Recent reports of a mixed profit picture for large law firms is a good reminder that strategy and differentiation now matter. 

Last week the Hildebrandt Institute and the Law Firm Group at Citi Private Bank released their 2012 Client Advisory (PDF). I find most striking the “Widening Dispersion of Performance in the Legal Market,” which two charts illustrate: 2001-2007 Profits Per Equity Partner, Compound Annual Growth Rate and 2007-2010 PPEP CAGR. In the earlier period, all but one firm had positive growth and most clustered between 5% and 15% growth. In the more recent period, profits shrank at many firms and growth rates varied widely (from a low of almost -10% to a high of over 20%). AmLaw 100 performance data for 2011, which is trickling out at, confirms the wide range of results.

Firms consequently can no longer take future success for granted. Jordan Furlong notes in a recent post, The Imaginary Normal, that the possibility of failure is the real normal. He points out that the there was nothing “normal” about ever-rising BigLaw rates and profits.

Where does this leave BigLaw? Large firms can either control costs or increase revenues to improve profits.

Cost Control
Some firms, even very profitable ones, have taken bold moves to control costs. The Hildebrandt-Citi report sums this up nicely:

“growing number of firms to move parts of their support and other functions to lower cost locations. Following the earlier examples of Orrick (in Wheeling), Clifford Chance (in India), and Baker & McKenzie and White & Case (in Manila), we have seen WilmerHale opening facilities in Dayton, Pillsbury opening in Nashville, and Allen & Overy and Herbert Smith both opening and expanding facilities in Belfast. [Such centers start with support functions] but they often quickly grow to include a wide variety of other activities, sometimes including litigation support, basic document drafting, and some legal research.”

I expect this trend to continue, as I suggested in my January Law Practice Today article, The Impact of Legal Process Outsourcing (LPO) You Might Not Have Noticed.

Revenue Growth

Revenue growth today is largely a battle for market share. Winning that means differentiating. Lateral hiring to change the mix of practices is one strategy but has risks. Retired Kirkland & Ellis partner Steven J. Harper blogged last week in The Lateral Bubble that firms may face unexpected troubles with so many lateral hires.

Only so many firms can occupy the uppermost niche. I suspect that some 30+ firms think they are in the top 10. Firms with a realistic self-assessment of their market position likely will promote their legal prowess but differentiate in other ways: via their business practices and business models. This likely means more adoption of and public emphasis on process improvement, project management, automation, knowledge management, collaboration systems, and other tools that (1) enable them to deliver more value and (2) objectively differentiate themselves.

The tough news for some law firm partners may be good news for experienced and innovative law firm managers, whose talents will be in higher demand.