By Sida Liu
This article is derived from Sida Liu’s forthcoming research article with Hongqi Wu, “The Ecology of Organizational Growth: Chinese Law Firms in the Age of Globalization,” to be published in the American Journal of Sociology (volume 122, issue 3, 2016). The research is a part of the Harvard Law School Center on the Legal Profession’s Globalization, Lawyers, and Emerging Economies (GLEE) Project.
In 2010, Larry Ribstein, a law professor at the University of Illinois, published a provocative article titled “The Death of Big Law,” in which he predicted the downsizing of business law firms after the 2008 global financial crisis, driven by conditions such as increased global competition and the rise of in-house counsel. While Ribstein’s predictions proved correct for some large law firms in London and New York, which have struggled to maintain their business models in the post-2008 period, Big Law has nevertheless been rising rapidly in China. Indeed, despite the short history of its legal profession, China is now home to some of the largest firms in the global legal services market.
This was not always the case. In 2002, when I first began to study the Chinese legal profession, no law firm had more than 100 licensed lawyers or 200 fee earners in total. Today, a number of firms boast thousands of lawyers. Following two consecutive mergers in 2012 and 2013, the Chinese firm of King & Wood Mallesons (KWM) became a global combination of more than 2,700 lawyers and the first global law firm with a Chinese brand. The firm Dacheng had more than 4,000 lawyers in 51 offices, including eight offices outside mainland China, even before it merged with Dentons in 2015 to create the largest law firm in the world. Yingke, a Beijing-based law firm, grew from fewer than 30 lawyers in a single office in 2008 to more than 3,000 lawyers in 32 domestic offices and 30 overseas offices in 2015. Now it claims to have more than 5,000 lawyers across China, though the precise number is hard to calculate due to its unique business model.
China is now home to some of the largest firms in the global legal services market.
Why and how did some Chinese law firms grow into Big Law with a global presence in a decade? As part of the Harvard Law School Center on the Legal Profession’s Globalization, Lawyers, and Emerging Economies (GLEE) Project (see sidebar below), in 2010–2013 my research collaborator, Hongqi Wu, and I conducted in-depth interviews in Beijing, Shanghai, Xiamen, and New York with 39 lawyers in 12 Chinese corporate law firms, four bar association leaders, and a senior official of the Chinese Ministry of Justice. Our research documents a critical period in the rise of Big Law in China in which corporate law firms experienced both rapid structural differentiation and intense market competition in the context of globalization. Like the rapid growth of American law firms in the late 20th century, the development in this more recent critical period will significantly shape the future of both Chinese law firms and, as China becomes an increasingly powerful player in the global economy, the global legal services market as a whole.
The case of China also provides a key alternative to the stories of law firm growth in the Anglo-American world. Most existing theories of law firm growth (e.g., Marc Galanter and Thomas Palay’s classic book Tournament of Lawyers) seek to explain firm growth by the internal dynamics within a law firm, such as the Cravath system of hiring and promotion or the reputational bonding and human capital diversification among partners. As a result, the growth trajectories of many large law firms appear highly homogeneous. What we found in the Chinese case, however, differs from the conventional story in two important aspects. First, law firm growth is caused not so much by internal factors such as the lockstep system or case referrals, but primarily by the competition, symbiosis, accommodation, assimilation, and other processes of interaction among law firms in what we call “the ecology of organizational growth.” Second, in this organizational ecology, law firms occupying different positions have developed distinct growth strategies in their march toward Big Law. As the rest of this article will demonstrate, the three largest Chinese law firms (e.g., Dacheng, Yingke, and King & Wood) are different from one another in almost every aspect except size. More importantly, their rapid growth in the past decade has generated disruptions to the Chinese corporate legal market as a whole, and many of their competitors have also adapted themselves in various ways to cope with the brave new world of Big Law in China.
Big Law is rising in China. Despite the short history of its legal profession, China is now home to some of the largest firms in the global legal services market. Our research suggests that Chinese law firms’ growth strategies were significantly shaped by their market positions and interactions with other firms. Although King & Wood, Dacheng, and Yingke have all grown into megafirms with thousands of practitioners and many branch offices across China and overseas, the models of their expansion vary substantially. Their rapid growth also generated strong competitive pressures for other Chinese corporate law firms to adjust their practice. While many firms seek to emulate their growth models, a few elite firms such as Jun He and Haiwen & Partners have chosen to resist growth and maintain their leading positions in the Chinese corporate legal market. Overall, the rise of Big Law in China offers not only an alternative story of law firm growth to the Western models but also some useful lessons for thinking about the future of global law firms.
King & Wood: A leading Chinese firm with global ambitions
King & Wood was founded in 1993 as one of the first partnership law firms in Beijing after Deng Xiaoping’s famous “Southern Tour” opened the door for the “socialist market economy.” By the turn of the century, it had become one of the largest and most prestigious full-service law firms in China, specializing in high-end international business transactions and serving both Chinese and foreign clients. King & Wood was also the first Chinese law firm to adopt the lockstep system for all its partners. Although the system was mainly based on seniority, the firm also kept a flexible range of point increases from year to year and decreased the number of points awarded to senior partners who produced less in order to accommodate the fluctuation of partners’ work performances. The consideration of seniority and performance enabled King & Wood to maintain its managerial coherence while rapidly expanding its firm size.
King & Wood’s domestic expansion occurred in two waves. In 1995 it opened branch offices in Shanghai and Shenzhen, two national business centers, followed by the Chengdu office in 1998 and the Guangzhou office in 2002. Then, from 2006 to 2009, eight new domestic offices were opened in Chongqing, Hangzhou, Xi’an, Tianjin, Qingdao, Suzhou, Jinan, and Hong Kong, though the Hong Kong office was sometimes considered an overseas office due to its separate legal jurisdiction. For the majority of its branch offices in mainland China, King & Wood did not grow through merger but sent its Beijing partners to different cities to set up offices and recruit partners from top local firms. For every office, the firm requested not only a uniform logo but also uniform personnel, financial, and administrative rules to guarantee that the entire King & Wood system would provide standardized, high-quality legal service.
It is evident that King & Wood’s domestic growth follows the trajectory of many large law firms in Western countries; that is, to set up offices according to business needs while maintaining a fully integrated firm structure. When local partners were recruited into a new King & Wood branch office, many were required to “take a bath” by working in the Beijing headquarters or other mature offices for a period of time to fully expose them to the firm’s culture and management practices. Most of the partners whom King & Wood recruited for their domestic offices were already locally renowned corporate lawyers with solid law practices in the city. In 2006, for example, more than half of the partners in LLinks, a prestigious law firm in Shanghai, joined King & Wood’s Shanghai office, and it significantly disrupted the balance of the corporate bar in Shanghai.
The convergence of King & Wood to the Western models of law firm growth is even more salient in its overseas expansion. The firm’s 2012 merger with Mallesons Stephen Jaques, a large Australian firm, followed the Swiss verein structure, a corporate structure under Swiss law adopted in a number of major Anglo-American law firms as well as some Big Four accounting firms for their global expansion. Under this corporate structure, KWM became three independent partnerships in mainland China, Australia, and Hong Kong, the only city in which the offices of the two firms merged. The three partnerships share the same firm brand but remain financially independent. The subsequent merger between KWM and SJ Berwin in 2013 followed the same model, and the British firm even gave up its brand to join the KWM system.
For many outside observers, the KWM merger in 2012 was an aggressive move of a Chinese law firm into the global legal services market. According to several senior partners at King & Wood, however, the primary objective of the merger was not profit or business opportunity but to gain management experiences from Mallesons and to develop King & Wood into a global brand. Mallesons Stephen Jaques fit the needs of King & Wood in two important aspects. First, it was one of the oldest law firms in Australia with a history of more than 150 years. This not only brought historical and brand value to the new firm but also allowed the King & Wood partners, most of whom had spent time overseas but had never managed a Western firm, to learn management practices directly from their Australian colleagues. In comparison to sending their lawyers to study or work abroad, the KWM merger was considered by King & Wood’s partners as a more effective way to elevate King & Wood from a leading Chinese firm to a truly global firm. Second, King & Wood chose an Australian firm rather than a British or American firm as the target for its first international merger because its partners preferred to keep their dominant position after the merger instead of giving up their firm brand to a larger and stronger firm. Furthermore, King & Wood has good, collaborative relations with a number of major American law firms, particularly regarding inbound investments to China (but also outbound investments in recent years), and a merger with any one of them would harm their businesses with others.
The primary objective of the KWM merger was not profit or business opportunity but to gain management experiences from Mallesons and to develop King & Wood into a global brand.
A controversial issue regarding the KWM merger was whether or not it violated the Chinese government’s regulation on foreign law offices, which prohibits merging with Chinese law firms or employing licensed Chinese lawyers. To conform to this regulation, the KWM merger was referred to as a “strategic alliance” in all formal occasions and the two firms merged only their offices in Hong Kong. The three partnerships that resulted from the merger (in mainland China, Australia, and Hong Kong) remain financially independent, and the firm name King & Wood continues to be used in mainland China. Nevertheless, to many lawyers in other firms, this kind of strategic alliance is problematic because a foreign law firm could adopt the same Swiss verein structure with a Chinese law firm to bypass the government restriction—the Shanghai office of McDermott Will & Emery and the recent alliance between Mayer Brown and Jingtian & Gongcheng are both similar alliances. To some extent, King & Wood’s two mergers in 2012–2013 were successful because the Chinese Ministry of Justice was supportive of its overseas expansion and thus implicitly permitted it to operate in the gray area of Chinese law.
Overall, King & Wood followed a route of global institutional convergence familiar to their Anglo-American counterparts. Domestically, it assimilated individual partners from local law firms and fully integrated them into the firm; internationally, it formed symbiotic alliances with foreign law firms by brand sharing and business referrals. To a large extent, King & Wood’s growth strategy was made possible by its leading position in the Chinese legal profession since the late 1990s, which enabled the firm to recruit the best lawyers from other local firms and become a pioneer of Chinese law firms’ overseas expansion.
Globalization, Lawyers, and Emerging Economies
Launched by the Harvard Law School Center on the Legal Profession in 2010, the Globalization, Lawyers, and Emerging Economies (GLEE) Project is a multidisciplinary, multinational collaborative designed to examine how globalization is reshaping the market for legal services in important emerging economies such as India, Brazil, and China. GLEE studies how these developments are contributing to the transformation of the political economy in these countries, their connection to the broader world economy and the institutions of global governance, North–South engagement and competition, evolving South-South collaboration, and the development of the increasingly globalized market for corporate legal services.
At present, GLEE has more than 50 scholars from a broad range of disciplines, including law, sociology, economics, political science, anthropology, area studies, and international relations, and from leading institutions in the United States, China, India, Brazil, Singapore, and the United Kingdom, conducting original qualitative and quantitative research on the transformation of the market for legal services in India, Brazil, and China. GLEE is currently planning an expansion to Africa, the Middle East, and the states of the former Soviet Union. To learn more, visit the Center on the Legal Profession’s GLEE website.
Dacheng: A local coalition with Chinese characteristics
Founded in Beijing in late 1992, Dacheng was also among the first partnership law firms in China. By early 1994, the Legal Daily newspaper reported it as “the largest law firm in China” with 74 lawyers and legal assistants in total. However, unlike the strong international orientation of King & Wood, Dacheng’s business was predominantly domestic, and it adopted the traditional commission-fee system for both its partners and associates. Under this “eat what you kill” system, every lawyer turns in a fixed percentage (e.g., 30 to 40 percent) of his or her billings to the firm to cover administrative costs and keeps the rest. With minor modifications, this system of remuneration has been used in Dacheng up until today.
Dacheng’s massive domestic expansion began after a serious internal shakeout. Around 2001–2002, many of its lawyers, including the entire securities department, left the firm due to disagreements with its founding partner regarding the firm’s development strategies. By 2003, the reduced size of Dacheng caused it to fall out of the top 20 firms in China, lagging far behind the rapidly growing King & Wood, Jun He, Zhong Lun, and other leading Beijing firms. To regain its market position, Dacheng recruited an experienced former government official to serve as its managing partner. With the full support of the firm’s senior partners, this managing partner focused exclusively on firm management and orchestrated a series of bold structural reforms that remade Dacheng into the largest law firm in China within five years. In 2009, a year after the PRC Lawyers Law permitted limited liability partnership (LLP), Dacheng became the first law firm in Beijing to adopt the LLP structure.
Dacheng is not a Cravath-style elite law firm but a local coalition that takes full advantages of the needs for horizontal integration in the Chinese legal services market.
Dacheng’s growth model has two main components. Internally, it adopted a three-tier partnership structure, including senior partners, second-tier partners, and junior partners. Among them, only senior partners are equity partners; both second-tier and junior partners are nonequity partners with different rates of commission fees. The only truly important criterion for its lower-tier partnership is the ability to generate revenue for the firm. In contrast to the seniority-based lockstep system, this three-tier partnership structure is a more open and individualistic system that enabled Dacheng to recruit and promote a large number of junior and second-tier partners in a short period. From 2006 to 2010, the total number of lawyers and staff in Dacheng’s Beijing headquarters increased from 179 to 547, and the office’s total billings also increased from about 30 million yuan to nearly 600 million yuan.
Externally, Dacheng used a franchise model to acquire local law firms all over China into its system. Most of its domestic offices were established by franchising the Dacheng brand to a well-established local law firm to form a loose coalition. Every branch office pays the Beijing headquarters a certain franchise fee for using the firm brand. Unlike King & Wood and other elite firms whose offices concentrated in major business centers along China’s east coast, Dacheng’s domestic offices spread across the country to nearly every province. It was a strategic choice to “get bigger first, then get stronger”—as one of Dacheng’s senior partners put it. Many major local law firms in the provinces welcomed Dacheng’s expansion because their largest corporate clients, usually provincial-level state-owned enterprises, preferred to use law firms in Beijing or Shanghai for the most complex and profitable projects such as IPOs or M&As. Without an affiliation with Dacheng or other major Beijing firms, these local firms would risk losing some of their most important clients. Consequently, Dacheng’s domestic expansion was warmly received by major provincial law firms across the country. According to one of its senior partners, Dacheng even divided its offices into multiple tiers according to their billings and strategic importance and adopted different management rules for different tiers. It is not a Cravath-style elite law firm but a local coalition that takes full advantages of the needs for horizontal integration in the Chinese legal services market.
In contrast to the domestic growth strategy adopted by King & Wood, in which we observe a high degree of integration between branch offices and the Beijing headquarters, Dacheng’s loosely connected coalition across China presents a distinct growth strategy that I refer to as “accommodation.” Besides the Dacheng brand and a national service network, Dacheng’s branch offices remained largely independent from its Beijing headquarters in terms of finance and personnel. Although Dacheng has a centralized case filing system and a unified training program for its lawyers, business collaborations between its offices were made mostly on an ad hoc basis. Due to the highly individualistic commission-fee system, it is also not uncommon for lawyers in the same office of Dacheng to compete for cases or projects. This is in sharp contrast to the fully integrated structure of elite Chinese law firms such as Jun He or King & Wood.
In its overseas expansion, however, Dacheng followed the lead of King & Wood and used the Swiss verein structure for its recent merger with Dentons. This merger was also supported by the Chinese Ministry of Justice, and it made the new Dacheng-Dentons combination the largest law firm in the world by head count—a win-win deal for both firms. Nevertheless, given Dacheng’s predominantly domestic client base, commission-fee system, and complex internal structure, it is unlikely that the symbiosis between Dacheng and Dentons would lead to further integration within the new firm. To some extent, Dacheng’s domestic orientations gave it advantages in forming a Swiss verein alliance with a foreign law firm, because there was little direct competition for business between the two firms. Indeed, it is an extension of its accommodation strategy from China to the global stage.
Yingke: A tech-savvy space rental
If the speed of Dacheng’s growth was stunning, then the growth of Yingke could only be described as miraculous. Unlike the first-generation Chinese corporate law firms founded in 1992–1993, Yingke was founded in 2001 through the restructuring of a state-owned law firm into a partnership. The founding partner of the firm was an experienced divorce lawyer in Beijing, but the firm remained small and obscure until the mid-2000s. In other words, unlike the other large Chinese law firms, all of which have been major players in the Chinese corporate legal market since the 1990s, Yingke began its growth from a low-status and marginal position. When it entered the legal services market, most high-end corporate legal work had already been monopolized by other law firms.
In 2007 a 35-year-old lawyer with an engineering degree from the prestigious Tsinghua University joined Yingke as its firm director and began to restructure the firm in revolutionary ways. In less than five years, Yingke grew into the second largest law firm in China with more than 2,000 lawyers in 20 domestic offices and a number of overseas offices. In several major regional cities such as Changsha, Chengdu, Tianjin, and Wuhan, Yingke’s branch office had become the largest local law office by 2013. By 2015, Yingke had more than 3,000 lawyers in 32 domestic offices and the firm also claimed to have 30 overseas offices across the globe. In 2016 it was reported to have more than 5,000 lawyers across China, though the precise number is hard to calculate due to its unique online business model.
Yingke’s miraculous growth was based on a series of organizational innovations. First, Yingke was officially registered as a partnership law firm, but it received a very large amount of investments from nonlawyers to support its growth. Such investments enabled Yingke to rent large and well-equipped office spaces in different cities and then aggressively recruit local lawyers. When recruiting lawyers, Yingke offered them an even more attractive contract than Dacheng’s commission-fee system: every lawyer paid the firm only a fixed annual “management fee” and kept the rest of the profits for him- or herself. Even for many lawyers who were officially listed as partners in the firm, their management fees were often as low as 5 percent of their annual billings. In return, the firm provided every lawyer an office space and necessary institutional support. In second- and third-tier cities where most lawyers received scarce support from their firms and practice as de facto solo practitioners, this low-cost competitive strategy was particularly appealing. Even in Beijing and Shanghai, Yingke was able to recruit hundreds of lawyers, many of whom had migrated from other cities or were less experienced practitioners in ordinary litigation.
As a partner of Yingke’s Shanghai office put it: “While other firms manage business, we manage lawyers. Lawyers are our business.”
Second, Yingke adopted a “professional manager” system for its offices and managed all its lawyers through employment contracts. This manager system is different from the managing partner system many corporate law firms use in that these managers were fairly young (usually in their late twenties to midthirties) and often had limited experiences in law practice. Their work focused on renting office spaces to lawyers and managing the office’s case sources and daily administrative affairs. If the office lost money in a given year, the manager would cover a percentage of the loss out of his or her own pocket. To some extent, they resemble leasing agents in real estate rental companies. As a partner of Yingke’s Shanghai office put it: “While other firms manage business, we manage lawyers. Lawyers are our business.” A senior partner of another large Beijing law firm even described the Yingke model as “a combination of real estate rental and law firm expansion.” Except for a limited number of senior partners, every Yingke lawyer signed an employment contract with the firm, which excluded the lawyer from sharing the firm’s profit or equity regardless of his or her status as a partner or an associate in the firm. The actual firm structure of Yingke, as one of its partners acknowledged, “is like a limited liability company.”
Arguably, this innovative corporate structure presents a serious problem for lawyers’ professional identity and status because it changes the nature of their relationship to the firm from collegial partners sharing the means of production to subordinated employees excluded from the firm’s equity—a process that resembles proletarianization in the Marxist critique of capitalism. This is precisely why the majority of Yingke lawyers are younger and less experienced than lawyers in other large Chinese law firms. Another widely held skepticism of the Yingke model is its sustainability. Although Yingke’s total billings are in the same league as other major law firms, its revenue per lawyer is significantly lower. After all, by the end of the day, a great law firm is built on its expertise, not its capital. Yet Yingke’s firm director seemed indifferent to these criticisms. His ideal corporate model was McDonald’s—that is, a large, industrialized chain with low profit margins but a global reputation.
This strategy can also be observed in Yingke’s overseas expansion. From 2009 to 2013, Yingke opened 15 offices abroad and became the first Chinese law firm with offices not only in global cities such as New York, London, and Dubai but also in less conspicuous locations such as Budapest, Warsaw, Istanbul, Tel Aviv, and Mexico City. Yingke’s massive overseas expansion generated even more suspicions among Chinese corporate lawyers than its domestic expansion because maintaining an overseas office is usually considered expensive and risky, especially when the business prospect in that location is uncertain. Yingke’s firm director grouped these offices into three categories: directly invested offices, brand-sharing offices, and strategic alliances. However, according to a former Yingke partner who was involved in setting up one of its overseas offices, many of the “directly invested offices” were not locally registered as law offices but as companies under the names of two senior partners of Yingke. The “brand sharing offices” and “strategic alliances” were mostly existing local law firms in various countries that signed cooperation agreements with Yingke, but there was usually a disclaimer in the agreements that separated these firms from Yingke in terms of liabilities. These strategic alliances were even looser than the Swiss verein structure that KWM and Dacheng-Dentons had adopted.
Yingke’s firm director’s ideal corporate model was McDonald’s—a large, industrialized chain with low profit margins but a global reputation.
But Yingke’s overseas offices have served an important symbolic function, namely, to signal to lawyers all over China that this is not only a large Beijing law firm but also a firm with global presence and high-end international business. A Yingke partner describes this symbolic function by adapting an old Chinese saying: “Flowers bloom outside the wall and the scent is smelt inside the wall.” With a large number of international offices, even if they were more symbolic than real, Yingke was able to brand itself as “the only Chinese law firm with a global service network” to its lawyers and clients in the early years of its expansion. To what extent Yingke can turn these overseas offices into substantive and meaningful business alliances in the future remains an open question. For now, they certainly have helped Yingke’s success in China, especially in second- and third-tier cities.
In addition to its domestic and international expansions, Yingke also took advantage of the technological innovations newly available to the legal profession and began to develop the “law cloud”—an online service platform that connects its lawyers with potential clients seeking legal services. To some extent, this is an idea similar to Uber, Airbnb, and other technological firms, i.e., to provide an online platform that connects providers and consumers of services. As a senior partner of Yingke commented, “We do not consider law a profession, but an industry. It needs integration, division of labor, resource sharing, and must be built into an industrial chain.” It is through both the law cloud and its flexible fee arrangements that Yingke recruited even more lawyers to join the firm in recent years. This unique combination of capital, technology, and law makes Yingke the most innovative, disruptive, and controversial law firm in China today.
To grow, or not to grow? That is the question
King & Wood, Dacheng, and Yingke all achieved Big Law status with thousands of practitioners, but their paths to Big Law differed significantly.
Why did the three law firms discussed above adopt distinct growth strategies? Above all, it is because of their different ecological positions in the Chinese corporate legal market. Located at the very top of the status hierarchy, King & Wood actively sought to become a major player in the global legal services market by assimilating partners from top local law firms and forming symbiotic relations with international law firms. After declining to the second-tier position in the early 2000s, Dacheng expanded domestically by forming coalitions with local law offices across the country through accommodation. In the case of Yingke, a law firm located in the marginal position of the corporate legal market was able to expand and even globalize by innovatively using economic and symbolic resources often associated with elite law firms. As a result, all three firms achieved Big Law status with thousands of practitioners, but their paths to Big Law differed significantly.
Not surprisingly, the rapid growth of King & Wood, Dacheng, and Yingke generated strong competitive pressures for other Chinese corporate law firms to adjust their practice. When the first KWM merger was announced in March 2012, there were wide speculations that other leading Chinese law firms, particularly Jun He and Zhong Lun, would soon follow suit. However, neither of those two firms made a similar move in the next four years. In an Asian Lawyer article in June 2013 titled “Jun He Decides There’s No Place Like Home,” it was reported that Jun He’s management committee, consisting of six senior partners, carefully watched the KWM merger but decided that their firm “would not look for an international merger or open new offices abroad” because “there is a lot more work in China” and “it is best to leave international law to Western lawyers who do it best.” One of Jun He’s partners compared their growth model to the models of the American firm Cravath, Swaine & Moore and the British firm Slaughter and May, both of which are highly prestigious law firms in their own countries but have only a limited number of overseas offices. In contrast to King & Wood’s choice to internationalize their practice by merging with less prestigious foreign law firms, Jun He’s strategy was to keep its position as the oldest and most prestigious Chinese corporate law firm and collaborate with a selected number of prestigious law firms in Europe, the United States, and other overseas markets.
Yet not every large generalist law firm could resist the pressures of growth like Jun He did. Take AllBright Law offices, the largest law firm in Shanghai. AllBright used to focus its practice in the greater Shanghai region as well as in Beijing and Shenzhen, but it opened five new offices in 2010–2012, three of which were in western China. In 2013, AllBright opened its Hong Kong office and was planning to set up its first office in the United States. As a result, the total number of lawyers in the firm increased from fewer than 400 to more than 800, with 425 lawyers in its Shanghai headquarters in 2012. Although a senior partner of AllBright called the growth of Dacheng and Yingke a model of “rough and barbarous growth,” she also acknowledged that the advantage of AllBright had been gradually reduced with the rise of these newcomers in the city. As a response, AllBright also initiated its own march toward Big Law with a national expansion. This march was also echoed by other major firms such as DeHeng and Grandall.
Nevertheless, in highly specialized areas such as initial public offering (IPO), venture capital, and private equity, the size of law firms matters less because clients are usually referred by sophisticated financial institutions familiar with the corporate bar. Accordingly, leading law firms in these areas of practice are often elite boutique firms that keep a relatively small size but provide high-quality service. But even elite boutiques feel the pressures from the rising Big Law firms. In the IPO market, for example, elite boutique firms such as Haiwen, Tongshang, Fangda, and Jingtian & Gongcheng compete with full-service firms such as Jun He, King & Wood, Grandall, and Zhong Lun. As the latter group expanded their sizes in recent years, the former group also adapted to deal with the increasingly intense market competition.
Chinese corporate law firms continue to face a simple question: To grow, or not to grow?
A good case in point is Haiwen, a national leader in IPO practice since the 1990s. From 2002 to 2012, while many of its competitors doubled or tripled their sizes, Haiwen’s firm size only slightly increased to about 100 lawyers. In 2009, facing the intensive market competition, Haiwen’s partners decided to adopt the lockstep system. Compared to King & Wood’s lockstep system, Haiwen’s system of remuneration was even more strictly based on seniority, though it also adapted in recent years to give incentives to high-performing partners. This seniority-based system was made possible by the high degree of homogeneity and collegiality among Haiwen’s partners, most of whom graduated from two elite law schools in Beijing (Peking University and University of International Business and Economics) and worked their way up in the firm. This firm culture closely resembles the Cravath system in which associates are drawn from a few elite law schools and then carefully nurtured to partnership in the firm. Keeping a small size enabled Haiwen to maintain this collegial culture in the strong waves of law firm growth in China; while other firms were diversifying their personnel and expertise, Haiwen decided to “purify” itself by resisting growth. One of Haiwen’s partners argued that, if two of their major competitors merged, it would not necessarily be a bad thing for them, because they would have one fewer competitor.
Haiwen’s strategy is shared by a few other elite boutique firms such as Fangda and Han Kun. Although these firms were relatively small in size, their profits per partner and starting salaries for associates were often the highest among all Chinese law firms. Consequently, they were able to attract some of the best legal talent on the job market. Lawyers in these elite boutique firms took great pride in the quality of their work and often looked down upon the uneven quality of services in some Big Law firms, including King & Wood. In this sense, “purification” as a strategy worked for Haiwen and other elite boutiques in that it helped them maintain their elite status in the Chinese corporate legal market.
Chinese law firms’ growth strategies were significantly shaped by their market positions and interactions with other firms.
An enduring weakness of the purification model, however, is that highly specialized areas of practice may be less flexible in adapting to market fluctuations. For example, during the 2008 global financial crisis, IPO activities in China paused for several months, which had a significant impact on the businesses of the elite boutiques that specialized in this area. China’s recent economic downturn might weigh on elite boutique firms as well. In contrast, large generalist firms have better capacities in adapting to changing market conditions. A good example is Zhong Lun, which used to specialize in two main areas of practice: real estate and Japan-related FDIs. Beginning in the early 2000s, however, Zhong Lun’s partners decided to transform the firm into a full-service law firm by recruiting a large number of new partners specializing in various areas of corporate law. By the end of the decade, Zhong Lun had grown into a large generalist firm and was widely regarded as a peer to Jun He and King & Wood in the Chinese corporate bar.
Thus, it seems Chinese corporate law firms continue to face a simple question: To grow, or not to grow? At the beginning of this century, the degree of structural differentiation in the corporate legal market was relatively low, and even elite boutiques such as Haiwen and Fangda—with fewer than 100 lawyers in total—were considered large law firms in China. A decade later, the ecology of Chinese corporate law firms had become highly differentiated and diverse, with an increasing number of law firms having grown into the league of Big Law with thousands of practitioners and a large number of domestic and overseas offices. To some extent, the different growth strategies that these firms adopted reflect distinct firm cultures and personalities of their influential partners, some of whom were more entrepreneurial, aggressive, or innovative than others. However, as I have demonstrated throughout the article, law firms’ growth strategies were also significantly shaped by their market positions and interactions with other firms.
Big Law is not dead. Even if it has experienced a period of restructuring in the West after the 2008 global financial crisis, in China and in other emerging economies such as India and Brazil, we have witnessed the rise of (non-Western) Big Law in the early 21st century. The real question, in my view, is not just to grow or not to grow, but how to grow. What organizational forms Big Law will take in the next decade or two, as technological innovations such as artificial intelligence and peer-to-peer service models continue to disrupt existing systems of law firm training and management? In this sense, the case of Big Law in China offers not only an alternative story of law firm growth but also some useful lessons for thinking about the future of global law firms.
Sida Liu is an assistant professor of sociology at the University of Toronto, a Faculty Fellow at the American Bar Foundation, and a member of the Institute for Advanced Study in Princeton, New Jersey, in 2016–2017.