Does size matter so much?

January 7, 2008

There is much talk around the world of consolidation in legal services; the globalisation strategies of some high profile law firms is mimicked by firms in individual countries and across regions seeking to grow through their own merger strategies. But while there is an obvious argument that supports larger full-service law firms with a significant regional footprint, is this the best way for the legal services market to evolve?

I pose the question deliberately knowing that some who have heard me speak before on this subject, particularly advocating change to meet client demand for more services, more depth, more coverage etc, will perhaps think I am contradicting myself.

I have said many times, because I have seen it with my own eyes, that there is a deepening and fast moving trend for corporate clients to reduce the number of different firms they use and to want more from the firms they choose.

But I do not advocate merger as a panacea to meet the demands of such clients – big is not always beautiful.

In my view the evolution of legal services will create change in two distinct and diverging directions; each will drive innovation, each will take advantage of the entrepreneurialism of younger leaders and each will seek strategic alliances in sectors such as publishing and information technology.

On the one hand, size matters and undisputedly so.

One-off mega deals often go to the largest firms, but this aside many corporate clients are setting up their law firm panels not just to provide transactional legal services, but to help manage legal risk across disciplines and across borders. Panels must be vehicles in part for information management and risk management and in part to help train, develop and embed best practice in creative, pre-emptive and pro-active ways.

Clients also know that to demand so much means that law firms will expect long term relationships that are not just profitable but which also carry a predictable expectation of significant volumes of activity as well. This in turn must result in smaller panels, with fewer, larger firms offering great relationship and business development expertise.

In short, therefore, firms of a certain size who aspire to be engaged by such clients must see that merger is their best (only?) opportunity to survive and thrive.

But at the same time, some large corporate clients that are less dependent on legal services, not to mention the huge swathe of smaller clients with less legal work anyway, still want and need great legal services, and they have a different world view.

Their perspective is not to have the management challenge of a fixed panel of uber firms, but to look for something more aligned to their needs – perhaps driven by the complexity and diversity of their activity; or perhaps because their work is ad hoc and unpredictable, or perhaps because in the end they are driven by value more than by vale add.

For these clients the huge beasts of the legal jungle will look over-hyped, over-bearing and clunky. The largest firms that need to roam on a national, regional, even global basis to feed the legions of staff they employ in their cathedrals to the great god of the billable hour, will not have the time or the appetite to deploy their resources for clients who cannot predict volume or even type of activity.

So, in very simplistic terms, we are heading for a significant divergence in law firms strategies:

  • First, those firms who compete for pan-regional, volume predictable activity, seeking clients from whom they can suck great chunks of work and
  • Second, the firms that seek to provide a bespoke legal service, tailored to need, for a reasonable fee.

In the second camp, speciality will be prized, as will value for money as will sector know-how. But this is not going to be a safe haven for the firms who lose out on the merger/growth curve; this alternative route to success is not a default position.

The firms that succeed will be equally entrepreneurial; for example in their recruitment policies, in the way they incentivise and retain staff, in their flexibility to client needs, in the nimbleness and cleverness of their solutions, in their deployment of information technologies and in how they build and sustain brand and reputation.

The losers, and there will be losers, will be the law firms that decide they can “wait and see”, whose strategy is based on hope and not conviction.

In the UK right now many of the best (some also of the biggest) law firms are considering how to respond to the Legal Services Act 2007; a piece of legislation that offers the opportunity for non-lawyer owners in law firms and alternative business structures. For the first time success may be determined not by the quality of the lawyers (although this is obviously still a key component) but the quality of the strategy.

The UK for now might be considered a special case, but the ideas won’t be retained within the UK and the ripple effect of entrepreneurial legal services and the increasing sophistication of the client purchasing decision will drive change across jurisdictions.

To the old certainties (death and taxes) add a third, change. Legal services are going to change – structurally firms will need to move away from the old partnership models to become more adaptable to new opportunities, publishers of legal know-how are going to be as important for many firms as the lawyers they retain; technology, offering new channels of access and delivery, will open new markets…There is so much to consider, and in reality not that much time to get it right

So, does size matter…you bet; it is a clear differentiator and a cogent response to the market trends, but it is not the only strategy in town.

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