Chinese Law Firms after the Financial Crisis: The Case of Shanghai*
Sida Liu
Assistant Professor of Sociology and Law
University of Wisconsin-Madison
Xueyao Li
Associate Professor of Law
KoGuan Law School, Shanghai Jiao Tong University
March 5, 2010
Since China’s entry into the World Trade Organization (WTO) in 2001, it soon became a
prime site for the global expansion of legal services. In less than a decade, more than a
hundred international law firms have established new offices in major Chinese cities such
as Beijing and Shanghai. In the meantime, a number of Chinese corporate law firms have
also become important players in FDIs, IPOs, and cross-border transactions. Until the
financial crisis hit the global market economy in 2008, most practitioners and observers
of the Chinese legal service market believed it would continue the rapid growth for at
least the next five to ten years, with law firms getting bigger, more specialized, and
playing an increasingly significant role in the global market.
Arguably, the global financial crisis has changed the Chinese corporate law market in
many ways, as it did elsewhere. However, given the resilient growth of the Chinese
economy, one may wonder to what extent Chinese law firms have suffered from the crisis,
compared to law firms in other countries. Using data from recent fieldwork in Shanghai,
this paper examines the impact of the global financial crisis on law firms in China. In the
following pages, we begin with a brief organizational history of Chinese law firms since
their privatization in the 1990s and then proceed to the analysis of the changes in
business, client relations, and individual career in the Shanghai bar after the financial
crisis. We draw on interviews with lawyers in a variety of law firms, including foreign
firms, large local firms, smaller local firms, and solo practitioners. The analysis will
demonstrate the varied effects of the global financial crisis on the management of these
firms and the work and life of their lawyers.
Law Firm Evolution in China: From Privatization to Globalization
The history of law firms in China is short in comparison to most Western countries, but
its dramatic change in the past three decades was perhaps unprecedented. Until the late
1980s, all Chinese law firms were state-owned firms in which all lawyers were state
employees on the government payroll. Following the Soviet model, when the legal
*
Preliminary draft for comments. Please do not cite or circulate without permission. The two authors
contributed equally to the paper.
profession was revived after the Cultural Revolution (1966-1976), legal service agencies
were called “legal advisory divisions” (falüguwenchu) instead of law firms. In July 1983,
Shekou District Law Firm was founded in Shenzhen, one of the five special economic
zones in the southeast coast. It became the first legal service agency with the title “law
firm” (lüshi shiwusuo) since the economic reform. A year later, in August 1984, the the
Ministry of Justice (MOJ) made a decision in its national work conference to change the
official title of “legal advisory division” to “law firm” across the country. By 1988, the
number of law firms in China was 3,473, with 31,410 lawyers in total.
Given that the Chinese legal profession was rebuilt from scratch since 1979, the
development in the 1980s seemed impressive, yet it still lagged behind the rapid growth
of the demands for legal services in Chinese economy and society. In particular, the area
of foreign investment remained undeveloped partly because few foreign investors would
retain state-owned law firms in business negotiations with Chinese enterprises.
Meanwhile, in the 1980s no foreign law firm was permitted to establish offices in
mainland China, though in reality a limited number of foreign lawyers played an
important role in international business transactions in the first decade of China’s market
reform.
The first critical point in the evolution of Chinese law firms came around 1988-1989,
when the MOJ began to experiment a new organizational form, “cooperative law firms”
(hezuo lüshi shiwusuo), in a few major cities such as Beijing and Shenzhen. Cooperative
law firms differed from state-owned firms in terms of both ownership and management
model. These firms were neither owned nor funded by the state, but by lawyers in the
firm following the “Two Nos Four Selves” (liang bu si zi) principle, i.e., no
administrative personnel, no state budget funding, self-finance, self-debt, selfdevelopment, and self-regulation. In other words, a cooperative law firm was collectively
owned and managed by the lawyers in the firm, but it was not a partnership because
private ownership was not recognized in China in the late 1980s. In this sense,
cooperative law firms were merely a transitional form in the privatization of the Chinese
legal profession.
The primary objective of Chinese lawyers’ privatization was to gain global legitimacy,
i.e., to signal to foreign governments and investors that China has a modern legal
profession relatively autonomous from the Party-state. However, soon after the
experiment of cooperative law firms began, the 1989 Tiananmen student movement
broke out, which resulted in the large-scale withdrawal of foreign capital from mainland
China. Consequently, as part of the government effort to bring foreign investors back into
China, in 1992 the MOJ officially permitted 12 law firms from Britain, France, the
United States, and Hong Kong (then not returned to China yet) to open “representative
offices” in the mainland. Since then, the number of international law offices in China
grew steadily throughout the 1990s.
Yet these China offices of international law firms were different from their offices in
other countries in that the offices could neither “interpret Chinese law” nor “employ
licensed Chinese lawyers.” Accordingly, when doing their work these international law
offices in China had to collaborate with local law firms in order to provide legal opinions
to or appear in court for their clients. While this barrier on transnational law practice
presented a heavy burden for foreign law firms seeking to enter the Chinese market, it
proved to be a big blessing for the burgeoning of domestic corporate law firms. In the
early 1990s, a small number of cooperative law firms in Beijing and Shanghai became
specialized in foreign-related corporate work and received much work from international
law offices. Although their tasks were often as simple as signing the legal documents
drafted by their foreign colleagues, it was the first barrel of gold for these new Chinese
corporate law firms.
From the mid-1990s, the privatization of Chinese law firms entered the second stage.
With the promulgation of the 1997 Lawyers Law and the guidance of MOJ policies, the
majority of state-owned and cooperative law firms were reorganized into partnership law
firms. The formal structure of these partnerships was quite similar to partnership law
firms in other countries, in which all partners assume unlimited and joint liabilities for the
firm’s debts and obligations. However, solo practice, as an old and prevalent form of law
practice in many parts of the world, was not approved by the MOJ. Therefore, the
“partnership” among Chinese lawyers is not a voluntary organizational entity, but a
compulsory partnership. Most partners ate what they killed and did not share clients or
resources with their colleagues in the same firm.
Another significant change since the 1990s was the rapid increase in Chinese law firms’
expertise in international business transactions. As many Chinese nationals with longtime legal training and practice experience in Britain, the United States, Germany, France,
and Japan returned to China and became partners in local law firms, they brought back
valuable experiences in handling complex corporate projects such as foreign direct
investment (FDI) and merger & acquisition (M&A). Accordingly, a few leading Chinese
corporate law firms began to take on a substantive part of the work in their collaboration
with foreign law offices. By the turn of the century, when the privatization of Chinese
lawyers culminated in a nationwide “unhooking and restructuring” (tuogou gaizhi)
campaign, the largest Chinese law firms had already employed more than a hundred
lawyers and established multiple offices across China, even with satellite offices in New
York and the Silicon Valley.
In 2001, China joined the World Trade Organization (WTO) after more than a decade of
persistent effort. One important agreement of China’s WTO entry was to further open up
its market for legal services. In the same year, the MOJ promulgated a new regulation on
foreign law offices, which still forbad foreign law offices to handle “Chinese legal affairs”
but, at the same time, permitted them to “provide opinions concerning the impact of
China’s legal environment” to the clients. This ambiguous regulation opened up a gray
area for the practice of international law firms in China. In many situations, they chose
not to collaborate with major local firms but to use filing companies or the so-called
“puppet firms” (i.e., local law firms doing rubber-stamp work for foreign firms) when
they need to provide written legal opinions.
The years after the WTO entry were the golden age for the development of the Chinese
corporate law market. The number of foreign and Hong Kong law offices increased from
133 in 2002 to 203 in 2006, and many existing offices also doubled or tripled their sizes.
Several leading international firms even established two offices in both Beijing and
Shanghai. The number of their branch offices would probably be even larger without a
restriction in the 2001 MOJ regulation, which only allows foreign law firms to establish
one new office every three years.
The massive entry of international law firms generated plenty of job opportunities for
both Chinese and foreign lawyers working in the corporate sector. The most notable
change is the shift in the direction of personnel flow between foreign and local law firms.
In the 1990s, few foreign law offices in China would hire lawyers from local firms.
Instead, they preferred to employ either lawyers with overseas training and experience or
law graduates from elite Chinese law schools and train them in the firm. Meanwhile,
almost no foreign law office would offer a partnership track to their Chinese associates,
and therefore many senior associates returned to local firms and became partners.
In contrast, since the early 2000s foreign law offices, especially those newly established
offices, began to employ a large number of lawyers from Chinese firms. To be sure, this
is partly due to their urgent needs for expansion, but it is also because of their rising
appreciation of the importance of localized expertise in the Chinese market. As Chinese
law becomes increasingly complex and the government control on foreign capital
remains strong, work experience in top Chinese firms also becomes more valuable for
lawyers seeking employment in foreign law offices. Consequently, several elite local
firms in both Beijing and Shanghai lost a large number of lawyers, particularly middlelevel and senior associates, to foreign law offices. It even led to a Shanghai Lawyers
Association news brief in April 2006, which publicly condemned the illegal behavior of
foreign law firms in employing Chinese lawyers.
Despite the aggressive behavior of some foreign law firms, the justice bureaus did not
take any action to enforce the MOJ regulation. In most situations, the Chinese lawyers
employed by foreign law offices would simply stop registering their lawyer licenses to
avoid government sanction but, at the same time, keep their professional qualification so
that they can still get a new license if they decide to move back to a local firm later. In
other words, the MOJ’s restriction on foreign firms’ employment of Chinese lawyers
merely became empty words and had no effect in practice. The main reason that the MOJ
did not actively enforce its rules is that any substantive sanction on foreign firms would
cause negative effects on foreign investment into China. Instead, keeping a gray area in
this rapidly changing market may be a more flexible and realistic strategy of professional
regulation.
Although the number of foreign law offices in China skyrocketed in the mid-2000s, most
of them remain relatively small offices, usually employing fewer than 20 lawyers. Even
combining the Beijing and Shanghai offices, no international law firm has employed
more than a hundred lawyers in mainland China. In contrast, the sizes of Chinese
corporate law firms, particularly those in Beijing, have grown substantially over the past
decade. In 2002, only a handful of Chinese law firms have more than a hundred lawyers.
Today, at least a dozen of them have more than two hundred lawyers, and the largest firm,
Dacheng Law Offices, employs nearly a thousand lawyers. King & Wood, the second
largest Chinese law firm, has established 16 offices in different parts of China as well as
in New York, Tokyo, and the Silicon Valley.
With the increase in size, the management models of elite Chinese law firms have also
evolved over the years. The traditional “eat what you kill” model was gradually replaced
by the bureaucratic model, in which the firm is formally divided into several specialized
departments, two or three tiers of partnership, and a management committee that holds
the ultimate decision-making power. Needless to say, the real patterns of power differ
much in different firms: some are more democratic with all equity partners share power,
while others are controlled by one or two influential partners, despite their large size.
Nonetheless, it is evident that the elite Chinese law firms are becoming similar to their
Western counterparts regarding the managerial structure.
In 2007, China revised its Lawyers Law and added “individual law firm” to the
organizational forms of the Chinese legal profession. Individual law firm seems to
resemble solo practice in Western countries, but it requires at least five years of practice
experience for the law firm director, and the director can also employ other lawyers in the
firm. Meanwhile, the transitional form of cooperative law firm was abolished. As a result,
state-owned law firm, partnership law firm, and individual law firm have become the
three legitimate forms of law firm organization in China. Furthermore, the 2008 Lawyers
Law also added “special normal partnership” (teshu putong hehuo), which is similar to
the limited liability partnership (LLP) model widely used in transnational law practice. In
November 2009, Dacheng Law Offices, the largest and most rapidly expanding law firm
in China, officially adopted the new model, in which only the partners with fault or
negligence assume unlimited liability to the firm’s debts and other partners only assume
limited liability according to their investment in the partnership.
The rapid expansion of large Chinese corporate law firms not only diversifies their areas
of practice, but also makes them more resistant to collaboration and potential merger with
foreign firms. To many foreign law offices, especially the lower-tier firms, the largest
Chinese firms have become formidable competitors in FDIs, M&As, and other corporate
transactions. However, not all Chinese firms are seeking rapid expansion and becoming
generalists – there are also a number of boutique firms, particularly firms in Shanghai,
which keep a relatively small size and specialize in one or two areas of practice such as
initial public offerings (IPOs) and venture capital projects. While these boutique firms
usually keep good collaborative relationship with foreign firms, they face increasingly
high competitive pressure from large generalist Chinese firms. Several boutique firms
were merged by or lost a large number of partners to their larger-size competitors in
recent years.
In January 2007, Chicago-based McDermott Will & Emery (MWE) opened its China
office in Shanghai. This office is fundamentally different from other foreign law offices
in China in that it was established as an independent Chinese law firm (“Yuan Da Law
Firm”), with an “exclusive strategic alliance” with MWE. This means that officially
MWE cannot share the profits of this China office, but all its China projects will be
exclusively conducted by this office. The two founding partners of the MWE China
office used to work in Allbright, the largest Chinese law firm in Shanghai. To them, this
new form of alliance is not a violation of the 2001 Regulation, but many other lawyers
and justice bureau officials seem to disagree. Arguably, it is a breakthrough into the gray
area of global-local collaboration and presents a strong challenge to the MOJ’s
restrictions on foreign law offices. Until today, this “hybrid” law office still operates in
Shanghai and no government sanction has been made. It is intriguing to observe whether
this hybrid model of entering the China market would be adopted by other international
law firms in the near future.
Overall, law firm evolution in China from the 1980s to the 2000s was a process of
diversification, in which the privatization of Chinese law firms and the expansion of
foreign law offices were the two main themes of transformation. In this process, foreign
law firms faced significant barriers in collaborating with Chinese law firms and
employing Chinese lawyers, but their entrance and expansion in the corporate law market
also accelerated the transformation of local law firms from small state-owned firms
toward large and sophisticated partnerships. Before the financial crisis hit the Chinese
legal services market in 2008, the market competition between international and local law
firms was fierce and extensive, and most practitioners believed that the market would
continue to grow in the next five to ten years.
After the Financial Crisis: Impacts on the Shanghai Bar
What are the impacts of the financial crisis on law firms in China? How has the crisis
changed the relationship between international and local law offices? We approach these
questions by conducting in-depth interviews with 42 lawyers and law firm managerial
staff in 13 law firms in Shanghai, China’s primary financial center. The interviews were
designed by the two authors in June 2009 and then conducted by the second author and
his research assistant during July 15 – September 10, 2009. Because this project was
funded and hosted by the Shanghai Lawyers Association, foreign law offices were not
included in the fieldwork. But we were able to collect information about their practice
from Chinese law firms collaborating with them.
We classified Shanghai law firms into five categories according to their numbers of
licensed lawyers: (1) 1-3 lawyers; (2) 4-15 lawyers; (3) 16-30 lawyers; (4) 31-50 lawyers;
and (5) 50 or more lawyers. The 13 law firms selected include firms in each of the five
categories, with a few more firms in the last category as the financial crisis had the
largest impact on this category of law firms. The majority of interviews were conducted
in the lawyers’ offices on an individual basis, but we also did a few group interviews with
multiple lawyers. A small proportion of interviews were conducted in coffee shops or tea
houses per request of the interviewees. For each law firm, we conducted at least two
interviews: one with the firm’s managing partner or a senior partner, and the other with
associates in the firm.
All the interview questions were designed as semi-structured and open-ended to collect
more information from the interviewees. With the administrative support of the Shanghai
Lawyers Association, most interviews were conducted smoothly, and the interviewees
were cooperative and provided candid answers to our questions. The diversity of our
interview sample enables us to make objective analysis and assessment of both the
current status of the Shanghai bar and the impacts of the financial crisis.
Business Decline and Fluctuations
In general, the impacts of the financial crisis on the Shanghai bar were substantial in
degree, but limited in scale. Whereas large and boutique law firms specializing in
corporate work and serving foreign clients were hardly hit, medium-size and smaller law
firms specializing in litigation and serving local and individual clients were only slightly
influenced by the economic downturn. Even for some large generalist law firms, the
financial crisis did not result in any significant reduction of their total revenue. The
managing partner of a large generalist law firm explained the firm’s performance in the
first half of 2009:
The financial crisis did not have any big impact on the total revenue of our firm.
By July this year [2009], the Shanghai office had a total billing of 136 million
[yuan], 19 million more than the same period last year [2008]. The total billings
of all our offices were around 180-200 million [yuan]. So in terms of the total
revenue, no impact of the financial crisis can be seen. Of course, without the
impact of the financial crisis, the increase in the amount of billings would be
larger, and the growth would be more significant. (20090811aa)
To be sure, beneath the steady increase in total revenue are fluctuations in the amount of
work across different legal fields before and after the financial crisis. In many corporate
law firms, field such as FDIs, M&As, IPOs, and outbound investments were heavily
influenced – the amount of work dropped significantly. In the meantime, bankruptcy and
litigation showed slight increases in work and billings. The firms also took on more work
from local clients than before as businesses from foreign clients and collaborations with
foreign law offices became fewer and less frequent. Among these general trends, the
sharp decline of FDIs and IPOs was particularly worrisome for law firm partners as those
fields had always been the most lucrative areas of their practice. For example, the
managing partner quote above admitted:
The biggest impact on us was in non-litigation work. First, after September 16
[2008], IPOs in the United States, Britain, Singapore, Hong Kong have mostly
stopped, and we have had no project to handle either. Second, M&As have been
highly influenced too. From last year [2008] FDIs have stopped – the financial
crisis had the biggest impact in this area. Many corporations withdrew their
projects and did not invest anymore, just watching for the economic trend. Third,
the venture capital markets in China and abroad have not been good. The first
half of this year [2009] was tough because of the financial crisis. All these have
had major impacts on our business. (20090811aa)
Another lawyer specializing in foreign-related work in another large firm confirmed the
patterns:
The impact of the financial crisis on the legal profession was from the second
half of last year [2008] to this year [2009]. The bigger the law firm, the bigger the
impact. The more high-end the business (finance, M&As, etc.), the bigger the
impact. It is similar to the situation in other countries. Project-based businesses
were highly influenced, almost gone, such as overseas IPOs, FDIs, M&As, etc.
(20090811ca)
Beside the reduction in the amount of corporate work, the billings from it were also
significantly influenced. Because both foreign companies and local enterprises began to
rigorously control cost, the client demand on law firms became stricter than the demand
before the crisis. Several lawyers specializing in corporate work all mentioned this
phenomenon:
Because of the reduction in the clients’ budget, now they let their in-house
counsel to do the work that could be outsourced before. For those work that
must be outsourced, they also strictly control the cost. Now they really care
about the hourly rate of law firms. Foreign companies, especially American
companies, would aggressively ask us to reduce the hourly rate or to give a 10-20%
discount. It was not like this before. This is to say, compared to the situation
before the financial crisis, now we do the work for a million [yuan], but only get
about 800,000 in billings. (20090811ca)
The conditions in smaller boutique firms specializing in foreign-related work were not so
different. In fact, these boutique firms were even more heavily influenced by the financial
crisis because their areas of practice were less diverse than the large generalist firms. For
instance, one boutique firm had a long-term collaboration with a major US bank. Not
surprisingly, after the crisis, the bank “has become a plant man,” as a lawyer in the firm
put it (20090812cf). It was a big blow for the business of the firm.
In addition to FDIs and IPOs, another area that experienced sharp decline was real estate.
However, the impact of the financial crisis on the real estate market in Shanghai was only
temporary, as a managing partner whose firm provides financial services to real estate
companies described:
The lowest point of our business was October and November last year [2008],
but it began to recover from December. From this March it has basically
returned to normal, even reached a new climax. … When the crisis struck, our
business shrank to only 1/3 of the highest point. In general, there was profit in
the first half of last year [2008] and deficit in the second half. The deficit was
almost 10% of the annual profit of the year before [2007]. (20090812cf)
Even in lower-end corporate work for smaller local business clients, there were signs of
substantial decline in the amount of legal service. Some small companies stopped to
retain law firms and began to hire or rely on existing in-house counsel. In the meantime,
some clients switched their law firms from large firms to smaller firms. For example, the
managing partner of a small law firm with 14 lawyers reported:
This financial crisis had a major impact on our clients. Some would not retain
lawyers anymore, but the percentage was relatively small. Some asked for fewer
lawyer fees. For some clients we even voluntarily reduce their fees. … Of course,
there were also clients who used to retain famous lawyers as outside counsel,
but now switched to us. We are more affordable and have good quality of
service too. (20090806aa)
In sum, for most areas of corporate work, the negative impact of the financial crisis was
clearly visible. Nevertheless, there are also a few exceptions. For instance, the Chinese
government’s four trillion yuan stimulus plan generated a surge in banking and corporate
financing for a few large corporate law firms (20090811aa). Meanwhile, the amount of
bankruptcy and labor contract work also increased for both large and small firms. As a
managing partner in a small law firm commented:
For smaller firms like ours, the financial crisis had little impact. In litigation work,
except that clients’ payments were not as smooth as before and sometimes
asked for discounts, there was almost no impact. … Our corporate work actually
increased. Of course it is hard to distinguish whether they were corporate work
or litigation work. They were generated by litigation, mainly including
bankruptcy, labor contract, etc. (20090806aa)
Yet the majority of lawyers considered such increase in these areas to be temporary. In
comparison to the large-scale bankruptcies in Western countries, the majority of large
corporations in China were state-owned enterprises and the government would not let
them fall in the financial crisis. Even for major private enterprises, the resilience of the
Chinese economy prevented them from going out of business. Therefore, bankruptcies
mostly happened in smaller private enterprises and would not create a large amount of
business for corporate law firms. As the Shanghai economy recovered in 2009,
bankruptcy work soon declined (20090813ca).
In fact, although the financial crisis is not over yet, its impact on the Shanghai bar has
already been in decline. Many lawyers in large corporate firms indicated that, from the
second quarter of 2009, corporate work in their firms began to recover (20090811aa;
20090811ca; 20090811dd; 20090813cb). As the stock market went up from the bottom,
IPOs and M&As started to increase again. However, most lawyers working in these areas
suggested that their businesses had not recovered to the conditions before the crisis. FDIs
and other foreign-related businesses have not experienced any sign of substantive
recovery. Arguably, this is related to the larger conditions in the global economy. Until
the international market for legal services recovers, it is difficult for Chinese corporate
law firms to repeat the rapid growth of 2005-2007. As a partner in a corporate law firm
commented:
If we look at the amount of business in June and July, it is actually higher than
last year [2008]. This is not to say that the financial crisis has passed. Some
increase was simply a resurgence of the market. The economic condition was
bad last year, and many IPO projects were on hold. Now the economy has got
better, those projects were released again. So part of the increase in these two
months was because of that. … Foreign-related business has not reached a high
point. Now it is harder for foreign investors to enter the China market, both
because of the financial crisis and because of the tight financial policies of the
Chinese government. Because of the collective difficulty in foreign investment,
foreign law offices are also experiencing a collective difficulty. … Only when
foreign law firms begin to hire lawyers from Chinese firms again, then it means
that they have recovered. (20090813cb)
In contrast to the dramatic decline and potentially long stagnation of corporate work,
litigation work was only modestly influenced by the financial crisis, and the impact was
mixed. On the one hand, the number of labor, debt, and bankruptcy cases significantly
increased because of the crisis, which generated more work for local law firms, especially
the smaller ones specializing in litigation. On the other hand, the financial crisis also led
to the reduction in the clients’ properties and investments, which had negative effects on
the billings of some law firms, particularly those specializing in property and real estate
disputes. As a partner in a small litigation firm commented:
After the financial crisis, our business declined substantially. The amount of highend businesses dropped at least 30%. Of course the number of low-end divorce
cases did not change. There were even more low-end cases which we did not
want to take. We have to consider the issue of cost. The second half of this year
[2009] was even worse. Now we can only get even between billings and costs.
(20090815aa)
Not surprisingly, in criminal cases and ordinary civil cases for individual clients, no
significant change was found in terms of billings or client relations before and after the
financial crisis. Two associates in two small firms talked about their experiences:
I mainly specialize in criminal cases. … The financial crisis seems to have no
influence on our cases. In litigation, when [the client] wants to hire a lawyer,
they would still hire a lawyer…also no impact on the clients’ payments of our
fees. Most clients still pay their fees in time. (20090807ab)
Our firm was not influenced at all. And there seems to be no increase in case
load due to the financial crisis either. In terms of billing, we have kept the billing
system and did not increase or decrease the rates. (20090806ab)
Similarly, in corporate litigation, no substantive impact of the financial crisis was found.
Although fewer clients would retain outside counsel, the total billings of some partners
specializing in corporate litigation even increased for more than 20% from 2008 to 2009
(20090806aa). One area that showed notable increase in the number of cases was labor
disputes, usually related to large-scale lay-offs in companies. Even some large corporate
law firms were involved in these cases, though they complained that these cases were
often not profitable (20090812cf). Overall, because non-litigation work declined
substantially, the proportion of litigation work increased in most corporate law firms, but
this was a temporary fluctuation rather than a long-term trend (20090813cc).
Client Relations and Firm Management
The financial crisis not only caused business decline and fluctuations, but also changed
the relationship between law firms and clients in important ways. Clients now have new
and higher demands on both the quality and the price of law firms’ legal services.
Accordingly, firms and lawyers have paid more attention to client needs and satisfaction
than before. Many lawyers expressed concerns of maintaining clients and dealing with
increasing competition among law firms (20090811dc; 20090813cb; 20090813cd). Two
lawyers from the same corporate law firm elaborated on this issue:
Now corporations need specialized, individualized service. All large corporations
would choose services that are not only usable, but also good. After the financial
crisis, clients’ choices become wider, and they are also pickier than before. This
causes difficulties for some of our projects. We experienced the situation when
the client went to find a cheaper law firm. The client did not say they wanted
discount. Our price was relatively fair. Now client not only care about the price,
but also seek good experience and satisfaction. (20090813cc)
The same project, a larger amount of work. Not only the legal work, but also
emotional care. Now we would make phone calls to greet our clients from time
to time, keeping an emotional tie with them. Now the entire firm is like this,
from the top to the bottom. (20090813cd)
The more proactive attitude toward clients is not only found in large corporate law firms,
but also in smaller firms. Clients put more demands on the ability of lawyers in solving
disputes and providing high-quality advice. Sometimes lawyers must change their
strategies in litigation and legal opinions to accommodate new demands from clients. A
managing partner explained this as the following:
In the background of the financial crisis, lawyers must change their strategies in
litigation. I give a few examples. First, a company is a creditor in the financial
crisis, but the debtor’s funding chain is easy to be broken, so in this condition,
the lawyer should try his best to persuade the client to mediate. [The lawyer]
must understand what the client wants, and tell the client that the 500,000
[yuan] now is more important than the 2 million [yuan] in the future. Tell the
client the need to give up. Also, if the debtor would go bankrupt, the creditor
should give the debtor a chance. The lawyer must provide better strategies for
the clients. The financial crisis is a chain reaction. The bankruptcy of some
companies would break a series of funding chains. Therefore, when collecting
debts the lawyer must use full speed. This is reflected in many cases we recently
handled. (20090806aa)
Similarly, in corporate work lawyers now take on more tasks from the client in a given
project, even if some tasks are not necessarily legal issues. Before the crisis, they would
simply tell the client that those tasks should be handled by other professionals
(20090811da). The amount of legal research and miscellaneous tasks increased for the
same project to please the client and raise the total billings. Yet many clients, particularly
the familiar clients, would ask the law firm to reduce service fees, otherwise they would
switch to another law firm (20090813cb). This creates more pressure of maintaining
clients for law firms than before the financial crisis. As a partner described:
The clients’ budgets were reduced, so they started to bargain with law firms in
terms of fees. No substantive influence in other aspects. For example, they
would ask for discounts, or would have a few more rounds of negotiation.
Sometimes they would not even waste the time. If they feel we are too
expensive they would simply go to other law firms. (20090811da)
Despite the increased pressure from clients and other law firms, the majority of lawyers
we interviewed were still optimistic. After all, business clients always need legal services,
and the lesson from the financial crisis for the relatively young Chinese corporate law
firms is to develop more sophisticated mechanisms of client management and diversify
their areas of practice. As the managing partner of a large corporate law firms
commented:
I don’t think this is a predicament. It depends on whether or not we can learn to
transform ourselves. For example, when influenced by the financial crisis, our
team switched from the capital market to banking. Now the capital market is
getting better, and we are switching back. We will not fall, because as long as our
clients are there, large companies, large enterprises, if they do not fall, we will
be alive. (20090811aa)
Besides client relations, the financial crisis also changed law firm management in
multiple ways. Many firms are developing new mechanisms of cost control, personnel
management, and team work to adapt to the challenges of a stagnant market. Nonetheless,
no revolutionary change in management model was observed among the firms in our
sample. As happened in other countries, reducing administrative costs and the number of
paralegals became the primary mechanisms for Chinese law firms to deal with the crisis.
Two partners in two large corporate law firms explained the changes in their firms’
management:
After the financial crisis, we pay more attention to controlling cost, more
rigorous than before. We also limit the speed of the firm’s expansion. The plans
for opening new offices were all put on hold. We encourage lawyers to explore
new areas of practice. Our firm made some policy adjustments and held many
meetings, adjusting our cost and policies according to the various influences in
different places. Our Shanghai office had planned to move, but now because of
cost control, we decided not to move. Now the Shanghai office has 2,000 square
meters, not enough at all. (20090813ca)
The financial crisis inevitably led to the death of those who could not control
their costs. With the financial crisis, we have made much progress in controlling
cost. We have become stronger, with better quality of management, and
removed much redundant meat. Now everyone has his own responsibilities. Of
course the redundant [staff] were mostly assistants. We have changed from
loose management to frugal management. For example, we used to give every
lawyer a desktop, and the repair cost was really high. Now we use a server to
centralize the control and repair of computers. (20090812cf)
Given the fact that the Chinese market for legal services had been growing at a stunning
speed for over a decade, few senior partners in Chinese law firms fully recognized the
increasing needs of maintaining clients and improving firm management. The financial
crisis gave them the first lesson of how to deal with a stagnant market. For many of them,
this is merely a “growing pain” for the teenage Chinese corporate law firms and it may be
beneficial to them in the long run. As the managing partner in a large firm explained:
We have always emphasized controlling cost. After the financial crisis, we
considered some suggestions, but did not take any major action. The financial
crisis had a big impact on us, but our firm size is big, so the amount of cash flow
is sufficient. Even in the worst months of March and April, we did not cut any
expense. The operating costs of law firms mainly include rent, employee salaries,
and taxes. Our firm did not reduce rent or fire people. No action in these two
aspects. At the end of last year [2008] we did consider laying off people and
reducing the office space. But as a corporate law firm, we need some reserves in
personnel. Our firm would not do anything shortsighted. We would cut cost only
if it really had impact on the firm’s daily operation. (20090813cb)
Work and Life of Individual Lawyers
For individual Shanghai lawyers, the most significant impact of the financial crisis is the
unprecedented layoff of lawyers in both foreign and Chinese corporate law firms. Since
the Chinese corporate law market was formed in the early 1990s, the sizes of most
foreign law offices and top Chinese corporate firms had been growing continuously,
sometime doubling or tripling the size of the office in merely 3-4 years. The financial
crisis is the first time in the short history of the Chinese legal profession when large-scale
layoff of lawyers took place.
Yet Chinese and foreign firms seemed to have used different methods in downsizing their
offices. Large-scale layoff occurred mostly in foreign law offices. Although no foreign
law office in Shanghai was closed down since 2008, many offices significantly reduced
their sizes, and most of them stopped hiring new lawyers. The massive flow of lawyers
from Chinese to foreign firms over the past several years halted in a sudden. In contrast,
in most Chinese law firms large-scale layoff did not occur. Instead, many firms
significantly reduced their annual bonuses and asked their lawyers to make shifts or use
flexible work hours, while keeping their jobs. Only a relatively small number of lawyers
lost their jobs permanently (20090811ca; 20090813ba; 20090816ac). For example, a
senior partner in the Shanghai office of a large corporate law firm headquartered in
Beijing explained how the office resisted the pressure of laying off lawyers:
Our Beijing headquarters did lay off people and reduce salaries. But the Shanghai
office did not change, relatively stable. We resisted the pressure from the
headquarters. The businesses in Chinese law firms are still centered around
partners. Partners try hard to create [work], very tired in the competition. The
salary level in Chinese firms cannot compare to that in foreign firms, so many
lawyers gained experienced in Chinese firms and then go to foreign firms to work
as legal consultants, tripling their salaries. Then our effort of several years would
be gone. This time the pressure from the headquarters was scattered into
different partners in the Shanghai office. To protect our employees and not to
drag the firm behind, we all promised to make profit for the firm. After the
financial crisis, the business of the headquarters was not good, but the Shanghai
and Shenzhen offices were doing pretty well. (20090811da)
While most local firms tried their best to keep their lawyers, their lawyers, especially the
associates, still felt high pressure in the months after the financial crisis struck the
Chinese market. For example, an associate in the same Shanghai office described his
feelings at the time:
We still feel much pressure. On TV we saw many people working in foreign
companies were laid off. [I] often heard that my classmates working in foreign
firms were cut. At that time our office had nothing to do for 2-3 months. Every
day, when I came to office, if the boss asked me to his office, I always felt scared
– am I being fired? … Fortunately, the financial crisis passed soon. Since March
and April, work started to get busy again. (20090812dc)
Another associate in a different firm confirmed the feeling:
The psychological pressure was real. The big environment was like that. Seeing
or hearing other law firms laying off people, of course [I] would have
psychological pressure. But we are still young and full of energy. I heard that
there was a female lawyer at XX law firm who was laid off and could not find a
job in several months. (20090811cb)
Needless to say, such pressure also made the associates appreciate the value of their jobs
more than ever (20090812cf; 20090816cf). Meanwhile, facing the large amount of
vacancy in lawyers’ work schedule, some law firms created training programs for
associates and spent more time on enhancing their professional skills, as an associate
reported:
Our firm created many training programs, for example, trainings on legal English
and legal documents for junior and middle-level associates. Such training was
usually on Friday, afternoon or evening. When there was free time, our team
would do some discussions, summarizing previous projects, etc. This is perhaps a
positive effect of the financial crisis. (20090811aa)
The main reason that local law firms chose to keep their lawyers despite the sharp decline
in business is that most partners expected the Chinese market to recover in a relatively
short time – and they were right. Unlike the seemingly long process of economic
stagnation in many Western countries, the Chinese economy continued to grow soon after
the financial crisis. Accordingly, most lawyers working in local firms were able to keep
their jobs. However, except for one large generalist firm, all law firms where we
conducted interviews stopped hiring new lawyers and staff for quite a while. Only the top
law graduates were able to find jobs and intern opportunities after the financial crisis
(20090811cc).
In the meantime, a large number of lawyers who used to work in foreign law offices were
laid off and therefore looking for jobs in local firms, though it was not easy for them to
find a position without significantly reducing their salaries (20090811aa). From October
2009, the new recruitment season began and most Chinese law firms started to employ
new lawyers again, finding themselves in a great position in getting the top talents in the
field. It remains unclear if foreign law offices have resumed their hiring a year after the
financial crisis.
But the impact of the crisis on individual lawyers is more subtle than simply keeping or
losing their jobs. Many lawyers, particularly junior associates in large corporate law firm,
reported that they were more careful in their daily spending and financial planning
(20090811dd; 20090812cf). For lawyers specializing in litigation, in comparison, no
significant change in consuming behavior was found. Several lawyers indicated that they
were planning to purchase new cars or apartments (20090813ca; 20090813cb;
20090815cf).
Finally, there seems to be no significant difference in terms of losing jobs or salary
reduction between male and female lawyers. Although the Chinese legal profession is as
gendered as legal professions elsewhere, our interviews suggest that female lawyers are
as competitive as their male colleagues in corporate law firms, even facing the economic
downturn. As an associate in a large law firms commented:
In our firm there is no difference between men and women. There are more
female lawyers, about 2/3. In our team there are also more women than men,
and more men lost their jobs than women. The partners considered the gender
balance and leaned toward male in recruitment, but the most important thing is
still the professional expertise. Female lawyers may have some advantages, for
example, in client relations. Most clients are men, and the communication
between different genders is smoother. Female lawyers are milder. They also
have better communication with partners. But women are weaker in terms of
taking pressure, also weaker in physical and health aspects. (20090813cc)
Conclusion
Has the Chinese legal services market recovered from the financial crisis? Given the fact
that few Chinese firms laid off a large number of lawyers and most firms have resumed
their regular businesses, the general answer is probably “yes,” but it is also clear that the
market is far from recovering to its high point of 2006-2007. As one of our interviewees
indicated, only when foreign law offices have recovered their businesses and began to
hire again, the Chinese corporate law market would continue its process of globalization.
We do not yet have empirical data to explore this aspect of the market change, but the
fact that no foreign law office in China was closed down even at the climax of the
financial crisis can only give hope to lawyers practicing in this new and fast developing
market for legal services.
With an increasing number of Chinese lawyers returning from their education abroad,
mostly in the United States and Britain, the supply of lawyers with expertise in
international business transactions is likely to exceed the demand of law firms in the near
future. This might have an unintended “spill over” effect on the overall work quality and
business orientation of the Chinese legal profession, as lawyers moving from foreign law
offices and top-tier Chinese firms to lower-tier firms.
For international law firms seeking to penetrate the national barrier of legal practice in
China, now the process will probably take a longer period of time than people expected
before the financial crisis. As Chinese law firms grow bigger, they have also become
more specialized, profitable, and even international. Accordingly, it is becoming
increasingly difficult for the much smaller foreign law offices to merge with them, even
if the MOJ would permit such mergers in the future. In a sense, the financial crisis has
added another layer of unpredictability to the mysterious future of the Chinese legal
services market, and we can only wait to see how global and local forces interact and
produce the new shape of law firms in the new millennium.