By Andrew Kemp
Hong Kong’s alternative legal service providers (ALSPs) will rely on cost- effective offerings to survive and expand during the current economic downturn
Hong Kong has been buffeted by a perfect storm of events that has left its economy reeling. Civil unrest, the Sino-US trade war and the coronavirus (COVID-19) pandemic have all weighed on the city’s economic performance over the past 12 months.
The banking and financial services sector, the heart of the city’s economy, is busy cutting either salaries or jobs in a bid to weather the downturn.
While it was inevitable that the city’s legal sector would feel the pinch from the fallout, alternative legal service providers (ALSPs) have past experience in adapting to economic challenges and could gain a competitive edge over traditional firms.
The pioneer of Asia’s ALSP market – also known as NewLaw – Kirsty Dougan, who is managing director of Pinsent Mason’'s Vario business in Asia, said: “We learned after the 2008 [global financial crisis] GFC that ALSPs can adapt readily to all economic circumstances.”
Hong Kong’s economy shrank by 1.2% in 2019, driven by a 2.8% and 2.9% contraction in the third and fourth quarters respectively. The city posted a record breaking 8.9% decline in the first quarter of this year as the full weight of the global pandemic came to bear.
Asia’s financial hub has entered survival mode, with firms slashing costs wherever possible. Hong Kong’s unemployment rate has climbed to a 15-year, reaching 5.9% by the end of May. The figure was the city’s eighth straight month of rising unemployment.
“We learned after the 2008 GFC that ALSPs can adapt readily to all economic circumstances.”
Kirsty Dougan, managing director, Vario ,Asia
Financial services workers are taking pay cuts of up to 20% amid the economic downturn, the South China Morning Post reported on June 1. The paper, citing members of the recruitment industry, said that annual bonuses were being slashed and that job cuts – which had been paused – could resume again in the near future.
COVID-19 has been a profound disrupter to the business as usual model, forcing companies to adopt remote working strategies and teleconferencing for almost all of their operations. For many traditional legal firms this shift has proven challenging, not just in terms of serving their existing client base but also in terms of finding new business.
Hong Kong Secretary for Food and Health Sophia Chan announced on June 2 that restrictions on business and social gatherings would be extended until August 31. Entry restrictions for travellers from Macau, Taiwan and mainland China will remain in place until July 7, while visitors from elsewhere will face restrictions until September 18.
The city’s legal community must adapt to clients’ changing needs, with opportunities for face-to-face meetings dramatically reduced and workflows fundamentally altered. Moreover, the reduced opportunity to develop new business has already seen two traditional international law firms – Osborne Clarke and Orrick – pull out of Hong Kong this year. Osborne Clarke, which cited the disruption and uncertainty caused the civil unrest and COVID-19, had only just launched a year earlier under its own brand after operating in an association with Koh Vass & Co. for four years.
There is no little doubt that Hong Kong’s legal providers are facing severe challenges, but those same challenges could also lead to new opportunities for the ALSP market.
Dougan said: “Clients are always looking for innovative ways to augment legal departments, especially during global hiring freezes. These are unprecedented times and clients will be looking to trim costs wherever they can and this includes external legal fees.”
COVID-19 will drive the global economy into recession this year, with the International Monetary Fund (IMF) warning on June 24 that it expects global GDP to decline by 4.9% in 2020.
Dougan pointed out that ALSPs flourished in the wake of the GFC, as clients tightened their belts. “Clients sought greater cost efficiencies during the last global downturn and they will likely follow the same strategy trend this time around.”
Flexibility is key
Corporate and banking clients became increasingly cost conscious following the GFC, gravitating towards ALSPs’ transparent legal expenses.
ALSPs have specialised in filling niche gaps, leaving more high-profile and strategic cases to traditional legal firms that have the expertise to execute the work.
“ALSPs are focusing getting the basics right during these uncertain times,” Dougan said, before adding that the strategy remains focused on hiring quality lawyers, staying as close to clients as possible and supporting wherever needed.
She noted that the flexible contracts, with clients being able to take on staff ad hoc, should prove attractive to companies focused on operational efficiencies. “The ability to be flexible will be key to who comes out the other side of the recession on the front foot.”
Although the last year has been extremely difficult for Hong Kong, the city’s immediate economic outlook remains uncertain. China’s decision to impose national security legislation has drawn international condemnation, with the US government threatening to revoke Hong Kong’s special trading status.
The legislation will likely lead to a harsher and more rapid crackdown on pro-democracy protests and riots. From a political perspective the move is controversial, from a business perspective it only makes sense.
As COVID-19 restrictions were slowly eased May, speculation had already begun that protests would resume. Beijing has demonstrated that it is unwilling to allow another summer of protests to rock what is one of the world’s top three financial hubs. Whether its new law aimed at stamping out “any acts that severely endanger national security”, which could be enacted within the next few months, achieves this is anybody’s guess.
What is clear is that business operating in the city will be tightening the purse strings and scrutinising costs like never before.
This article was written by Andrew Kemp for Conventus Law in association with Vario
For further information on Alternative Legal Service Providers in Asia, please contact:
Kirsty Dougan, Managing Director, Vario