Hong Kong Lawyer

March 2017

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T he following is the first in a two-part series of bulletins exploring issues facing small and medium-sized firms in the context of the broader competitive market and with specific reference to Hong Kong. In this bulletin we highlight a series of strategic and operational considerations for small and medium-sized law firm leaders and how these are changing with intensifying competition. The second of these bulletins will explore what law firm leaders need to do including moving from cash flow management to revenue generation as an outgrowth of this and a structural shift in organisational mindset. While the principles of law firm management apply to firms of all sizes, their execution differs according to a firm's organisational capabilities. Many of the challenges facing small and medium- sized firms are consistent with those of larger firms. How they respond to these challenges can differ vastly and the "trickle down" effect (from large to small) can alter the nature of the challenge, including in some cases magnifying their impact. What small and medium-sized firms lack in organisational capability, they can more than make up for in agility both in their approach to their clients and markets and in the way in which they manage their businesses. However, this requires a clear understanding of a firm's strategic positioning and the management skills to compete and maintain that position. One characteristic of small and medium-sized firms in most markets is their focus on SME clients. In part, this has been driven by localised buying decisions often where a family business has retained counsel for a range of private and corporate matters. (SMEs are more inclined to use their law firm for a "package of business law services" provided the firm is truly good at these. This may not be the case from the client's perspective.) These are segments of the market that "big law" has generally avoided because of an abundance of other, more profitable work and because their cost bases would not support lower margin work. Hence, big law and small and medium- sized firms effectively coexisted in parallel markets. In this respect, Hong Kong has differed because of the relationship between personal wealth, closely held family businesses and the largest publicly listed companies. Small and medium- sized firms have traditionally been able to advise larger companies than would necessarily be the case in other markets. In some markets in which competition is intensifying and in which access to SMEs is increasing, including through more efficient delivery mechanisms and lower costs of production, the separation is blurring and a number of large professional services firms, notably the Big 4 accountancy firms, are actively targeting the SME sector. According to the Hong Kong Government's latest statistics, there are approximately 317,000 SMEs in the territory, constituting 98 percent of its business units and 46 percent of private sector employment. Despite the considerable size of this segment, it is not out of proportion, say, with the UK in which over 99 percent of businesses are SMEs, accounting for 60 percent of private sector employment [and 47 percent of private sector turnover]. However, the relative importance of SMEs in Hong Kong has been much greater for the reasons stated above including in the way in which legal services are bought. This raises a series of related issues in managing the business of small or medium-sized firms and questions for their leaders to consider. Client Focus A number of major business law firms (Global Elite and International Business Law ("IBL") firms) that previously shunned private wealth services have altered their strategies in recent years. They are now investing in these areas and are actively targeting High-Net-Worth Individuals ("HNWIs") through private wealth services as a means to secure PRACTICE MANAGEMENT 執業管理 How to Manage Business as a Small to Medium-Sized Firm By Alan Hodgart, Managing Director Hodgart Associates Ltd Rob Ashing, Director Hodgart Associates Ltd 72 www.hk-lawyer.org •  March 2017

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