Hire the best lawyers. Invest in Information Technology. Get good management. Many law practice partners and senior management have leaned on the saws of conventional wisdom to compete globally. Advanced statistical analysis reveals what drives the competitiveness of Hong Kong’s law firms – specifically in winning mandates from Chinese firms looking to acquire foreign firms (‘Going Out’ companies - named after China’s Going Out policy encouraging companies to compete internationally). Legal advisors to such companies and the financial advisors they work with need to offer niche services to survive. Yet, such niche services did not mean specialising nor were such services enough. The complexity of a jurisdiction’s financial law, such as Hong Kong’s, in fact helps law firms there to structure deals that they might not be able to structure had they were situated elsewhere.
Specialisation: Too little, too late?
Specialisation does not necessarily drive law firm performance overall. Yet, in the case of Going Out mandates, law firms that offer something different, unique and better managed to capture more business. Figure 1 shows the industries that top law firms’ clients came from between 2000 and the end of 2014. According to Figure 2, such top law firms did not get more business because of a specialisation. No type of specialisation correlates with the ranking of firms (from those earning the most from Going Out deals to those earning the least). Figure 3 reveals that larger law firm advisors lost business over time – and particularly after the crisis, but not due to a lack of specialisation or because of their size. Smaller law firms in other jurisdictions besides Hong Kong managed to beat out Hong Kong law firms, because of their different service offerings. As can be seen in our larger study (Michael, Bryane, Dariusz Wojcik, Douglas Arner, Chen Lin, Wilson H.S. Tong, and Simon Zhao, What Determines M&A Legal and Financial Advisors’ Competitiveness in an International Financial Centre: Using China's Going Out Policy as a Natural Experiment, University of Hong Kong Faculty of Law Research Paper No. 2015/017, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2607348), these smaller law firms with headquarters outside of Hong Kong managed to find services Going Out firms wanted. They did not specialise in them but they did develop them and use them to steal Hong Kong business away.
Can the Legal/Regulatory Environment Matter Just as Much as Strategy?
The environment contributes to a law firm’s success – perhaps far more than many law firm executives might admit. Two aspects about the legal environment deserve particular attention.
First, the complexity of financial law contributed to a law firms’ competitiveness in winning Going Out mandates. Most lawyers might view complex financial and corporate laws with dismay. Isn’t ease of doing business a key to business success? Our study found that law firms operating in jurisdictions with very complex financial law managed to attract more Going Out mandates – holding other factors constant like overall demand, the advantages large cities bring, specialised offerings and other factors. Complex law allows legal advisors to structure deals in ways they can not in other places. Figure 4 shows the legal advisors to the large banks helping to structure Going Out transactions. Large banks preferred to work with large law firms (of course). Yet, they preferred to work with offices where local law could best structure the deal.
Figure 4: Advisors to the Advisors Based in the Big Three
International Financial Centres
(advisor in red rows and advisors to the advisors in black columns, with the city where the advisors’ advisor works in gray columns)
The figure shows examples “advisors of advisors” for Going Out transactions. We chose the financial and legal advisors with the highest numbers of advisors for illustrative purposes. For example, Morgan Stanley retained Freshfields, Jones Day, Shearman & Sterling, and Slaughter and May as advisors to them directly (rather than Morgan Stanley’s client firm).
Second, law firms working in jurisdictions with high-ranked and active law schools tended to win more Going Out mandates. Figure 5 shows the results of a particular type of statistical analysis known as a linear regression. Such a regression finds patterns in data. In our case, we wanted to see if legal complexity and law school quality correlated with a jurisdiction’s law firms winning Going Out advisory engagements which can be found in our larger study as mentioned above. Yet, we can say that the variables with the red boxes around them represent, what economists call “statistically significant” variables. In other words, the data show that the legal complexity of a jurisdiction and the quality of its law schools have a 95% probability or better of correlating with law firms’ abilities to win Going Out mandates. Such regression analysis also helps us remove other factors that interfere in the analysis.
The effect of law schools – and the academic environment around law – should not be surprising. Government regulators sit in the same colloquia as businessmen during academic conferences about financial law. For better or worse, the financial industry and law firms can make their preferences known to regulators – and vice versa. Academics think of ways of making regulations more efficient. Law schools also represent excellent places to hire bright young lawyers, continue the education of bright older ones, and dispel the bad ideas of all of them. The regression results above help us determine that law schools themselves – and not the fact they are in large economies – have this effect on law firms’ competitiveness.
The success of Hong Kong’s law firms will continue to depend on their manager’s business and legal savvy. Yet, we find they also depend on the broader legal environment too. We find that how their competitors make new services for broad sections of their clients – like Chinese firms looking to acquire foreign companies – affect their performance. How they react affects their performance. Their contributions to the law itself also play a major role. The complexity of financial law helps determine law firms’ competitiveness. Their input, feedback into that law – and compliance with that law helps determine this competitiveness. In this regard, law schools play a unique role in such competitiveness. Law schools represent the crucible for forming new and better financial law for lawyers to use. These law schools also provide a place for the legal community to come together to cooperate, even as their firms fight for market share.