The Implications of Dacheng Dentons: Re-writing the Rules for China

Photo Copyright © 2015 Bloomberg Finance LP

By Peter Zeughauser, Chairman, Zeughauser Group

The combination of Dacheng Dentons into a 6,600 lawyer global behemoth challenges every aspect of conventional Big Law wisdom. If it prospers, it may well re-write the rules for the expansion of western firms into China and give the firm the advantages of first mover status. But there can be no doubt that Dacheng Dentons will also experience growing pains.

From a western perspective, the size of the firm is far beyond what anyone thought possible in a profession constrained by conflict of interest rules like none other. On the other hand, China has a population four times that of the United States, GDP soon to match, and a quarter of the world’s largest cities — the behemoth may actually be right-sized.

What’s most striking about this combination is that it came together barely a wink after the PRC Ministry of Justice published its “General Plan…for Exploring Means and Mechanisms for Closer Business Collaboration between Chinese and Foreign Law Firms.” The General Plan provided for secundment — meaning temporary assignments — of up to three lawyers from a Chinese firm in a foreign firm, or vice-versa, and applied to various new free-trade zones around the country, most notably, Shanghai. The Dacheng Dentons completely leapfrogged these rules.

Dacheng Dentons’ leadership is championing a China-wide “polycentric” global law firm with a fully “harmonized” compensation system that incentivizes putting the best team of lawyers on the field regardless of whether they reside outside China or not. The message is simple: we’re different; let’s skip the new free trade zone experiment and put down roots as an integrated global firm with over 100 offices, some fifty of them in China.

This feat is accomplished in part by using five vereins. Assuming the combined firm succeeds, the mere fact that one law firm can span so many borders, satisfy the restrictions placed on the practice of law by so many regulatory bodies, manage seemingly implausible professional liability risks, not least among them cyber-security, and operate under a common brand, should forever put to rest aspersions cast on the verein structure by the legal media. A firm’s breadth and depth in core markets — defined by geography, practice area, or industry sector — is the greatest driver of brand recognition and favorability; Dacheng Dentons will fully enjoy the growing benefits of being a global law firm. In other words, size matters.

The Dacheng Dentons also puts a new spin on China strategy. Until now, the brass-ring for a Chinese practice has been representing multi-nationals investing in China; and on the other side, representing large Chinese companies, including state-owned enterprises, doing business abroad. Those types of clients merely comprise some of the legacy Dacheng firm’s practice.

The key to this combination is Dacheng’s penetration of China’s vast small and medium sized business sector — this is what distinguished it among the largest Chinese firms. In a mature economy, preeminent national firms likely wouldn’t build the foundation of their client base on this market sector. But if Dentons’ embrace of Dacheng’s client base works, other firms may well rethink their strategy in the Chinese market.

Dacheng Dentons is a bold attempt to step out in front of a rapidly evolving global legal market. It represents one firm’s choice to place its global go-to-market strategy above all other structural and strategic imperatives. In one fell swoop, it has enveloped the globe and the world’s principal legal markets — China, The U.S. and Europe — under a common brand with vast breadth and depth in each geography.

Whatever position Dacheng Dentons ultimately occupies in the global marketplace, however its compensation system is ultimately harmonized, and however well it is ultimately integrated — all of which will take time to evolve — this new behemoth raises the stakes for all comers, and opens the door for more.