The outbreak of the novel coronavirus (COVID-19) pandemic puts a chill on all businesses, globally or locally, big or small. Given their vulnerability to economic conditions and market atmosphere, small and medium enterprises (“SMEs”) are hit hardest. Law firms, especially small and medium sized law firms (“SME law firms”), are no exception to the blow. Such a crisis has exposed and escalated the numerous challenges that are facing law firms in Hong Kong. As the Chinese saying “each family has its own book to read”, while no two firms are the same, the writer believes that there are common questions to ask, and to ask again, during as well as after, the Covid-19 pandemic.
SMEs and SME Law Firms – What Makes us Similar yet Different?
SMEs and SME law firms both make up the very high proportion of businesses in the market. According to government latest statistics, over 98 percent of business establishments in Hong Kong are SMEs (manufacturing businesses that employ fewer than 100 employees and non-manufacturing businesses that employ fewer than 50 employees). For the legal industry, as of 31st January 2020, more than 89 percent of Hong Kong law firms are either sole proprietorship or with only two to five partners.
Yet, as a profession, as distinct from general SMEs, we have well-established rules delineating the conduct and operation of our legal business. From the determination of professional fees, handling of client’s money to our business name cards, conduct our business development plans and so on, we are all under the regulation of Legal Practitioners Ordinance and the various subsidiary legislation, The Solicitors’ Guide to Professional Conduct and so on. SME law firms having to honor their professional obligations may not have the same agility that most SMEs share.
Meanwhile, they both face the same pressure of costly operations and similar challenges to stay afloat in the market. Given our unique context, these challenges are particularly prominent in our legal services market and especially for SME law firms.
The Perpetual Challenges
Space of Operation
Space is a luxury in Hong Kong. Given the high rent in Hong Kong, it is difficult to maintain a very big office. However, our legal profession is highly dependent on paper, documents and human resources. A lot of court and registry filings and hearings are still required to be done by paper which are very space-consuming. There are various rules on record keeping which stipulate the ownership of the papers, document storage and retrieval method and procedure, and require us to retain documents for a range of years for different case types. The fees for document storage are also ever increasing. The fees grow up with the market as well as the quantity of documents accumulated year after year.
Manpower and Work Arrangement Limitations
Costs of human resources and talent retention are also notably high in Hong Kong. Talents – both professional and supporting staff – are the building blocks of our professional service and the high costs of human resources pose great difficulty to our delivery of high quality of service to clients. Rule 4A of the Solicitor’s Practice Rules also mandate minimum supervision and management requirements for all law firms, entailing that our costs are not just monetary but also carry implications over the whole managerial and supervisory structure of our operation. Work-from-home arrangement has considerable practical limitations, especially for SME law firms.
Technology Deficiency due to Limited Resources
The advancing technology constantly puts law firms in a dilemma: to invest or not to invest in it. Off-the-shelf technology is costly and unlike the past market practice which could be bought one-off, many technology related products and services are offered on monthly subscription basis only. This means indefinite investment of resources and limited bargaining power in system upgrade. Doing system migration also involves high opportunity costs as self-developed software takes long time to develop with prolonged investment of time and resources, or otherwise requires considerable resources to keep up with the rapid developments and fast changing needs of the contemporary world. There are also strict rules on confidentiality duty and storage duty on us.
Much as law firms (especially SME law firms) would like to embrace the technological tide, because of the aforesaid, we are often deterred and intimidated by all the uncertainties. We therefore shelve our technology plan indefinitely as a result. Paradoxically, the more we shy away from technology, the more we strain our firms’ resources and time on complicated but yet tedious tasks that could otherwise be more value adding.
Competition in the field of legal services is undoubtedly intense. This holds true locally, cross the border and internationally. Many law firms have their own “main-dish” and in order to be conversant with the worldwide developments, they need to identify, face and tackle their own set of unique internal and external challenges to survive.
When Roof Leaks Meet Lasting Rains – COVID-19 and SME Law Firms’ Challenges
All these challenges have escalated in the COVID-19 pandemic at an unexpected speed, scale and totality.
Our courts have closed for a period that is unprecedented. The issues involved during the closure, the difficulties that were revealed, were of great (if not paramount) concern to our legal profession, and invited us to reconsider, on a higher level, how to uphold our duty as officers of the court and on the more practical level, keep our clients content and ensure steady return of legal fees.
The economic effects of this pandemic are yet to be seen but signs of economic downturn are already appearing. For the past few months, economic activities have slowed down on an obvious scale. During the times of SARS in 2003, unemployment rate rose to 8.7 percent, for the current pandemic, the Government predicted that the rate would be 4-5 percent at the very least. Corporations have started costs controlling measures, rent reduction has also been called for but many landlords are still taking a “wait-and-see” attitude. Our law firms cannot simply stop or drastically reduce the scale of operation in a short period as this affects compliance of professional obligations. All these illustrate the impact and additional challenges posed to law firms especially SME law firms.
No doubt it is hoped by all that the pandemic will be over as soon as possible. However, the problems that law firms (especially those of the SME law firms) have been facing – and aggravated during this period – cannot be reasonably expected to get totally eradicated with COVID-19.
What do all These Mean for our Legal Practice - Rethinking the Path Forward
Obviously it is more than keep reminding ourselves and our staff to wash our hands and maintain best personal hygiene.
The writer submits that there are a few questions to ask first:
- Are we expecting more and more black swan(s)? The forms and facets that people interact in the contemporary world – both online and offline – bring along not just unique opportunities but also problems of such nature, scale and speed that would otherwise not be the case.
- Firms face different issues and challenges at different stages of its development and operation – is it a never-ending (and increasingly harder) fight?
- For firm size, it is not necessarily the bigger the better as it reduces flexibility and agility in meeting increasing challenges of unexpected nature and speed – but there is old wisdom, such as economies of scale, to remember.
- There are increasing success stories of SMEs and micro enterprises – in light of the uniqueness of professional legal services and the Hong Kong market, to what extent is their experience applicable to the Hong Kong legal industry?
Much as the following may have popped up the minds of law firm operators, shall we reconsider them in light of the above questions?
There must always be ways for us to boost and develop our market. We could explore opportunities both within and outside our own jurisdiction offered by different practice models, such as association of firms, limited liability partnerships (LLPs) and mergers, the experience in other jurisdictions in modes such as solicitors corporation and group practice are also worth exploring.
Technology deployment could be a potential way to reduce costs of operation, but balance must be struck between affording better convenience for practice development on one hand, and professional regulation and prevention of abuse on the other. As legal professionals we should overcome the layman fear of using technology, and find better ways to draw on our technology know-how and experience at an affordable cost and apply to our legal practice.
Compliance and Practice Regulation
While it is always easy to abandon some requirements or restrictions and thereby making life easier, the better way may be to afford the same protection to the public with lesser trouble. While appreciating that many of our law firms especially the SME law firms could probably not want to invest resources in compliance audit, revisiting our professional rules and conduct, providing assistance, promoting understanding of the rules thereby facilitating positive compliance with the rules rather than waiting to be picked and scrutinised, may all be ways that we can explore to lessen the burden on our operators in compliance while maintaining the professional standard that we all strive to achieve.
Professional Indemnity Scheme
Since our Professional Indemnity Scheme has been in place, it has afforded much relief for general public and investors, local and overseas alike, in engaging the services of the Hong Kong legal profession. But given the technicality, it may not be readily or easily comprehensible even for our practitioners. Is getting top up professional indemnity coverage an added protection or just putting resources into nowhere? To understand more about the rules and operations of the Scheme is a topic that would never be outdated.
With our professional obligations, the questions of duty to the Court and public interest always come before us. In light of all the challenges that our profession is facing, we should, on a more fundamental level as an industry (before we move on to talk about profession), better equip or strengthen ourselves to face these challenges.
Legal Profession Vis-à-vis Public Sector
We should continue to facilitate the communication and understanding between the legal profession and public sector, by opportunities of actual cooperation between the public sector and private practice practitioners, facilitating and promoting use of legal services in Hong Kong, protecting the public against provision of legal service by unregulated service providers. A sustainable legal professional service market for demands of different nature and scale requires the joint efforts between the legal profession and the public sector.
What law firms (in particular SME law firms) have been undergoing has been persistent over the years. The pandemic merely intensifies and makes them more clearly shown. The challenges may seem perpetual and ever-lasting, but driving on our concerted grit to fight the pandemic, there could always be innovative and small steps that could prove greater achievement in making the Hong Kong legal profession a better one to serve our society and to attract talents.