“Growth – real growth – depends on innovation. Oh sure, a big acquisition can inflate a company’s top line, but it’s hardly fair to call this growth; agglomeration would be a better word.” So writes Gary Hamel and Gary Gets in the current issue (July-August 2004) of the Harvard Business Review to open their article, “Funding Growth in an Age of Austerity.” What does this say about large law firm consolidation and future growth prospects?  

This article and much of the issue argue that real growth comes from innovation. Even if a law firm merger works – and it’s unclear how many really do – and revenues grow faster than they otherwise would, that growth presumably comes from a better ability to cross-sell. Such growth probably reflects another firm’s market share loss rather than an increase in market size.

I suspect that recent large law firm growth stems from three factors: (1) increased demand for legal services, for example, new transactions, corporate investigations, or new regulatory requirements; (2) price increases; and (3) a gain in share relative to smaller firms. Lawyers may get lucky and experience continued demand growth stemming from business and legal developments. But growth by acquisition, pricing, and share gains may not continue unabated.

As the HBR points out, real growth ultimately stems from new demand (e.g., low cost flights, MP3 players, Starbucks, or online stock trading), which means innovating and building new businesses, tasks that are very difficult. Innovating in the legal market seems even harder than in other markets, which is why I suspect firms typically focus on combining or adding new practice areas.

Adventurous firms could try starting new businesses. Reasonable targets might be preventive law audits or fixed-price counseling services. I think the goal has to be to tap what Richard Susskind identified as the latent market for legal services, that is, the managers at companies large and small who need legal help but don’t get it. Exploring these opportunities may mean special dispensations, particularly, waiving billable hour targets for a few lawyers.

I am biased of course, but it seems likely to me that any new business opportunity for a law firm will have a big technology component. Whether it’s an Extranet, Web Service, or expert system, I can’t say. But given that law is so information-intensive, it seems likely that technology would be required to support any truly new business.

The challenge here is significant and discussed succinctly in a companion article, What Every CEO Should Know About Creating New Businesses. It’s a “top ten” list of the challenges in innovating. My favorite is “Starting a new business is essentially an experiment.” The author points out that “perfectionist cultures…are in for a rude awakening, since it’s seldom possible to figure product designs or business models fully in advance.” The drive for perfection and fear of failure runs deep in large law firms. Future growth may require confronting and overcoming these.