Think of China’s law ﬁrm scene and like most people, you probably think of the magnificence of Dacheng’s roomy Beijing headquarters, or the sky-high law offices that dot the glittering spires of Shanghai’s Pudong district. Though young when compared to their U.S. white-shoe or UK Magic Circle peers, China’s elite firms still give their blue-chip clients a reassuringly traditional service, with the expensive office space and smartly tailored attorneys to match.
But in the city of Xi’an (population over 8 million) in Shaanxi province, better known as the ancient capital of China and home of the Terracotta Army than as a legal hub, a four-partner ﬁrm is trying to leapfrog the evolution of Chinese law ﬁrms along traditional Western lines. If they succeed, they could bring a city in the geographical heart of China straight to the forefront of the global Alternative Legal Service (ALS) revolution.
Nearshoring, the Chinese way
Silkroad Law Firm managing partner Haifeng Yang does not look like a revolutionary. But in quiet, measured tones, he explains the logic that led him to quit his job as a senior associate at a Big Law firm and start a Chinese law ﬁrm on a very un-Chinese model in 2011.
“At first, I thought of setting up in Beijing or Shanghai because that’s where my clients were,” said Yang. “But the cost of living in those cities is really too high. At the same time, I noticed that many talented graduates from the top law schools were leaving very early in their careers to go back to their hometowns, provincial capitals like Xi’an, to be closer to their families – particularly for the generation now in their 20s and 30s, who are mostly ‘only’ children.” (China abandoned its one-child policy in 2015.)
This led Yang to his epiphany. If talented lawyers were willing to trade in Beijing salaries and careers just to go back to their hometowns, maybe there was an arbitrage opportunity. It has long been known in the West that much legal work does not need to be done by senior attorneys in high-cost locations. Dedicated legal process outsourcers (LPOs) and firms now have well-established service centers in low-cost locations such as India. However, these support mostly English-language work in jurisdictions such as the U.S. and UK: Even when there is a China aspect (such as UK ﬁrm Herbert Smith Freehills, which has established a small service center in Shanghai), they are not set up to exploit the price differential between China’s booming coast and its inland cities.
If Yang could keep his client base in the major cities, but resource those matters from Xi’an with equally qualiﬁed attorneys, he could create value. The approach has been popular with clients; Andrew Ning, general counsel of Big 4 Chinese bank CCB International, praises Silkroad’s business model and contrasts their “good lawyers” and “good value for money” favorably with the “outrageous” fees charged by some well-known firms for work of similar nature and complexity.
Quality in quantity
LPOs typically face two challenges specific to their business structure: quality control and employee churn. To address these, Yang and his partners have invested heavily in managing their knowledge.
“We do not have dedicated professional support lawyers (PSLs) as their drawback is they are out of the deal ﬂow and it takes a lot of time to get them working well with the practicing lawyers,” says Yang. “Instead, all mid-to senior-level associates have a significant knowledge management component to their compensation, and in assigning deal teams we focus on building execution capability.”
Over time, this has allowed the ﬁrm to build what Yang calls a “center of excellence” in Xi’an, which provides their mechanism for quality control. “Our model would not work without lawyers-to-the-lawyers,” said Yang. The focus on quality control has yielded dividends; Andrew Han, executive director of Legal & Compliance of China Merchants Capital, cites Silkroad’s “high-quality legal professionals” as a key reason behind his choice to use the firm.
In addition to the training and support, Yang believes that the quality of instructions helps with associate retention. Their work mix “basically reflects my Big Law background,” says Yang, citing merger & acquisition and private equity/ venture capital funds work as key areas. The ﬁrm’s headline clients are certainly impressive, with China Merchants Capital and CCB International both on the roster, as well as provincial state-owned companies and regional governments. “No other firm can offer regular work for clients like this to its associates in Xi’an,” claims Yang, who says that this helps to combat associate churn. It seems to be working: Total attrition rates are below 20 percent in the five years since the firm was founded (a low number for China’s notoriously volatile lateral market).
An alternative model
The firm remains small but in growth mode. Revenues have trebled from 2014 to 2016, and indications are that 2017 is on track for them to double again. The team, too, is growing: Silkroad now has four partners and 25 associates. Yang anticipates that they will soon be seeing imitators. As the ALS boom in the West has shown, it will be good news for clients if he is right.