As international law firms from outside the region become more deeply embedded in the legal markets of Asia, the leading local and national law firms, which previously may have held relatively secure market positions, must respond quickly and accurately to these new competitors, or face relegation to the lower, less-profitable levels of the market.
We expect that the consolidation and shakeout of legal service providers, which is already well underway in some emerging markets in Asia, will continue through the end of the 2020s throughout the region. As profits are squeezed by expanding areas of price sensitivity and more demanding – and sometimes farther-reaching – expectations from sophisticated consumers of legal services, some law firms inevitably will find themselves being slowly squeezed out of the competition for the best work from the best clients.
This is not just a matter of the threats from foreign (i.e., non-Asian) law firms. As has already been observed in markets that recently opened to foreign competitors, a relatively small number of strategically agile and innovative local, national, and transnational firms usually meet the foreign challenge successfully, producing additional competitive pressure on those who do not. This frequently produces a phenomenon by which the top firms – both local and foreign – "pull away" as a group from other firms in the market. This is why some lawyers welcome foreign competitors; in the words of a managing partner in South Korea, "they push us to be better."
It is almost impossible to describe the strengths and weaknesses of national and local law firms in a way that can accurately and reliably bridge the significant variations in local market dynamics, regulatory environments, economic climates, and customary patterns and structures for the delivery of legal services across such a broad, diverse region as Asia. We have observed a set of basic strengths and vulnerabilities that many Asian law firms already have, and take with them into the new internationalized environments in which they now must compete. Their experiences convince us that it is possible for almost any well-managed Asian law firm to escape "the squeeze" by starting with a candid assessment of a relatively small number of common vulnerabilities and potential strengths.
To be sure, these are not the only strategic factors at work; nor do they universally apply equally or in consistent proportions to all firms in all Asian jurisdictions. However, there are eight factors that appear frequently enough, and with sufficiently clear and measurable effects on market position and financial performance, to serve as practical starting points in a diagnostic checklist that local and national firms in Asia can use to prioritize their strategic responses to the entry of foreign law firms into their respective markets.
four serious vulnerabilities
Four areas particularly concern us about whether a local or national law firm in Asia can compete effectively against larger, better-resourced legal service providers that are entering their markets from outside. None of these issues are fatal to a reasonably well-managed law firm; but any one of them can leave a firm vulnerable to a multi-directional squeeze on clients, legal talent, and profits. Firms that fail to address these risks probably will quietly slip, over the next five to ten years, into a "death spiral," as their best clients, best lawyers, and best instructions go elsewhere. They might survive, but often only as what we describe as "zombie firms," still walking around in the market, but without any detectable financial pulse.
Every law firm is different. Nonetheless, every local or national firm in an emerging international legal market in Asia should pay close attention to these common vulnerabilities, which we see as somewhat characteristic of the region, even if not universally descriptive of each firm. It is also very important to bear in mind that these challenges are not unique to Asia. We have observed the same issues confronting law firms in other emerging legal markets in Latin America, Africa, and eastern Europe.
- Many of the local and national law firms are not well-known outside their home jurisdictions.
- Most law firms do not adequately differentiate themselves from new foreign competitors – or even from other local competitors – in terms that are clear, persuasive, and relevant to the needs of international clients.
- Almost all local firms, as well as most national firms, are vulnerable to aggressive recruiting of their best legal talent, frequently at compensation levels that most Asian firms cannot match.
- Systems for sustainable profitability often are weak or non-existent, even in otherwise well-managed Asian firms.
four frequently overlooked strengths
Even the best-managed Asian law firms are going to continue to be squeezed by new competitors, changing client expectations, and increased price-driven pressures on profitability. However, the Asian law firms that, in our opinion, are already responding effectively to the entry of foreign law firms consistently display a set of four distinctive strengths.
- Although not true of every Asian law firm, many of them have superior knowledge and practical experience of the economic, legislative, and regulatory environments and regimes governing investment and business operations by foreign clients and their local subsidiaries.
- They demonstrate superior industry-sector knowledge in the jurisdictions where they practice.
- Throughout the region, we observe highly entrepreneurial and innovative practice management structures to meet client needs and expectations.
- Client loyalty is a frequent casualty when foreign competitors enter the market; but the most successful Asian law firms have built their practices on the foundation of long-standing local client relationships.
priorities for Asian firms
Based on these observations, the top strategic priorities for most local and national Asian law firms should be:
- Identify, understand, and address the vulnerabilities. They are risks for law firms throughout Asia, and even well-managed ones. No Asian law firm should assume that these are not potential problems for them or that they are irrelevant to the special characteristics of their firm, client base, size, legal specialties, or market. The four vulnerabilities outlined above are not the only strategic risks that an Asian law firm might have, but they probably are among the most serious.
- Institutionalize the strengths. The four frequently-observed strengths of local and national Asian firms suggest that the best returns on the investment of partner time and management attention come from developing and demonstrating a level of intimate understanding of each client's business environment, objectives, and concerns, sufficient not only to respond to changing client expectations, but also to lead the clients to higher expectations through innovative approaches to client service. In other words, draw from strengths that are already in the firm's professional culture and work habits to demonstrate to each client the advantages of using an established local firm of top-quality experts, rather than an outsider.
This is how local and national Asian law firms can escape the "squeeze," which will crush those of their colleagues who do not understand their potential strengths and their most serious vulnerabilities in the emerging international legal markets in which they must compete. It is this well-informed, in-depth understanding that will allow good local and national law firms not only to survive the radically changed competitive climates that are emerging across Asia, but also to thrive in them.
Click here to download "Escaping the Squeeze: Strengths and Vulnerabilities of Asian Law Firms in International Legal Markets," which was prepared for presentation to the 2017 Asia-Pacific Regional Conference of the International Bar Association.