available to firms that apply a long term, systematic and rigorous approach to developing their international relationships and effectively demonstrate their capabilities to their current and target clients.

Indeed in an era of continuing globalisation, firms face a stark choice. Engage with cross﹣border activity in the ways mentioned above or risk becoming irrelevant to existing clients as they develop internationally or missing out on international clients entering your market. In these circumstances, standing still can be the most dangerous plan.