Stephen Mulrenan talks to Kenneth Ng, head of legal at HSBC, and Andrew Carmichael, capital markets partner with Linklaters, about changes affecting the selection process for external legal advisers in Hong Kong.

Ed: In your experience, what impact have tougher times had on the selection process for external advice?
KN: None particularly. I don’t detect that. The selection process is a continuing process.
AC: Not much actually. HK is facing a dichotomy between what is called its ‘internal’ economy (construction, property, restaurants, leisure activities, retail) and its ‘external’ economy. The ‘internal’ economy has been, for a number of years now, under some negative pressure, to put it mildly. But legal/financial transactions are much less influenced by that. They are exposed more to the ‘external’ economy, which this year has been looking brighter and more prosperous. So there are two genuinely different economic camps. Therefore, the work that is done in HK as Asia’s premier financial centre is, predominantly, not generated by the HK domestic economy.

Ed: So is that to say that the lull in the economy has not impacted on the way in-house counsel outsource their work?
AC: Certainly not in the corporate finance, international finance, and securities issues work that Linklaters concentrates on. Obviously, over the last two years, a downturn in HK has had an effect. HK companies that might have done things haven’t done things. But because, at the moment, the negative aspects of HK are particularly concentrated on the internal economy, I think it has been less felt by the financial sector and lawyers and accountants than it might have been.

Ed: UBS Warburg recently rationalized its panel of law firms in Asia as it looked to cut its legal budget in response to tougher times. What must law firms do to remain on these panels?
KN: They should be expected to cut their fees. They should share in the reduction in revenue. I don’t insist on that but I do expect people to be realistic. Our clients are very demanding and they exert pressures on us.
AC: Panels are slightly misleading. Throughout my time as a partner, our clients have been reviewing their panels because they always seem to be adding to them and then suddenly they realised they’ve got 56 lawyers or so on their list. There’s been a tendency over the last few years for people to try and concentrate on pure global law firm relationships.
What we have to do, particularly in the finance and corporate finance businesses, is have the global relationships so that you are on the panel. But that is not necessarily a HK originated decision, it may be a NY or London decision. HK is, still, a very capitalist economy and price matters. Prices go up and down quite sharply in HK. It is very quick to respond, on the supply and demand front, to good times and bad times. And we’re obviously a business and we have to operate as one.

Ed: Multinationals such as General Motors and Alcatel are increasingly viewing Beijing, Shanghai and Shenzhen as logical – and cheaper – alternatives to HK as their base of operations for China. What impact has HK’s changing role – vis a vis China – had on service levels within law firms?
KN: The law firms are striving to improve themselves and this is the way the business is heading. But I don’t detect any unusual trend.
AC: Undoubtedly the growth we expect to see in the forthcoming years will come rather more from the mainland than HK. The mainland is likely, relatively, to be more important than HK in five or 10 years time. And particularly for, as you say, the multinationals rather than the banks. The banks do seem to operate more from HK than they do from the mainland. But the General Motors, the Volkswagens, the BPs and the Vodafones of this world are all looking towards the mainland. There are only seven million people in HK. There are 1.2 billion increasingly prosperous people on the mainland and they’re buying more goods and spending more money. Our clients are definitely looking there.

Ed: So when we look at service levels in HK, are law firms diluting – to a certain extent – the critical mass that they have there to exploit these opportunities on the mainland?
AC: Not diluting. When you look at what actually goes on, HK is still, as it were, the ‘mother house’ to our Shanghai and Beijing operations. It can provide fire-fighter resources, it has the infrastructure, and so on. And China is a very large country. It isn’t just Shanghai and Beijing. There are lots of other areas of China requiring financial legal service transactions. So HK will continue to be very significant for that.

Ed: So do you see a time when China law practices at firms that are currently run and have traditionally been run out of HK, are no longer so?
AC: If the Chinese miracle keeps working – both the economic miracle and social miracle – then in due course people will find it perfectly acceptable to do all that they need to do, in the mainland, from the mainland, through the mainland, and by the mainland. So if China continues to prosper as it has over the last 20 years, that will generate all those things that create a civic order and one would expect then that the international investor would be perfectly relaxed about conducting activities relating to China exclusively from China.

Ed: A recent ALB survey (April issue) found that only 30% of in-house counsel felt they were getting ‘value for money’ from their advisers. How much scope is there for new market entrants to make inroads in this area?
AC: There is always some scope for that. There is a fair amount of activity in HK that does provide opportunities for others to get some work. Creating a unique client service relationship will help generate business. That is the nature of a competitive market economy that HK will always claim it has been and must continue to be.

Ed: Is that to suggest that there are other, more important factors when it comes to keeping a client happy than service levels?
KN: We just pick and choose when to outsource work basically. For example, when things are too heavy and there are too many documents involved. But there’s no set type of work we don’t do in-house.
AC: The continuation of work for a firm is a product of many things – price, service, relationships, personal knowledge, depth and quality, a firm’s internal culture. All sorts of things matter and have an impact. In any one particular matter a single factor may be predominant but in the overall relationship it is the composite that determines things.

Ed: What would you identify as being uniquely ‘Asian’ when it comes to addressing service issues?
KN: London, New York and Hong Kong are very different business environments. If you want to be successful in Hong Kong, you have to be very quick and practical rather than being very academic.
AC: Asia is very much about getting the job done. Doing the deal and being efficient and organised is important everywhere, but particularly in HK, as it does not have a time consuming regulatory framework before you can do anything. Asia, or HK, is all about fast reactions – get the job, get it worked out, documented and done, and move on to the next deal. It’s the ‘hussle hussle’ culture. London is different and New York is different again.

Ed: So is the degree of service level available in HK a necessary victim of the sheer pace of deal making in HK?
KN: Yes, I think that’s fair to say.