Expertise, experience, reputation and communication skills are among the top indicators when engaging law firms, according to China’s in-house counsel – with price quickly climbing the ladder of priority. Kevin Cheng reports
Nobody enjoys going through tough times, but it does bring out the most tenacious, creative and resourceful sides in people. China’s reinvigorated post-pandemic consumption, the biggest contributor behind 5.5% year-on-year GDP growth recorded in the first half of 2023, stands in contrast with the continuing international trade slump, with year-on-year exports sliding 14.5% in July, the sharpest decline since February 2020, and foreign direct investment (FDI) dropping to a 25-year low at USD4.9 billion in the second quarter.
Companies, whether directly affected or not, are compelled to reconsider their near-future strategies and troubleshoot entire operations for unwarranted risks, questionable expenses and many signs of non-compliance amid the firmer regulatory grip, particularly in relation to the protection of data and personal information, as well as their transmission across the border.
General counsel and their in-house legal teams play a crucial role in these endeavours, as the need for stability and predictability becomes paramount. They understand, perhaps better than most, that constrained budgets don’t automatically translate to improved efficiency – not without dedicated research, delicate business moves, and the sheer will to scrutinise every rulebook, system and business relationship, even those long held untouchable.
Law firms are no exception to the great shuffle, but then again, they are hardly strangers to having to fight to prove their value.
When it comes to picking out the most suitable firm to work with, there is no one-size-fits-all solution, and sometimes personal preference, corporate culture or a history of co-operation trump even the ace cards of other candidates. But in general, law firms embodying the following qualities tend to see their odds at making the cut dramatically improve:
- Expertise and proven track record in needed areas;
- Effective communication and strong network;
- Consistency and long-term availability;
- Good reputation and credible market recognition; and
- Reasonable price tag and flexibility in fee arrangements.
Knowledge for hire
External legal services continue to be most heavily sought after for resolving disputes, facilitating significant deals and advising on complex capital market projects. They serve to fill a gap, either because the in-house team requires reinforcement in certain areas, or lacks sufficient manpower due to a surge in workload. Additionally, some tasks, such as representation in court or drafting an underwriting agreement for an IPO, can only be performed by external practitioners.
When asked about desired qualities in a law firm, expertise is often the foremost requirement that comes to the mind of an in-house counsel, and there is little mystery as to why.
“Professionalism, being a basic requirement for lawyers, is a fundamental consideration of ours when choosing a law firm, and the foundation on which our co-operation is based,” says Tian Siyuan, vice president of legal and compliance at Micro Connect Group, a Hong Kong-headquartered investment platform focused on providing funding for micro and small businesses in China.
Experience is another coveted trait, and a history of past success can be very convincing. Feng Lin, general counsel at China Resources Capital Management (CRCM) in Shenzhen, is willing to grant more consideration to firms with experience in fund businesses similar to its own, as familiarity can lead to greater efficiency provided there are no conflicts of interest.
But it is not always a simple matter of looking up the record books, as a lawyer’s performance is not always directly tied to a win/loss outcome. Yang Xingfang, the Tianjin-based chief legal officer at China Network Television subsidiary Future TV, pays attention to a candidate lawyer’s past statements and court strategies, as well as the ability to find a way out of unfavourable situations and turn the tide.
“The win or lose of a case is not necessarily the most important thing, as some cases are not meant to be won,” she says. “What matters more to me is the lawyer’s performance during the lawsuit, his/her way of thinking and legal perspectives when confronted with complex problems.”
Like other commodities, legal services may see a hike in value when clients face exceptionally difficult situations, and only a select few can be counted on to break through the barrier.
Wu Xiaohui, the Guangzhou-based general counsel and chief compliance officer at China Southern Power Grid International (CSGI), cites law firms with a global service network as valuable for a company engaged in cross-jurisdictional M&A projects requiring thorough due diligences and complete mapping of legal risks.
“We are primarily considering firms with legal analysis and case study capacity on the EU’s review mechanisms and the US long-arm jurisdiction,” says Wu. He points out the new Regulation of the European Parliament on foreign subsidies distorting the internal market, in effect since July 2023, and the US blocking China International Marine Container’s acquisition of Maersk Container Industry, as major red flags indicating the enormous challenges facing outbound Chinese companies.
Expressing a similar need for legal services targeting overseas businesses, Zhang Siqi, the general counsel at EEO Group, a Beijing-based education software-as-a-service provider, says the value of a legal adviser to cross-border dealings may be augmented if they can provide more integrated services and help the company achieve its commercial goals.
Her call for “integrated services” resonates well with Zhang Hantao, the general counsel at China National Nuclear Corporation Overseas (CNOS) based in Beijing, who hopes to see one-stop-shop legal services from a law firm that can last through the life cycle of a project.
“For legal issues involving many practice areas, we hope that through the firm’s internal management and team co-ordination, sufficient resources would be in place to efficiently tackle these complications,” says Zhang.
Others prefer a more divided, modular approach. Huang Chaohuan, general manager of legal and compliance at Dah Chong Hong, a Hong Kong-based conglomerate and wholly owned subsidiary of CITIC, shares that he screened the company’s lawyer pool this year, expanding it along the lines of specific industries, practice areas and geographic locations.
Confident in the professional capacity of most lawyers, Ge Mengying, the Beijing-based general counsel and data compliance officer at TalkingData, is on the lookout for the extra spark – business acumen.
“In an investor-dominated market, lawyers representing a company need to be able to make business-savvy judgments,” she says, “such as how important a given matter is to the company, and which clauses must be kept intact in negotiations.”
Received, read, replied
When legal issues arise, law firms are expected to provide timely, conclusive and feasible game plans, which cannot be achieved without smooth two-way information flow and a keen understanding of client needs in the given moment.
Stressing the importance of communication costs, Zhang Hantao of CNOS expects the firm to “provide tailored legal services taking into account [our] corporate nature, management features, main business, risk appetite and operating styles”. With fluctuations in global politics and the economy, and greater prudence required for controlling compliance risks, Zhang says standards have been raised for a law firm’s response time.
Players in relatively new, fast-growing markets tend be more sensitive to the speed and quality of information exchanged. Tian, of Micro Connect, pays extra attention to how well external counsel fit with the in-house team, in addition to their level of expertise and timeliness of feedback. “Smooth and constructive co-operation can also do wonders to the outcome of the in-house tasks,” he says.
While there is no understating the importance of fluent, efficient and to-the-point communication with the company, its value extends beyond that between the service provider and the client.
“Effective communication between the law firm and the government is a new requirement under a strict regulatory system,” says Beijing-based Pang Xiaomei, the general counsel at Sohu, a leading Chinese internet company. In an era of surging technologies such as 5G, big data and AI, Pang believes that a high-quality legal service must be built on understanding the commerce and the client’s business.
When evaluating lawyers for potential court action, Yang, of Future TV, not only takes note of their abilities to compose and deliver convincing statements or responses, but also how well they can communicate with the judge.
She explains that a sharp lawyer can pick up on the judge’s concerns and misgivings. After court, he/she may continue professional communication with the judge by phone or email. In some cases, where the lawyer is eloquent and approachable, the judge may even take the initiative to contact him/her in order to learn more about the case.
“I consider the ability to communicate with a judge to be a vital part of a lawyer’s overall qualities,” she says, stressing the importance of familiarising judges with industry practices and case-specific contentions of interest, which often go beyond cold, hard legal provisions.
For the long haul
Picking out a law firm is no trifling matter for in-house legal teams, as the selection process can be gruelling and time-consuming, especially if bidding is involved. Unsurprisingly, they would prefer that lawyers making the cut can be counted on for more than a few sessions.
Consistency is highly valued by Future TV’s Yang, who requires the assignment of two core lawyers for long-term co-operation, and does not accept arbitrary assignments from the law firm. She observes that law firms operating under quasi-corporate management mode tend to be able to mobilise the resources of the whole firm more flexibly, enabling them to provide timely and effective legal services for urgent or complex projects.
Jiang Wenlu, the Shanghai-based general manager of the legal department of Sinochem International, laments that some of the more active international firms in mainland China are pulling out their local offices, moving their talent to Hong Kong, Singapore or back to their home headquarters.
Absence of a local office in China deprives potential clients of the chance to communicate face-to-face, forcing them to remotely contact their head offices across jurisdictions and time zones, which is relatively inconvenient for all parties involved.
On the brighter side, Jiang believes the exodus of international firms is complemented, and in some ways indirectly prompted, by continual strides made by prominent “red circle” firms.
“Over the years, these leading domestic firms have attracted lots of talent from international firms,” he says. “Now the quality of their services has caught up, these firms are beginning to edge out the market, owing to greater familiarity with the Chinese language and culture.”
Nevertheless, Jiang encourages international firms to retain Chinese offices in key cities.
Time to whip data into shape
The Cyberspace Administration of China’s (CAC) eagerly awaited Measures on Standard Contract for Personal Information Export came into effect on 1 June 2023.
They coincide with long-anticipated guidelines on filing the standard contract for export of personal information, one of the only four lawful pathways provided under the Personal Information Protection Law (PIPL).
The standard contract option is open to companies that do not require going through stricter security assessment. A grace period is granted to rectify all existing cross-border exports of personal information along the lines of the standard contract, which must be completed by 1 December 2023.
The clock is ticking
The signals are clear. Gone are the days when lawyers and in-house counsel must convince their clients or colleagues of the gravity of data compliance.
Pang Xiaomei, general counsel at Sohu, cites the importance of being prepared. She began establishing the leading internet brand’s internal data compliance system early on – paying heed to all experience learned from the process – so her team would be well prepared to meet the new regulations.
“Since the release of the Measures for Security Assessment for Outbound Data Transfer, we set up special compliance and self-assessment systems for data export, and we did not wait until we had actual data to export,” she says.
“These steps laid the foundation for better sorting out the daily data flow, promoting standardised data management, and protecting the rights of data subjects.”
Ge Mengying, general counsel and data compliance officer at third-party data intelligence service provider TalkingData, says her team performs a data compliance assessment for each new product that launches each week, analysing if there is a need to revise the privacy policy, or fulfil the duty to inform.
Owing to their data expertise, Ge’s team is frequently consulted not only by their own company in relation to potential risks, but also its clients and suppliers.
The explosion in data awareness coincides with the gradual refinement and enrichment of relevant regulations, interpretations and guidelines, making the protection of data more viable both in practice and enforcement.
The head of legal at a multinational healthcare company, who prefers not to be named, observes that just a few years ago many companies were still unsure of exactly what to do, and therefore adopted a wait-and-see tactic.
However, pieces of the puzzle have largely fallen into place in the past two years, he says. But there are still gaps to watch for, such as the specific security review criteria of cross-border data transmission.
On the bright side, several big names in the market like Mazda, Sephora, Hyundai Motor, Focus Technology and Guotai Junan Securities have been greenlighted by the CAC for data export after a security review, injecting some confidence and reassurance into the market.
Help doesn’t come easily
Consumer product companies often rely on massive user data to devise marketing strategies in order to gain or maintain dominant market positions.
But they face a dilemma: do they take a hit in terms of manpower and financial resources to process this data in-house, or transfer the data to a third party specialised in the function? And if choosing the latter, what are the potential risks to the users, the company and, in extreme cases, the nation?
Ge says that TalkingData, along with many companies, would greatly benefit from some kind of automation tool able to conduct risk assessment for large amounts of data.
Until such a tool is widely adopted and market-tested, can they rely on third-party professionals such as lawyers to perform such a task? The answer is a resounding yes. In fact, many law firms are making a point of attracting data-proficient talents, or setting up new offices with data-related services as a hot new direction.
However, not all bases are covered, and law firms may find the information gap in corporate data a challenge rather difficult to surmount.
Yang Xingfang, chief legal officer at internet television streamer Future TV, considers data compliance a task more suitable to the in-house team, chiefly because it likely involves trade secrets such as the internal work process, and the collection and categorisation of data, which can only be properly handled with more intimate knowledge.
“We may not be able to explain all business details with the lawyers, which means they would be analysing our data at a disadvantage,” she says. “When it comes to this kind of legal work, no detail is too small.”
Data-specialised lawyers are engaged by Yang to provide training and interpretations on laws, ministerial regulations and normative documents. But when it comes to actual work, such as the classification of data security level, the team usually handles that internally.
Ge agrees that data compliance is more efficient when handled in-house, as companies tend to exert high demand in efficiency, and it may simply take too long to properly explain the underlying business and operating nuances to an external team.
“Data compliance is more than just a legal task, but is business-oriented and requires in-depth understanding of our business and technology,” she says. “In-house counsel are clearly more informed in this regard.”
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High recommendations
It is common practice for a company to retain a law firm pool – or something similar to that – of legal service providers to be considered first in times of need. Generally, induction into the pool is based on one or both of the following: positive experience of prior co-operation; and/or results of extensive market research.
Jiang Wenlu, of Sinochem, says that such a database exists for his team, but stresses it is largely for reference and not mandatory, nor the sole source of soliciting an intermediary. “In principle, we prefer to work with well-known, highly-ranked firms with a long history,” says Jiang.
He explains that this description could refer to informal but popular concepts in the industry, so-called magic circle, white-shoe and red circle firms. Awards and rankings compiled by professional institutions and media are also considered.
Likewise Huang Chaohuan, of Dah Chong Hong, trusts the team’s and business unit’s assessment of past legal services above all else. But in scenarios calling for additional considerations, he says that “a law firm’s consistent appearance in credible rankings, lists and awards, as well as continual output of professional content, help the company come to a fairer and more comprehensive decision”.
In marketing, word of mouth often works wonders in expanding vendor influence and triggering consumer interest. While legal services is no common product, it is no exception to this rule.
Jiang considers reviews of other clients a valuable source of reference, as long as they are veritable and reliable. “If I can be presented with the true feedback of fellow clients, it greatly facilitates our decision-making,” he says.
On the flip side, Huang says that if a firm gains notoriety, whether in the form of massive negative publicity or administrative penalties, he would be put off from that option.
Good value for money
Cost management has been a constant struggle, but times of economic uncertainty bring its importance to the forefront.
Eden Zhou, the deputy legal director at Lukfook Jewellery in Guangzhou, observes that the current economic situation demands a firmer hand in budget control and optimised usage of resources. More than before, he says the team needs to “consider the reasonableness and fairness of the firm’s rates to ensure access to quality legal services while controlling costs”.
He is far from the only in-house counsel to have sensed a shift in these parameters, particularly in industries bearing the brunt of economic shakeups. Shang Dongning, the Foshan-based director of legal management at Midea Real Estate Group, says that in times of rapid industry development, more opportunities are extended to firms good at investment, M&A and capital markets, with today’s demand being for those with a proficiency in dispute resolution.
“Price was not so sensitive in the past,” he says, “but given the economic slowdown, we now prefer firms or teams able to offer a better price for a comparable level of counsel.”
Likewise, Tian Siyuan, Feng Lin, Yang Xingfang, Wu Xiaohui, Zhang Siqi, Zhang Hantao, Huang Chaohuan, Ge Mengying, Jiang Wenlu, Huang Chaohuan, Eden Zhou, Marco Chung, the Hong Kong-based group head of legal and managing director at capital markets and investment group CITIC CLSA, observes that “cost and flexibility on billing are increasingly being considered”.
Nevertheless, Chung says that the relationship with the firm and the quality of its work remains his focus. “Cost would be one of the factors, but equally important are the expertise and work attitude of the law firm,” he says.
In light of the economic downturn and strong development in AI-empowered legal technologies, EEO Group’s Zhang Siqi places a heavier focus on “lawyers more in touch with business logic who can propose ways to balance business interests and legal risks”.
At Tupperware (China), tasks such as project and case management are increasingly being relocated to the in-house legal team for both cost savings and efficiency gains, says Nancy Wei, the legal director based at the company’s Guangzhou office. Her choice of law firms greatly hangs on the cost-effectiveness of the service.
Great legal bake-off
When it comes to the screening process for law firms, one thing is abundantly clear: no fancy technologies enabling instant remote communication, however convenient, can truly substitute for the good old-fashioned face-to-face. However, tendering is an increasingly popular practice adopted by general counsel, especially for major projects.
Feng Lin, of CRCM, generally opts to speak in person with final candidates to most effectively gauge a lawyer’s capabilities. “In face-to-face meetings, you get a true sense of the lawyer’s experience in certain areas, as well as the ability to express oneself, grasp the core of an issue, and think logically,” she says.
However, the in-person meeting may be reserved for the few. Law firms must first survive the extensive market research that Feng and her team conducts, and stand out by possessing the desired qualities and expertise. After the research is completed, the short-listed firms – usually not many due to confidentiality concerns – are invited to bid.
Likewise, competitive procedures are adopted by Zhang Hantao, of CNOS, as a means of cost control. “In the same round of selection, we generally won’t pick firms quoting significantly higher rates.”
Other than face-to-face evaluation, Huang Chaohuan’s team at Dah Chong Hong relies on written candidacy material submitted by law firms to support their decision. The material incorporates information such as team members, their expertise, similar cases, awards, rankings and revenue, over which a weighted score is given.
The evaluation continues even after a firm makes the cut, as its subsequent performance will be further scored for annual assessment, which determines if it stays or leaves the pool the following year.
Tendering and price comparison has been a staple for many large-scale state-owned enterprises. At Sinochem, the process is mandatory and part of internal compliance, which is something Jiang Wenlu wishes more overseas law firms could understand.
“Tendering or price comparison is not about giving anyone a hard time, but a mandatory process required for procurement of all key services,” he says. “The purpose is to prevent corruption or other violations at all steps of the procurement.”
Hopes for the future
Co-operation between internal and external legal teams is not a simple give-and-take, but a dance that requires fine co-ordination and skilful moves on both sides.
Wei, of Tupperware (China), says that in-house counsel should pave the way with sound internal communication, and information gathering and processing, and then obtain effective evidence based on their common ground with the external law firm.
When compared with in-house counsel, Wei says that external lawyers have the upper hand in terms of more diverse experience, and more opportunities to observe and study the dynamics of litigation, administrative law enforcement and current judicial trends. She hopes that the design of legal offerings can be further diversified to take into account the various industries, company types and complexities of legal issues, enabling law firms to respond to client needs more pertinently.
“Take data compliance for example,” she says. “Law firms can consider designing industry-specific service plans in addition to the common service module.”
Shang Dongning, of Midea Real Estate, also hopes to see a stronger affinity to the client’s industry and business logic. “It’s my wish that external counsel can develop litigation strategies closer to the commercial perspective, and offer improvement suggestions based on management and business risks reflected in the case,” he says. “I also hope they will join the in-house team in reviewing the case.
As a rule, in-house counsel prefer precise, actionable solutions, instead of excessively long, complicated or generalised replies. However, Daphne Dai, vice president and APAC general counsel at Honeywell Building Technologies, also emphasises the in-house responsibility to guide lawyers into the desired precision.
“It is up to the in-house counsel to provide lawyers with a clear scope of required services,” she says. “Our demands, business needs and situation must be explained to sufficient clarity. Only then can we get the precise responses.”
Wu Xiaohui, of CSGI, is on constant lookout for new laws enacted in key target jurisdictions, as well as new trends in foreign investment review. In this regard, he appreciates close communications and exchanges of intelligence with law firms. “Firms actively offering interpretations to new laws, case studies and value-added services are prioritised in our tendering for legal services,” he says.
Echoing these sentiments, Sohu’s Pang Xiaomei says he wants law firms to provide more practical, down-to-earth insight to new regulations.
Hourly billing is the staple in the legal sector worldwide. According to a China Business Law Journal survey earlier this year, the industry average hourly billing rates of PRC law firms is RMB3,124 (USD430) per hour. However, the practice has long had trouble acclimatising itself to the Chinese market.
Efficiency is key in time-sensitive or fast developing businesses. But for obvious reasons, the idea of time-based fees can seem out of place. Ge Mengying, of TalkingData, recommends law firms to consider not using hourly billing for efficiency-sensitive projects, and instead quote a fixed price for the whole project.
While acknowledging hourly billing’s positive effect in incentivising for top-in-class services, CITIC CLSA’s Marco Chung reflects that in some cases, there could be a disconnect with the value of the actual service. “There might be cases where it could be unpredictable and out of proportion, which makes it hard to budget,” he says.
Sinochem’s Jiang is a supporter of fee caps because foreign-related cases could take years, which means costs could easily get out of hand, potentially putting the legal department in a difficult position.
“We tend to trust in the professional ethics of the lawyers, and are not used to verifying, and sometimes challenging, each item on the invoices, such as the time for preparing documents or travel,” he says. “For this reason, we are quite reliant on a fee cap.”
On the other hand, he is open to adjusting the fee cap down the line, should there be any unexpected developments.
Deposit is another overseas industry practice that Jiang’s team struggles with, he says, as some law firms fail to realise the procedural difficulties it can create for state-owned entities, which rarely go through this step for consultancy.
Jiang finds it regrettable that co-operation must sometimes be called off due to procedural barriers, whether deposits or bidding. The conversation could not have progressed to these specificities, he adds, without his team being already impressed with the law firm’s offerings and willingness to move the deal forward.
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