(Katerina_Andronchik)

The giant size of legacy Dacheng Law Offices, with nearly 4,000 lawyers working in 43 offices throughout China, propelled Dentons to the ranks of world’s biggest law firms last year, when the Anglo-American firm merged with the Chinese one.

Meanwhile, China’s 130-lawyer Haiwen & Partners has pursued its own expansion plans, albeit at a somewhat slower pace. In April Haiwen opened its third office, in Shenzhen—some 17 years after the Beijing-based firm opened its second office, in Shanghai.

As it happens, both Dacheng and Haiwen were founded in 1992, part of the first wave of Chinese law firms. But Dacheng’s and Haiwan’s divergent development trajectories represent two distinctive models under which Chinese law firms operate.

Legacy Dacheng followed the commission-based model, under which each partner is an individual profit center. Partners pay a percentage of their fees, or commission, to the firm and keep the rest; they typically handle administrative matters like hiring associates themselves. At more loosely organized firms such as Yingke Law Firm, partners might retain 90 to 95 percent of their fees. At firms such as Shanghai-based Duan & Duan, where functions such as marketing and resource sharing are more centralized, that proportion might drop to 75 percent.

This is the model used by most Chinese firms, including both large firms like Yingke Law Firm and Allbright Law Offices and smaller corporate specialists such as Jingtian & Gongcheng and Commerce & Finance. Its appeal to many law firm partners is obvious.

“From partners’ money-making point of view, that system has the highest profit margin,” says Dafei Chen, Han Kun’s representative partner in Hong Kong. “Because you can control your cost and maximize profit.”

By contrast Haiwen follows what’s known in China as the corporation model of law firm partnership. The colloquial term describes a centralized management and operation style under which a law firm pays office rent, employee salaries and other costs, handles administrative matters such as associate hiring and distributes profit to partners.

It’s a model familiar to many law firms in the United States and the United Kingdom. China’s King & Wood Mallesons, JunHe, Fangda Partners and Han Kun Law Offices also operate under this organization.

In terms of revenue per lawyer, corporation-model firms have outperformed their commission-based counterparts. The five firms with the highest RPLs according to our China 25 survey—King & Wood Mallesons (RPL of $509,332)*, Fangda ($350,000), JunHe ($320,721), Han Kun ($266,895) and Llinks ($216,041)—all follow the centralized corporation model. Haiwen declined to comment on its revenues, but based on information provided by one source inside the firm and one outside it, Haiwen’s RPL is similar to that of JunHe or Han Kun.

Commission-based firms tend to have lower RPLs. Zhong Lun Law Firm (RPL of $207,949), Jingtian & Gongcheng ($183,940) and Global Law Offices ($163,895) fall just behind their corporate-model competitors in RPL. But at others, such as legacy Dacheng (RPL of $95,785), Yingke ($33,906), Zhong Yin Law Firm ($42,663) and Duan & Duan ($87,971), RPL failed to break $100,000.

The prevalence of the commission-based model has its roots in the fact that, until 2008 when the Lawyers Law was amended, solo legal practitioners were not allowed in China, says Sida Liu, a professor of sociology and law at the University of Wisconsin-Madison who has studied the Chinese legal profession. If a lawyer took a case, she had to register it with a law firm, Liu says.

Even today, most Chinese lawyers are de facto solo practitioners handling litigation cases, and aside from their official affiliation, individual lawyers get very limited support from their firms, Liu adds. Some don’t even have an office.

But several factors are making the corporation model more attractive.

Under the commission-based system, cross-selling often comes with a referral fee, and partners can find themselves competing with each other for the same clients. This model doesn’t help the firm build its brand.

In a country where private law firms only go back 20 years, major players such as King & Wood Mallesons, JunHe, Fangda, Zhong Lun and Han Kun are still run by founders or first generation partners. Some of these leaders want to build more institutional firms. “These people want to make sure the firm brand they build will sustain once they retire,” says Haiwen managing partner Zhang Jiping.

And increasingly, the market recognizes the power of a legal brand. David Tang was part of an eight-partner team that moved from commission-model Allbright to corporation-model Han Kun last year. He says profit margins at commission-model firms can be 50-60 percent, compared to 40 percent at a corporation-model firm. But at the latter, he says, “you benefit from the firm’s brand reputation and get more work. The cake is bigger—a smaller proportion is not that different.”

Meanwhile, corporate dealmaking requires more lawyers to complete a project. Compared to civil or criminal litigation work, complex transactions such as public takeovers and initial public offerings often need multiple teams across practices to work together, says Liu. “In a decentralized firm, if you want to work with other partners, first you have to negotiate the price,” says Zhang.

In theory, the corporation model will help reduce internal competition and increase collaboration. But whether or not the mechanism really encourages cooperation ultimately boils down to the partner remuneration system.

That’s where things become less clear cut. The corporation-style firms, having been modeled after their Wall Street and Magic Circle counterparts, still mostly shy away from a pure lockstep system. While the centralized operation model is more or less the same, partners can be compensated quite differently even among corporation-style firms. Meanwhile, commission-based firms are maneuvering to strike a balance between partners’ personal gains and firm’s brand building. In part two of this story, we will look at some of the recent attempts from Chinese firms to find a suitable remuneration system.

Email: azhang@alm.com.

*King & Wood Mallesons’ $509,332 RPL is a global average incluidng the Swiss verein’s partnerships in China, Hong Kong, Australia and U.K.