As China’s legal industry sees consolidation driven by undercutting, firms look to innovation to stay competitive
There is a price war on in China’s legal industry. As the market expands and matures, law firms are undercutting each other furiously, in a way that could reshape the entire legal services landscape for good.
Zhang Jianlai is the executive director of Sunshine Law Firm’s Guangzhou office, which specializes in the energy and environmental work. He says that in the past year, fees charged by firms for investment and M&A projects in the new energy sector have dropped dramatically. For example, for certain types of projects, law firms would have charged upwards of 100,000 yuan ($15,500), but today there are firms willing to do the work for 20,000 to 30,000 yuan, which "can't even cover the travel expenses."
Other regions are also seeing the same scenario unfolding. Lin Wei, director of P.C. Woo & Zhonglun W.D., tells ALB that it has to deal with competitors undercutting them on projects in Northeast China, North China, and East China. "It's the same even in overseas projects. In some projects, the price quotations of some Magic Circle law firms are even lower than ours," says Lin.
So what’s causing this competition over price? Lin mentions market maturity as one factor. “Many new legal sectors are blue oceans at the beginning, become red oceans after three to five years, and then price wars start. Given the overall economic slowdown in the past two years, the time period for a blue ocean to a red ocean is even shorter."
Another factor, says Zhang, is changes to the pricing mechanism of China's legal market. In the past, local governments implemented guideline prices for legal services, which "had been gradually cancelled in recent years as an attempt to leave the choices to the market." Moreover, government agencies, state-owned enterprises, and even some large private enterprises now procure legal services through tenders and competitive bidding, "many of which conclude with the lowest price offered ... which further intensifies the price war," Zhang points out.
That leads to a race to the bottom. Lin tells ALB that in some tenders the firm has participated in, the quotations of many “big names” were even lower than those of the small and medium-sized firms. In those cases, "we had to lower our quotations."
LARGER FIRMS CAN ABSORB COSTS BETTER
Lin and Zhang feel that the kinds of work where the price competition is strongest are the relatively mature and commoditized ones in which the processes can be standardized, perhaps even automated. These include basic legal advisory, conventional due diligence, IPOs, debt restructuring, mergers and acquisitions, labour and employment, and intellectual property rights. "The price competition in those areas is more intense as they are regular practice areas of all firms," Zhang says.
On the face of it, it might be surprising to witness lowballing from high-end firms. But Lin says that is part of a calculated approach. "Large firms take it as a strategy, in particular when it comes to projects of state-owned enterprises or large projects – large firms want to capture a greater market share rather than profit margin. Also, larger firms have the breadth and diversity brought about by scale that enables them to absorb costs if need be. “For large corporate-type law firms, it's easy for them to rearrange their resources. On one hand, they implement low price strategy for those large projects to occupy the market share; on the other hand, they raise fees for other projects to maintain their overall revenues," Lin says.
He adds that this is leading to gradual consolidation of the market. "While large firms occupy greater market shares by implementing low price competition strategy, it's hard for small and medium-sized firms to stay profitable in price war," Lin says. "And it is why many small and medium-sized firms now choose to become local branches of large firms from Beijing and Shanghai."
WHEN THEY GO LOW, WE INNOVATE
The undercutting isn’t going to stop any time soon, and law firms are beginning to look at other ways that they can differentiate themselves, instead of price alone. One approach is to be very good in areas where price is not the deciding factor. "Take complex litigation cases as an example, says Lin. “In some tenders for high-profile litigation cases we participated in, they implement a comprehensive rating system to evaluate the feasibility of the plan proposed, advantages and experiences of a team, the number of team members on the project, etc. The quotation only accounts for about 30 percent of the overall rating of a firm,"
Sunshine Law Firm, on the other hand, is exploring more specialized fields such as carbon neutrality and carbon trading. “Moreover, given there currently aren't many lawyers specializing in environmental public interest litigation and environmental compliance, it gives us advantages in price negotiations," says Zhang.
Law firms also need to be able to allocate their resources in smarter ways, notes Lin. P.C. Woo & Zhonglun W.D. "has been expanding its business from the coastal areas to the central and western regions as many of our mature services may see involution in the coastal areas, but are badly needed in the central and western regions." In terms of deployment of internal resources, the firm "carries out labour-intensive businesses in the central and western offices, and skill-intensive businesses in the coastal areas, and conduct joint bidding to reduce costs and lower quotations," Lin says.
Another lawyer who asked not to be named said that “some firms have started to recruit non-legal staff for their bankruptcy business. In this way, they can save cost on manpower for on-site operations. Some firms also hire many young associates as auxiliary staff to help with IPO projects for the same reason."
KEEP CALM AND CARRY ON
Another important strategy is to adopt the mindset that “price wars are inevitable in all industries,” as Zhang puts it, and legal is no exception. Lawyers need to “stay competitive only by adapting to the changes."
Han Jinwen, an intellectual property expert at GEN Law firm, believes that "firms should adopt a reasonable fee standard no matter what. Meanwhile, we should endeavour to deliver quality services to clients and show our clients the value derived from our services."
In Han's opinion, low price competition or price war can be a reminder for lawyers that "we must constantly improve our capabilities. In addition to legal expertise, we should continue to learn business knowledge and publicity skills, to demonstrate our value to the clients."
Lin agrees: "Honestly, we don't have the energy to study the real ups and downs of the market. What we need to do is making improvements internally to sharpen our competitive edge, such as offering better services and giving better customer experiences, and then naturally, the impact of external factors on our business will decrease."
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