The American Lawyer reports on a mistaken and dangerous belief pervading the current U.S. legal market: that it is consolidating as larger firms grow more quickly than the market by taking share from their smaller rivals. However, an in-depth analysis of Am Law data over the last 20 years reveals that in fact consolidation is not happening. Rather, worldwide revenue growth from larger firms expanding overseas has been mistaken for consolidation of market share.
In Am Law’s latest article, Debunking the Consolidation Myth, the authors argue that the mistaken perception of consolidation has driven firms to bulk up—by merging, acquiring and hiring laterally—to avoid being at a competitive disadvantage. Such moves are high-risk, disruptive distractions for leaders whose attention is better focused elsewhere. Despite the intense effort involved, they create no strategic advantage. Wise partner groups and firm leaders will see past the prevailing dogma and focus instead on optimizing the performance of organically growing businesses, (as quoted in The American Lawyer).
In a tightly argued analysis, the authors conclude that “Consolidation is not happening. The imperative for law firms to grow is groundless. Smaller firms that don’t expand internationally are not losing share; in fact, they’ve gained share through the Great Recession. The data could not be clearer. And yet we know that this simple truth will be ignored. Facts are an ineffective counterweight to long-held belief. It’s too bad. Running a U.S.-centered, organically growing law firm well is a strategy with enormous validity and tremendous potential for strong profit growth.”
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Big law firms have always been pathologically conservative in updating their policies, but has this mentality begun to affect their overall profitability? The American Lawyer recently released an article investigating whether large firms’ aging partners, who often control a majority of the client base, habitually put their self-interests above the firm’s longevity—to the point that the partners’ “short-term gains could become the institution’s long-run catastrophe.”
The New York Times released a statistic in their Dealbook stating that nearly half (46 percent) of all managing partners are between 60 and 70 years old, with only 3 percent under age 50. And, according to The American Lawyer, these partners are hoarding their clients with an “eat what they kill” mentality–which, AmLaw argues, makes the eventual succession of new partners that much more difficult.
Interestingly enough, this problem does not go unnoticed at the big law firms. A 2011 survey by Altman Weil found that 47 percent of firm leaders identified the “retirement and succession of baby boom lawyers in their firms” as their greatest concern. Yet, in Altman Weil’s 2013 survey, “only 27 percent of managing partners reported that they had a formal succession planning process.”
The American Lawyer concludes that aging partners should work to “encourage long-term institutional stability,” through prioritizing client service, encouraging partner cooperation, helping partners prepare for their “second acts,” and encouraging them to sacrifice some self-interest for the long-term betterment of the firm.
However, while Big Law partners should certainly concerned be about the futures of both their firms and themselves, many big law firms are already feeling the heat from their stagnated approach. In 2013, a study of over $10 billion in client fee invoices by LexisNexis/Counsel Link found that mid-sized firms (termed “large enough” firms, of 201-500 lawyers) are quickly grabbing the market share from biggest firms (those with 750+ attorneys). In fact, the study found, while big law firms saw a drop in their market share from 2010 to 2013, ‘large enough’ firms successfully grew theirs from 18 to 22 percent.
So, while the biggest firms continue to turn a blind eye to future strategy, it’s safe to conclude that their mid-sized competitors are eagerly seizing the opportunity to thrive.
Innovative strategies are necessary for continued firm growth in the corporate legal market, according to a recent article from The American Lawyer. William Henderson and Evan Parker report that due to decades of organic growth, when law firms simply grew with their clients, the “supply of capable outside counsel [now] exceeds demand,” requiring firms to consider a new, focused approach for future expansion.
They posit that the Am Law 200 firms are now forced to grow solely by taking the market share. Henderson and Parker believe that focus is key to successfully doing so, quoting the approach that Apple’s Steve Jobs took of “starting with the customer experience and working backwards to the technology.” They encourage law firms to act similarly by exploring their particular niche and studying their existing clients in order to effectively take the market share.
The article also broke down market size by practice area, and found that “the largest market is the one most synonymous with large-firm practice: antitrust, corporate, securities, finance, and insurance”–essentially, the commercial world.
Henderson and Parker use the $15 billion labor and employment market as a case study to illustrate Jobs’ focused approach, attributing the L&E firms success to “working backwards from the needs of the client” in order to build “an ark that won’t sink.”