A new report by The Center for the Study of the Legal Profession at Georgetown Law and Thomson Reuters Peer Monitor reports on the current state of the large law firm market in the USA and questions the choice of many large law firms to make growth their strategy.
- The dominant law firm strategy today is trying to grow by merger or lateral hiring. The report questions whether growth is the right strategy.
2013 FINANCIAL UPDATE
- Demand was flat again in 2013: “on the whole the financial performance of the U.S. legal market remained fairly lackluster during the year.”
- Annual billable hours per lawyer from 2008 through 2013 have been 100 hour lower than the pre-recession level.
- Hourly rates in 2013 were up 3.5% (versus 7% typical pre-recession) but the realization rate remained low, at 83.5%, down slightly from 2012.
- Expenses were up a bit in 2013; firms are still compensating for the “panicked” reductions in 2009-10.
- Taken together, these factors mean profits per partner have been relatively flat for the last 3 years, with just a modest uptick in 2013.
- Flat performance reflects that “the legal market has become much more intensely competitive than it was five years ago.” The new order is that firms must compete for market share.
- Clients drive for value”. That means “efficiency, predictability, and cost effectiveness in the delivery of legal services, quality being assumed”. So they now specify how matters are scheduled, organized and staffed.
- This has resulted in clients moving work from (A) law firms to inhouse lawyers and (B) pedigreed” firms (AmLaw 20 and Magic Circle) to “non-pedigreed” ones.
QUESTIONING GROWTH AS A STRATEGY
- The report questions whether firms can really recognize the scale economies they say they seek by growing. A statistical analysis of profitability and firm size finds little correlation. This finding supports the argument that whatever scale economies exist can probably be achieved at a relatively small size, perhaps as low as 100 lawyers. [RF: I personally would have guessed it is closer to 500.]
- In fact, the opposite may be true: bigger firms may suffer from dis-economies of scale. Managing offices in multiple countries requires much expense “to achieve uniformity in quality and service delivery and to meet the expectations of clients.”
- Trying to grow “masks…the continuing failure of most firms to focus on strategic issues that are more important for their long-term success than the number of lawyers or offices they may have.”
THE RIGHT STRATEGIC FOCUS
- Firms should instead focus on how they organize, price, and deliver service. Yet only a few firms do so.
- Promoting growth, however, is “more politically palatable” than seeking to change how lawyers actually work. Yet with potentially disruptive forces looming, a re-think is key.
- “For most firms, in other words, the goal should be not to “build a bigger boat” but rather to build a better one.”