ANALYSIS: The fee gap: can international firms still charge double?

The findings of the 2010 ALB China In-house Survey have sent out a positive message to law firms. According to the results, only 17% of the polled legal departments stated their budgets for legal spend on external counsel have contracted compared to last year, and 49% have seen an increase in 2010 budgets.

However, clients and general counsels are under increasing pressure to manage the cost of external counsel, even if their budgets have been increased. "The higher hourly rate charged by an external counsel means its client would receive less legal support with the same budget. So we have to watch our external legal spending very carefully and ensure we have enough resources and appropriate support to meet the company's legal needs," said a Shanghai-based director of legal affairs in a US-headquartered Fortune Global 500 company.

The legal director also addressed the question of the price/value gap that exists in the services provided by international firms. "Some international firms' charge-out rates (for partners in China) are too expensive even to top multinational companies. Their top-ranked professional service and quality advice are desirable to clients, but the additional value delivered is not enough to justify the additional cost," he said.

Price alone won't make the cut
As companies become more proficient at managing risk and build up their own in-house legal function, they stop outsourcing as a matter of course and instead engage external counsel only in particular circumstances. Usually these circumstances require high quality work, specialised expertise, and quick turnaround times. Firms are therefore getting increasingly less likely to win mandates on the basis of price along. It is the ability to provide international-standard legal services and lower-than -international-standard prices that constitutes a new winning proposition. 

In the middle market, where mandates generally involve less significant offshore elements and can be handled by either PRC or international firms, leading domestic players currently enjoy an advantage.

"A good number of domestic firms are catching up with their international counterparts and are taking a more dominant role in servicing foreign companies in China – providing not only general corporate services but also corporate finance and transactional advice," said Willie Uy, director of legal affairs of Hong Kong-listed property developer Shui On Land. "They are able to offer legal services that are compatible to services provided by many international firms, whilst keeping their fee levels at a more reasonable level."

In addition, Uy noted, these PRC firms have adopted the international model of delivering services through a team-based approach, which has added an additional degree of comfort for their foreign clients.

• The hourly rate differences between international firms and PRC firms

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