Looking Ahead to 2021
Through 2020, law firms in China underwent changes in relation to practice areas and business models due to the pandemic, and also the uncertain outlook at home and abroad. Coming into the new year, partners from local and foreign law firms discuss legal trends and their lessons learnt from last year, as well as expectations for law firms in 2021.
A challenging 2020 has finally come to an end. While most law firms in China will only understand the full picture of their 2020 revenues after the Lunar New Year in February, law firm leaders already have an idea of their financial performance last year based on the number of contracts in hand and their billing records. However, the good news is that they did not suffer the kind of huge losses many had expected. Most law firms performed about the same as in 2019, and some even saw a slight increase in revenue.
Xu Yu, director of the Beijing managing committee at Hylands Law Firm, tells ALB that the law firm predicted in the middle of 2020, after the firm suffered grave losses in the first two quarters of the year, that its performance in fiscal 2020 would be the same as in 2019. “But, by late November and early December, we could see that our business still managed to grow compared to 2019,” he says.
Ma Jiangtao, CEO of Dentons China region, also tells ALB that by September 2020, the law firm’s performance had remained the same as in 2019. “Affected by the pandemic, our growth momentum lost some steam compared to last year, but we remained on a growth track,” he says.
“This environment has presented considerable challenges, but it has also presented opportunity – not only from a business perspective, but from a client-service standpoint.”
——Xun Zeng, Cooley
Summing up 2020, Xun Zeng, partner at Cooley’s Beijing office, tells ALB: “While the coronavirus pandemic has created significant uncertainty, Cooley is well-positioned to navigate evolving economic and market climates. This environment has presented considerable challenges, but it has also presented opportunity – not only from a business perspective, but from a client-service standpoint.”
UPS AND DOWNS
The revenues of the legal services market correlate to economic development. During the pandemic, some industries were badly hit but others stood to benefit, and this was reflected by the changes in law firms’ revenues.
Speaking of areas that witnessed a significant downturn in 2020, Zhang Liguo, director at Grandway Law Offices, says two examples were foreign-related business as well as domestic and overseas M&A business. Hylands saw a similar trend with areas that experienced a decline in activity in 2020 including M&A and international trade, as well as intellectual property.
Dentons China’s Ma points out that the most impacted areas were real estate and construction, and banking and finance.
As for areas that saw growth, Zhang tells ALB that Grandway focuses on capital markets, especially the one in China. The year 2020 was the most active year for new fundraisings, so the law firm’s domestic IPO business saw significant growth.
Xu, on the other hand, tells ALB that his law firm found growth in its dispute resolution as well as bankruptcy and insolvency businesses in 2020. Its fund and investment business, which they did not expect to perform well, also recorded mild growth. “It is perhaps because funds had stayed inactive and investments opportunities were limited in the first half of the year, then by the end of the year funds decided they still had to seek investment opportunities,” he says.
Like Hylands, Dentons China’s bankruptcy and insolvency business were also among those that saw faster growth, recording a 42 percent year-on-year increase. Its disputes resolution business also grew 4 percent year on year.
But, as different law firms have different competitive edges and business portfolios, performance varied in 2020. For example, Dentons China’s cross-border investment and trade business grew 18.68 percent, while its capital market business fell by 10 percent.
Speaking of the implications of the changes in their business over the past year, Xu says integrated law firms provide diversified legal services and that gives them resilience. Ma concurs and says: “We can coordinate resources internally to increase our flexibility. For example, when non-litigation lawyers who work in capital markets and finance saw less business in 2020, the law firm allocated these lawyers to teams that worked on the non-litigation matters of bankruptcy and insolvency cases that grew in number. To enable this, the law firm needs to have a platform for coordination, and leaders need to grasp the internal information to organize and coordinate work between various teams.”
Besides diversity, making up for shortcomings is also a key to addressing uncertainty. Xu says Hylands recruited many young partners in 2020. “We categorize our work into core, enhanced and emerging businesses, and focus on the latter two when recruiting new people,” he explains. “In 2020, we had partners joining us in capital markets, healthcare, industrial parks businesses.”
CHANGES IN EXPENDITURE
As operations grow costlier, law firms are spending more on remuneration and rent year after year, which translated into unprecedented pressure on them in 2020. Speaking of their spending over the past year, interviewees say they cut back their spending slightly on certain areas but believe that there were some costs that could not be saved.
Ma tells ALB that in March and April, Dentons China approved its annual budget for 2020. “Although the budget was smaller than the one in 2019, we still had an adequate budget. Our budget was determined by a committee made up of 46 offices in China. Most of them still saw opportunities amidst crises and believed that the committee should be given full authority to allocate funds flexibly,” he explains.
But in the first half of 2020, Dentons China was still cautious about its spending on certain areas: pay rise was suspended and conference and travel expenses were also cut before July due to travel restrictions.
Zhang also tells ALB that even though Grandway did not have any layoffs, it did not undertake any mass recruiting either despite significant growth in its capital markets business.
As for their offices, Grandway expanded its office space in Beijing and Shanghai in 2020 as planned, while Hylands also “decided to keep the new lease in the second half of the year and expects the new office to be in use in March 2021 given the future outlook,” says Xu, despite concerns over office space expansion.
Besides careful budgeting and planned expenditures, interviewees also tell ALB that their spending on digital transformation and marketing increased significantly.
For example, Zhang says Grandway implemented two measures focused on digitalization. “First, we put more IT resources into enabling video conferencing. Second, we added new legal search tools. We also reached out to academic institutions to advance AI applications in the legal sector,” he explains.
Zhang also stresses that these measures were not meant to address challenges arising from the pandemic specifically. The video conferencing system, for example, had been proposed before the pandemic to increase efficiency and reduce costs, which happened to be a good call during the pandemic. And the plan to use more legal tech tools was put forward because Grandway believes that “the rapid advancement of communication technology, big data and AI means some of the legal work, especially work regarding the capital markets, can be done smartly,” Zhang explains.
IT was also one of Dentons China’s biggest expense in 2020. Ma tells ALB: “After the coronavirus outbreak, we were among the first law firms to enable live video streaming. We proposed the idea of ‘study vacation’ and started to live stream since Feb. 1st. To date, we have held over 230 webinars that drew over 3.5 million viewers.” Dentons China also purchased online courses for its live streaming platform, such as a series of courses on the Civil Code that drew over 140,000 viewers in one episode. Moreover, to go with the trend of remote working in the future, Dentons China has invested 1 million RMB into developing contract robotics.
Dentons China also devoted a lot of resources to marketing in 2020. Ma explains that the law firm recruited a marketing and HR director who previously served at the world’s top 500 companies. Dentons China also took part in several major events in the second half of the year, such as an international conference in Sanya about the Belt and Road Initiative and an Asia Pacific Economic Cooperation (APEC) forum about the small- and medium-enterprises. “These were not in our budget… but we believe devoting resources to these areas demonstrated our responsibility as a big law firm,” Ma says.
To Hylands, marketing was also a key area of focus. Xu tells ALB that the law firm “significantly stepped up collaboration with PR and marketing agencies,” which brought along benefits such as “enhancing the law firm’s reputation in the market that helped us retain existing clients and gain new clients.”
During the challenging year that was 2020, did law firms feel clients tightened their budget for legal services and were more price-sensitive?
Xu tells ALB that at the beginning of the pandemic, Hylands already “predicted that clients’ ability to pay could be weakened and was prepared for it.” On one hand, the law firm reminded partners to keep a positive attitude with clients under the unusual condition. On the other hand, the law firm even proposed protecting clients who might have problems paying in a short time.
Speaking of clients’ sensitivity to billing rates, Xu feels that clients had more concerns in this regard in 2020 and tried to bargain more. But looking at dispute resolution, his practice area, billing rates were not much different from those of the previous year. Meanwhile, Ma says the fact that clients suspended certain business activities had a bigger impact. Traditional clients such as those from real estate and construction sectors suspended IPOs and investment projects in 2020.
Zhang tells ALB that since Grandway mainly serves listed companies, he did not feel much the changes in billing rates. But he could see that clients’ now demand swifter response times. “This may not come from the clients themselves. The new registration-based IPO system is more inclusive and predictable, but it also means faster registration and approval. This led to a surge in work for lawyers and other agencies, who are then required to work faster,” he explains.
As Xu puts it, the keywords for client relationships in 2020 were “inclusivity” and “more trust.” For lawyers, supporting clients amidst adversity means longer work hours or even bigger sacrifices. Echoing Xu’s view, Ma shares two stories. When Beijing was hit worst by the pandemic after the Lunar New Year, a subsidiary of a national energy group required lawyers to provide on-site services. Dentons China’s partners went to the site in full personal protective equipment with few hesitations.
Another story took place when Dentons China joined the bid for the restructuring of a large-scale enterprise. “We assumed that if we won the bid, we would need a lot of employees working on-site. When Beijing was yet to be locked down on the third day of the Chinese New Year, we required lawyers to change their flights and train tickets to return to Beijing. After winning, we could therefore dispatch a team of 30 people to the site immediately since no one needed to undergo a 14-day quarantine.”
Cooley has also felt the changing needs from the clients. In uncertain times, “this is a moment where clients are turning to their most trusted advisers, not looking for new firms. Clients want safety, familiarity and trust… Additionally, clients want specifics on what firms can offer them. They want useful, practical and specific legal advice they can implement immediately,” it says.
EXPANDING THEIR PRESENCE
Large, integrated law firms in China have been expanding more slowly in the past few years but did not stop opening in major cities in 2020.
For example, Dentons China Yichang and Luoyang offices have been approved, continuing its strategy of opening in cities with strong economies. Hylands, in turn, set up branches in Haikou and Wuhan.
Speaking of the development of their branches over the past year, Zhang tells ALB that since Grandway focuses on capital markets, its expansion goes hand in hand with China’s economic development, especially its capital markets. “The trend stayed the same in 2020. Most of our clients are from the Pearl River Delta and Yangtze River Delta. Our branches in these areas also recorded the highest revenue growth,” he says.
Observing the same trend, Xu says: “Several larger branches of Hylands, such as our Shanghai office, saw higher revenue growth in 2020. By October 2020, it already made as much as in 2019.”
Meanwhile, as the Chinese government kept rolling out regional development plans, interviewees say certain regional branches stood out from the others in 2020.
One example is the rise of branches in the western region. Ma tells ALB that Dentons China Chengdu office expanded its space to rent a whole floor in 2020, with its personnel and revenue also growing. Its Yinchuan office also expanded space, and its Lanzhou office grew to become the biggest law firm in the city and even Gansu province within two years of its establishment.
“At Grandway, our Xian office and Chengdu office achieved significant growth compared to last year,” Zhang says.
Besides these, Ma also mentions Dentons China Shijiazhuang office, which achieved “a 30 percent increase in revenue in 2020,” and Dentons China Nanjing office, which “expanded office space to rent the entire floor in 2020.”
For Hylands, its Nanjing branch registered as a bankruptcy administrator and took part immediately in some major bankruptcy and insolvency projects in Jiangsu province. Besides, its Shenzhen, Hangzhou, Guiyang and Jinan offices also realized a large increase. But Xu admits: “Some branches performed well in 2020 because they took up more projects rather than generating more revenue. Their revenues are expected to grow in 2021.”
Strategic management has become a way for businesses to stay afloat in the uncertain post-pandemic era. Any lessons learnt in this regard by law firms in the past year?
In 2020, as law firms were slowing down their expansion, integration became a priority for many of them. Hylands, for example, strengthened integration of all branches across the country.
“In August, we held board and committee meetings to formulate rules and authority of our national-level board. Our strategy, for now, is to encourage teams to work together. Once they are used to collaborating, we will then create a practical compensation system based on their feedback,” Xu says.
Ma also has a lot to say on integration. “To be honest, integration was not perfect for Dentons China. But in 2020, when we were hit by the pandemic, our partners and lawyers remained positive even when we had to concentrate resources to support a bigger agenda at the expense of certain teams. In the face of adversity, we instead created a sense of community,” he explains.
He also explains to ALB the importance of and expectations for integration: “When we had over 9,000 lawyers, some doubted who would need that many lawyers. But now every client is served by a lawyer who is supported by 9,000 colleagues. They can take any case type from anywhere with any special requirements. After integration, lawyers can refer clients to one another. Many lawyers at Dentons China only need to work on maintaining their professional image, then they will be introduced to clients by their colleagues.”
Besides integration, specialization has also become a priority over the past year. Ma tells ALB that specialization does not only apply to lawyers, but also other positions in the law firm. As mentioned above, besides the HR and marketing directors, and a new IT director will also be joining soon. To help them adapt to the work environment of a law firm, Dentons China also created the position of Chief Operating Officer to facilitate communication. By doing so, the firm hopes to foster management professionals who will truly understand law firms in China.
“We need to turn crises into good challenges.”
——Ma Jiangtao, Dentons China
LOOKING AHEAD TO 2021
For 2021, law firm leaders remain cautiously optimistic. Xu explains: “It is difficult for us to predict how the pandemic will develop in 2021. The impacts of the pandemic may not be in full play yet, as recession is a natural rhythm in an economic cycle. We should be better prepared.”
Believing in opportunities amidst crises, Ma says: “We need to turn crises into good challenges.”
Grandway has already set specific plans for 2021. Zhang tells ALB that the law firm will first work on opening more branches: “We’ve been looking at Zhejiang, Guangzhou and Fujian. As the STAR board further develops, cities in Central China with innovation momentum, such as Hefei and Wuhan, are also our considerations. We’re also looking at Hainan,” he says.
“These two years are bullish years for new fundraisings in China. We believe the trend will carry on in the future, which is in line with our core business.”
——Zhang Liguo, Grandway Law Offices
As for key areas for business in 2021, Zhang says: “These two years are bullish years for new fundraisings in China. We believe the trend will carry on in the future, which is in line with our core business. Based on the changes in China’s capital markets, we will expand our team moderately to enhance service quality and maintain our leading position, as well as open new branches to step up our game.”
And, at Dentons China and Hylands, integration and specialization will continue to be their priorities in 2021.
Having navigated a year of unparalleled uncertainty, do law firms now feel they are prepared and resilient for the upcoming changes?
Ma summarizes his observations for 2020 in one word: forward-looking. As China has basically contained the pandemic and large law firms start expanding again, he says: “Dentons China aims to increase flexibility at work in 2021 to make us adapt more easily to work from home.” The law firm will keep in place the measures that it adopted during the pandemic, such as video conferencing, live streaming and the development of contract robotics.
“The attempts we made during the pandemic will become the new way we work in the future,” he adds.
Xu, for his part, summarizes his experience in two words: calm and agile. “The pandemic has made us more accustomed to embracing crises. When similar crises arise again, we won’t panic too much. The work we do in the law firm enables us to still find new opportunities amid adversity, but it will depend on how agile the law firm is in its management and business.”
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