Great haul of China
16 January 2012 | By Yun Kriegler
A massive domestic push and some international toe-dipping has seen China’s Dacheng grow into a firm of 2,600 lawyers. Now it has global ambitions
Last November Dacheng Law Offices, the largest law firm in Asia, threw a party to celebrate the 10th anniversary of its Shanghai office.
The party took place in the conference centre of the Shanghai World Financial Centre, China’s tallest skyscraper, which soars above Shanghai Pudong’s brash skyline. It was a big bash by any standards, with no fewer than 350 local officials making an appearance, as well as long-time supporters, clients and employees.
Although it was held in the most prominent international commercial district of the country’s most cosmopolitan city, the gala dinner was quintessentially Chinese.
There were no pre-dinner cocktails to get the crowd to mix and mingle; instead most guests stayed in their seats throughout the event. Government officials, accompanied by the firm’s senior partners, made a grand entrance to the banquet hall with a single spotlight shining down on them. A 16-course banquet was served at each of the 35 tables, and Shanghai managing partner Liu Yixing went around during the dinner to offer toasts and drink with all the guests, thanking them for their presence and support. Instead of a DJ and a dance floor, the entertainment was provided by the Dacheng choir singing Ode to Joy and Auld Lang Syne and a symphony orchestra playing classical hits such as Strauss’s Radetzky March and the overture to Carmen.
Although the event was very Chinese in feel, there were some telling international elements. Several foreign faces amid the crowd, together with the congratulatory video messages from the firm’s New York and Chicago offices, reminded everyone that for Dacheng the world is not going to stop at Shanghai. Barely known outside its national frontiers, the fastest-growing firm in China is explicitly targeting global expansion.
Dacheng, a name that was unfamiliar to the industry and business community a mere few years ago, has swiftly become a household name in China owing to its breakneck growth in recent years. At the end of 2011 Dacheng had around 2,600 lawyers, including 700 partners, across 42 offices. At the beginning of 2007 it had just 330 lawyers, including 100 partners, in six offices. Within a mere five years the firm has achieved something that is impossible to ignore.
A significant part of the firm’s domestic expansion has been achieved through mergers with regional law firms and aggressive lateral hires of partners and lawyer teams. For example, Dacheng merged with Guangzhou-based Xin Yang Law Firm in June 2010, launching into Hong Kong with Xin Yang’s existing Hong Kong office. In the same year the firm strengthened its Beijing and Shanghai offices by acquiring established teams or boutique law firms, such as the aviation and real estate teams from Beijing’s Kingfield and Shanghai shipping outfit Li & Chen.
Dacheng at a glance
- Established in 1992
- Headquartered in Beijing
- Managing partner is Wang Zhongde
- Is home to 2,600 lawyers,
- including 700 partners, 245 of whom are equity partners
- Has 42 offices, including seven overseas
- Turnover for 2011 was Rmb1.2bn (£120m) with an estimated average profit per equity partner of Rmb2m
With Dacheng branch offices sprouting like mushrooms across China, the firm has also embarked on a world endeavour, making its name known beyond its traditional borders with international office openings and strategic alliances. Dacheng currently has seven overseas offices and nearly 20 strategic alliances around the world, all of them established within three years.
“We didn’t grow for growth’s sake. We’re pursuing a strategy we formed after long and arduous contemplation and after the firm went through some years of great difficulties in making progress and achieving growth,” stresses Dacheng managing partner Wang Zhongde, who holds a full-time management position essentially similar to the role of CEO.
“We’re facing a historic opportunity in a unique market, where competition is fierce but demand for legal services is enormous, complex and immensely dynamic,” he continues. “Without any precedent, it’s all about exploring and finding our own way to move forward. I think our strategy’s well aligned with the unique time and environment we’re in.”
While the firm’s operation and network have expanded dramatically in the past five years, its annual turnover has also grown fourfold to reach Rmb1.2bn (£120m) in 2011 from Rmb250m in 2007. The 2011 figure, although tiny by international firms’ standards, will safely put Dacheng in China’s top 10 law firm list by revenue.
However, compared with the 700 per cent growth rate of lawyer headcount, the rate of growth for revenue was proportionally slower. Furthermore, while the total number of lawyers at Dacheng is two and a half times the lawyer count at King & Wood, Dacheng’s annual turnover is still lower than that of King & Wood, which is estimated to have come in at more than Rmb1.5bn in 2011.
One of the main reasons of this disproportion in the growth rates is the wide gap between the strength and depth of the legal markets in first-tier cities such as Beijing and Shanghai and that of the second-tier cities, where most of Dacheng’s branch offices are located. Take Beijing and Shenzhen as examples: the total revenue of the legal industry of the former reached Rmb11.3bn in 2010, while the latter only made Rmb2.7bn during that year.
An increase in lawyer headcount hardly guarantees financial strength or quality, but Wang sees an important impetus behind his firm’s domestic expansion push.
“The importance of second-tier cities is often overlooked, but in fact they are the future engine of China’s growth,” says Wang. “Although the headquarters of large Chinese and foreign-invested companies are mostly based in Beijing and Shanghai, they’ll increasingly invest into the second- and third-tier cities.
“By establishing ourselves in many of these markets, either through taking on leading local teams or by relocating lawyers from the headquarters, we’ve created a national brand that can be identified by clients when they need services across the country.”
The Dacheng brand is attractive to local regional firms, which lack national platforms, causing them they lose mandates when their home city clients do businesses across the country. Whenever Dacheng enters a new city it will generally receive great interest from local teams that want to join its network. Its expansion is also welcomed by local legal industry regulators, as they expect Dacheng to be a role model for local law firms and to set the bar higher in the local market.
Dacheng, through astute contact-making, is beginning to collect some strong names for its client roster. New clients the firm has been servicing include Beijing Automobile Group, China Eastern Airlines, China Huadian Corporation, AVIC International Holding Corporation, China Shipping Group, GE China, WalMart (China) Investment Co and Hyundai Heavy Industries (China) Investment.
“A number of top-tier firms, such as King & Wood and Jun He [Law Offices], have long dominated the legal market as they’ve been focusing on the top-end and foreign-related corporate issues and transactions since their establishment. It was difficult for most of the firms to focus on these areas, particularly 10 or 20 years ago,” notes Wang. “We’ve been a very domestic work-centered law firm until recent years. Our approach is to create a good brand and set up a wide network first and then attract large and higher-end clients. We’re also making a conscious shift towards developing more corporate clients instead of individual clients.”
To gain a fuller understanding of the Dacheng of today, you have to understand its past. Its history is intertwined inextricably with the country’s economic transformation and the emergence and continuing evolution of the legal industry in China.
Dacheng was established in 1992, the same year as Deng Xiaoping, then the nation’s leader, conducted his critical ‘Southern tour’, which ushered in China’s economic boom. Jun He and King & Wood, the country’s two top-tier national firms, were also established around the same time.
When Dacheng first opened its doors it did so with only five partners, three lawyers and two administration staff, with founding partner Peng Xuefeng at the helm, who left his job at a government-run law firm to set up one of the country’s first private partnership firms. Dacheng initially only focused on litigation.
In the first nine years Dacheng enjoyed a period of fast growth, due mainly to the great demand created by the shift from a planned economy to a market economy and the general shortage of lawyers. During this period clients did not ask for sophisticated legal advice and lawyers were mostly engaged in delivering legal information and low value-added services and products. The quality standards were relatively low and clients were easier to satisfy back then.
“To achieve success back then wasn’t a very difficult task. The key lay in having competent and high-earning individual partners who could attract good lawyers to join,” recalls Wang of the market status a decade ago.
However, things quickly changed between 2001 and 2003. Firms that were not nimble enough to stay ahead of the changes experienced challenging impasses to their development. Dacheng then had more than 100 lawyers, but it was one of the many firms where growth had stalled and it suffered from a high rate of staff turnover.
“The nascent legal services market was maturing at a significant speed,” relates Wang. “The market posted much higher requirements for lawyers and large corporate clients started demanding complex legal services delivered by a team of high-calibre lawyers across different areas. Dacheng’s old model, which was a commission-based business centred on individual lawyers, put the firm in a very disadvantaged position.”
Dacheng’s eat what you kill model and the absence of a proper management structure not only resulted in a lack of ability to develop relationships with large clients and compete for large projects, but also promoted internal conflicts. Dacheng was a revolving door for partners and lawyers, and when partners left they would usually take their entire books of business with them, leaving the firm in a vulnerable position.
“The three years of vicious cycle really made the firm’s partners think about their future and has ultimately led to the firm’s determination to revamp its strategy, practice structure and management,” contends Wang.
At the centre of Dacheng’s reform was, whose appointment to the newly created management role in 2004 also marked the commencement of a five-year reform process.
Prior to joining Dacheng Wang had been a practising lawyer, a judge and had held management roles in various companies and government bodies. His management skills and market knowledge have guided Dacheng to envision itself as a giant Chinese firm with extensive global reach.
With tremendous efforts and a tortuous course, Dacheng has reached the goals it set out in 2004, including growing to a large size, establishing an extensive domestic network, branching out overseas, creating specialised practice groups, rationalising its management and creating a distinctive brand image.
As a means of funding the reform and development, the management committee decided to raise the firm’s R&D fund ratio from 6 per cent to 50 per cent of annual net profit starting from the beginning of 2007.
“The fundamental issues we were looking at during the reform were to improve management structure, eliminate competitive individualism in the firm and promote teamwork. We’ve achieved some success, but not to the full extent yet. There’s still a lot more work to be done,” says Wang. “We’ve also realised that unifying such a large firm can’t be done by only implementing strong policies and systems. Creating a strong culture and a branding strategy are also critical to the longevity of a firm.”
Dacheng has a three-tier partnership across its offices, comprising a full equity partner rank, a fixed-share partner band and a salaried partner band. It has developed a merit-based formula for profit sharing, which takes into account a partner’s rank and gives different weights to various elements, including business origination, work completed and contribution to management matters.
A firmwide management committee consisting of 15 senior partners chaired by Wang is the decision-making, executive and governing body of the whole firm. Each committee member will be in charge of one discipline of management, such as finance, HR, administration, quality and risk control, practice specialisation and marketing. In addition, each branch office also has its local management team to oversee day-to-day operations and local development.
Dacheng’s rapid expansion through mergers and rebranding smaller regional firms has its critics. Some of its peers consider Dacheng as a franchise or an alliance of independent firms under a common name. Questions have been raised about Dacheng’s integration, quality management and risk control.
Wang admits that each office has its separate profit pool, but stresses that his firm is committed to a “single firm” approach.
“We won’t merge with a firm or hire an established team without conducting thorough due diligence,” states Wang. “New members of the firm must meet a set of criteria.”
For example, the firm or team must have a leading position in the local market or be specialised in a certain practice area. In addition, its client base must reach Dacheng’s requirements. “When a new member joins Dacheng we’ll require it to sign an agreement to obey and implement all of the firm’s policies and rules and to share the firm’s vision and values,” adds Wang.
The firm has established stringent policies and rules that apply across all offices to ensure unity and consistency in all key aspects of operation and practice, including conflict of interests, client service standards and procedure, quality monitoring systems and a performance review process. According to Wang, if you print out all the policies and rules and stack them up, the pile will be at least one foot tall.
The firm has also invested heavily in building a highly sophisticated IT infrastructure across all offices, which is an essential platform to ensure the policies and rules are duly applied and managed effectively.
“We understand the importance of offering consistent services and quality to our clients across our network,” says Wang. “But China’s legal market is vast and very dynamic. Different regional markets have very different characteristics, fee rates and cost bases. We’ve chosen a flexible structure that’s the most suitable to the reality in China. It can ensure that we act as one firm and at the same time allows us to maximise local advantages and competitiveness in each of the regional markets. That’s critical for a national firm to stay afloat.”
Wang sees the reform and expansion in the past seven years as only the first step the firm has taken to achieve its goal.
“What we’ve done in the past seven years is lay the foundation and build a skeleton of what we want to become in the future. Most of the achievements we’ve made are quantitative, like growing the size and geographical coverage of the firm,” says Wang. “In our next five-year plan, starting this year, we’ll have a paramount focus on improving the all-round quality of the firm.”
There is a long list of areas for improvement, which include the quality of services and products, the technical skills of lawyers, the depth and degree of integration between the headquarters and branches, the consolidation of resources, the function and adequacy of the global network and the quality of instructions and the firm’s client base.
“Dacheng’s development has reached another critical point. We now have many new problems to solve and changes to make to drive a 3,000-lawyer firm forward and upward,” says Wang. “If you drill down to the core of many problems, it’s all about finding and implementing the most appropriate profit-sharing system. We’ll continue to experiment with new models, striving to create a more collegial atmosphere with increased teamwork among the partners. It will be an even more challenging phase then the previous one.
“If we don’t handle this issue with extreme delicacy and careful deliberation, what takes us two decades to build up will collapse overnight.”
Chinese firms are realising that growth is just one part of the battle. Instilling the right organisational culture will be the biggest test.
Argentina: Perez Alati Grondona Benites Arntsen & Martinez de Hoz
Australia: Minter Ellison
Austria: Peter Wittmann Law Offices
Cambodia: HBS Law
Chile: Cariola Díez Pérez-Cotapos & Cía
France: Hertzog Zibi & Associés
Hong Kong: Christine M Koo & IP Solicitors & Notaries
Hungary: Kelemen Mészáros Sándor & Társai
India: Brus Chambers
Italy: LS Lexjus Sinacta
Malaysia: Jeff Leong Poon & Wong
Poland: Lukowicz Swierzewski & Partners
US (California):Wang Hartmann Gibbs & Cauley
Sweden: Advokatfirman Delphi
Dacheng’s overseas footprint
Dacheng sets up office in Paris and enters into strategic alliance with Paris-based Hertzog Zibi & Associés; enters US by absorbing boutique California firm Matthews Wilson Hunter, which was converted into Dacheng’s Los Angeles branch
Enters Singapore via joint venture (JV) with Singapore firm Central Chambers
Law Corporation (JV recently terminated, with Dacheng establishing new JV with Wong Alliance, known as Dacheng Wong Alliance)
Taiwan affiliated office established in Taipei
Launches in Hong Kong via merger with Guangdong’s Xin Yang Law Firm, which has an existing Hong Kong office
Opens second US office in New York on Wall Street
Establishes Chicago office after absorbing boutique John Z Huang & Associates into network and appointing founding partner John Huang as senior partner