The China Challenge
One cynical China lawyer is purported to have said: "If you come in here expecting to make a lot of money, you ought to understand that China is a tough row to hoe.“ Indeed, China revenue per lawyer is modest by U.S. standards. The initial exuberance of an international firm entering the market in China is often followed by a period of lessening expectation. The constraints of a different language, culture and an authoritarian government – including the ongoing power of the Chinese state to shape the legal services market – are confounding factors. On the other hand, the paucity of law firm exits from China reflects the perception that a China presence is a requisite symbol of global commitment, and a worthwhile bet on future growth.
According to a recent academic study: "The bottom line is that China is a marginal part of nearly every international law firm's business. For more than 80 percent of…law firms, lawyers reported that Mainland China generates less than 5 percent of global revenue." However, the rote comparison of revenues versus expenses fails to capture the effect of referrals for work ultimately billed by offices outside of China, for China related engagements.
Foreign managed law firm branches in China typically hire a Chinese law firm to handle a lawsuit or provide a formal legal opinion. Although lawyers agree that the Ministry of Justice ban on practicing Chinese law by foreigners is poorly enforced – the worst consequences are often a warning or a fine – investing substantially in a practice that PRC authorities could arguably shut down at any time can be unsettling to international law firm leadership.
It is estimated that 95% of international law firms are global partnerships where equity partners divide worldwide profits. Often this profit sharing structure creates isolationist wings of partners who don’t feel like integral members of the international team. Some international law firms treat their China offices as "outposts," separate and apart from other mainstream firm initiatives. Many mainland China law firms do not encourage collaboration among their lawyers. As a result, even informal alliances are complicated by economic, cultural and jurisdictional anomalies. Chinese lawyers are often paid a fixed percentage of their individual billings, from which they pay their own support staff. This culture can be inimical to the sharing of work with other partners and can operate to suppress international law firm synergies.
In addition, international law firms may encounter difficulties in monitoring China law firm branch practices that may expose the home office to Foreign Corrupt Practices Act violations, cyber security issues, and troublesome cultural misunderstandings. Often, the mainland China firm will exhibit a more laid-back approach to conflicts of interest and various compensation practices that reward the individual lawyer's interests at the expense of the law firm, as a whole.
CTI has the most extensive staff of native Mandarin speaking analysts and professionals outside of China. Law firm management can exercise greater control over firm administration, including control over compliance, liability exposure and profitability with respect to its China operations, by subcontracting with CTI. Deployed at the discretion of centralized management, CTI staff can provide a highly sophisticated and sensitive professional force to analyze and interpret any aspect of China operations that require the assimilation of complex, nuanced financial and legal Mandarin documents - documents that may otherwise be misinterpreted or disregarded by centralized management. Operating on an outsourced, spontaneous basis, CTI can monitor and coordinate China branch operations and/or issues that affect any aspect of China operations. International law firm management can absorb the expense of CTI assistance (and markup such wholesale cost as appropriate) on a variable, only when needed, basis rather than as a fixed overhead expense.
At the same time, CTI can improve communication and understanding between firm leadership and its branches in China, and ensure that all team members are pulling in the same direction. Deployed at the discretion of international firm management, CTI is in a position to evaluate exposure to international law practice liabilities as well as FCPA compliance issues.