Many big law firms pursue a path of mindless growth through mergers and lateral hiring, but few managing partners seem to question the wisdom of that strategy. Growth for its own sake gets protective cover in false rhetoric about serving clients. But contrary data continue to accumulate on the subject of what clients really want.
Challenging traditional views
Two recent articles ought to send a chill down the spine of big law partners everywhere. The first is a recent article for the Harvard Business Review Blog, “Why the Law Firm Pedigree May Be a Thing of the Past,” by Dina Wang and Firoz Dattu.
As the title suggests, the authors argue that clients are increasingly searching for value and efficiency at the expense of big law firms that rely on their brand alone to attract and retain business at premium rates. Insofar as the authors believe that truly elite law firms may be in mortal danger, I think they overstate their case. The most sophisticated clients with the most complex problems will continue to seek top legal talent. Much of that talent will reside in elite firms that will retain their stature, provided they create environments that appeal to the best young lawyers.
But it’s more difficult to quibble with the authors’ survey of general counsel at 88 major companies. In matters that were high-stakes (but not necessarily bet-the-company), 74 percent were less likely to use an Am Law 20 or Magic Circle firm than a less-pedigreed firm, provided they achieved legal cost savings of at least 30 percent. (The article suggests that the actual cost savings in such situations could exceed 60 percent.)
Follow the money
Now couple that finding with these recent Counsel-Link survey results:
“Among the firms with 201-500 lawyers, referred to as ‘Large Enough’ firms in this report, the share of U.S. legal fees paid by clients has grown from 18% three years ago (July 1, 2009 – June 30, 2010) to 22% in the trailing 12 months that ended June 30, 2013.”
Who’s lunch are the “Large Enough” firms eating? The megafirms’:
“Simultaneously, the share of U.S. legal fees paid by clients with more than 750 lawyers, the ‘Largest 50,’ has gone in the opposite direction — from 26% to 20% over the same period.”
The shift is even more dramatic in higher fee legal work: “‘Large Enough’ firms have almost doubled the share of high fee litigation matters — those matters generating outside counsel fees totaling $1 million or more (High Fee Work). ‘Large Enough’ firms grew their portion of U.S. High Fee Work from 22% three years ago to 41% in the trailing 12 months.”
Disruption as a powerful market force
How are the “Large Enough” firms doing it? Here’s a partial answer: “‘Large Enough’ firms billed nearly twice as much under alternative fee arrangements as did the ‘Largest 50’ firms over the trailing 12 months.”
None of this should come as a surprise. For years, law firm management consultants have been saying that there are no economies of scale in the practice of law once a firm reaches about 100 attorneys. In fact, maintaining the infrastructure to support continuous expansion at the largest firms actually produces diseconomies.
Embedded interests die hard
Firms engaged in aggressive lateral hiring and law firm mergers might be adding top line revenues, but most are also adding disproportionately more costs. According to the 2013 Hildebrandt Consulting Client Advisory, 60 percent of law firm managing partners said (in an anonymous survey) that their lateral hires had been financial successes. If 40 percent are willing to admit to deploying a strategy that is “break even at best,” imagine how worse the reality must be.
Perhaps the accumulating intelligence about clients’ actual desires and the true costs (both financial and cultural) of a growth strategy will cause some managing partners pursuing that strategy to pause. Maybe they’ll reconsider the construction of global behemoths that serve their own egos but little else. Don’t count on it.
The Belly of the Beast 