Why is your law firm merging?

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What do you think of when you read the phrase “a large law firm”?

What type of law firm comes into your mind? How many lawyers does it have? In how many jurisdictions is it located? What is its annual turnover? How you answer these questions will vary according to your own market and how that market has shaped your expectations around size.

If, like me, you’re based in Canada, a large law firm generally means an entity with more than 500 lawyers and a substantial presence in four or more major cities. (At least, up until this week it did; but after Fraser Milner Casgrain agreed to join SNR Denton and Norton Rose announced its merger with Fulbright & Jaworski, that definition may be changing — here’s a brief video of my thoughts on those two mergers.) But “a large law firm” will mean something different in India, Australia, the United Kingdom or the United States — and it will vary again as between Delhi and Jaipur, Sydney and Perth, London and Glasgow, New York and Denver.

No matter how you measure size, however, you would probably agree that the world’s biggest firms are behemoths. They employ more than 2,000 lawyers (sometimes many more), they maintain more than 25 offices in numerous countries, and they generate in the neighbourhood of $2 billion in revenue every year. Norton Rose, following the completion of its Fulbright merger next June, will have an astonishing 3,800 lawyers in 55 offices worldwide. These are our profession’s giants, the legal colossi of the globe.

Now, stack the planet’s biggest law firms up against the Big 4 accounting firms. George Beaton of Beaton Consulting in Australia did just that in an article published earlier this fall. Each of these four firms, George pointed out, employs upwards of 100,000 people. The smallest of the four generates $20 billion annually. Each is larger than many of its big clients. If you merged the world’s two largest law firms and gave the new enterprise 5% annual growth, he noted, it would take the new mega-firm 17 years to reach the $10 billion mark. It can be done, and it may very well happen. But it won’t be overnight.

So when we talk about “large law firms,” we need to remember that size is relative. The very last company listed in the most recent Fortune 500 reported annual revenue in the $22 billion range. Our largest law firms are pikers by comparison.

There are plenty of reasons cited to explain why law firms seem to have a natural size limit, most prominently conflicts of interest rules and other ethical or regulatory constraints. Personally, I think that’s an excuse: if we really wanted 50,000-lawyer law firms spanning the globe, we’d have found a way around our self-imposed regulations before now.

The real explanation, to my mind, is that law firms can only grow so large before they transition from “difficult to manage” to “utterly unmanageable.” Law firms of all sizes are unwieldy collections of ferociously independent and self-interested lawyers famously reluctant to place organizational gain above personal advancement. These are character traits, it should go without saying, deeply inimical to building a world-class enterprise.

I once had lunch with a partner in a Big Four accounting firm, and I noticed that he constantly spoke in “we.” He talked first and foremost about the firm’s work and the firm’s objectives, the firm’s future plans, competitive strengths and long-term strategies. His own expertise was important insofar as it contributed to and reinforced what the firm was doing. Contrast that with the way many lawyers usually talk: in the first-person singular. They refer to their law firm not as the strategic core of their work, but as a beneficial platform or vehicle for what they do. The firm’s attributes are important for how they support the lawyer’s personal focus and expertise, rather than the other way around.

That’s why, if you’re looking to build a really huge law firm — whether you go the full merger route or take the Swiss Verein path or choose some other way there — you’re probably going to want to find a way to reduce the importance of lawyers in revenue generation.

Start by asking yourself: why do we want our firm to be bigger? Why do we want to expand? There are plenty of good answers to that question, most of them to do with serving multinational clients, following them around the globe, picking up new business in emerging economies, and so forth. There are also bad answers, including hubris, management ego, and expansion as a substitute for strategy.

But if you’re looking to get bigger so that you can better serve your clients, then maybe, as my Edge colleagues Pam Woldow and Doug Richardson suggest, you should ask your clients what they think about that. Chances are they’ll tell you that they’re not terribly excited by the prospect of their firm getting bigger. Very few people have ever found themselves saying, “Why yes, I’d love to have more lawyers.”

Moreover, as Gerry Riskin and Mike White explain, simply adding lawyers in another city or state or country is no guarantee that a client with business in that jurisdiction will automatically give that business to you. Think about it: if a competitor opened up an office in one of your current locations, would you expect your own clients to instantly decamp to the competition’s new office? Wouldn’t you be shocked and outraged if they did? Then why would you adopt expansion strategies that employ exactly that line of reasoning in the other direction?

Here’s the thing: Growth in a law business is not the same thing as adding more lawyers. Law firms do not exist in order to provide steady employment to the maximum number of lawyers — or, if they ever did, they don’t any longer. Law firms exist to provide legal services to the market in a cost-effective and profitable manner. “Adding more lawyers” is no longer the first and only way to make firms bigger and better.

Technological advances are disrupting many traditional ways in which legal work is done. Automated contract creation, e-discovery packages, data-crunching analysis systems, expert applications that answer regulatory and compliance questions, online dispute systems powered by game theory — all these programs and functionalities are available on the market, right now. They do work that lawyers used to do. Full stop.

Similarly, disruption has come to the legal talent model. If you can get good, solid work from a contract lawyer, or a lawyer in Mumbai or Manila or Belfast, or in an innovative firm like Axiom Law or Keystone Law, or from the lawyer’s own home — and you can — why would you put that lawyer in your expensive offices, on your full-time payroll, with salary and benefits and overhead? What’s so all-fired great about having tons of lawyers on hand?

The answer to that question used to be self-evident: Leverage. Billable hours. Profit generation by the simple expedient of adding bodies to files. Those days, as I’m sure you’ve noticed, are gone. The business rationales that promoted “lawyer growth” as a stand-alone and sufficient profitability strategy are gone.

And lawyers, as I noted above, are often stumbling blocks to growth. Lawyers thrive on being big fish, and the bigger the pond, the smaller and less satisfied they’re going to feel. Lawyers want control over their environments, and as the environment expands, their control lessens. Expansion requires short-term risk for long-term gain, and lawyers tend to dislike both. Lawyers are hard to manage, and thousands of lawyers are thousands of times harder to manage. There’s a pattern emerging here.

“More lawyers in more offices in more locations” is not an end in itself. More revenue, higher efficiency, and greater profit, all delivered courtesy of satisfied clients — that’s the end you have in mind. Mergers and quasi-mergers might well be the perfect vehicle to get you there. But there are other routes, too.

If you want your firm to grow, then you need to clarify exactly, precisely, in show-your-work detail, why that is. And you need to remember that lawyers are no longer the only or best available driver of revenue in law firms. I suggest you take these two thoughts with you into your next law firm strategy meeting.

[This article appears in the Fall 2012 edition of the Edge International Review, a special issue devoted to Swiss Vereins and other innovative growth strategies for law firms.]

Jordan Furlong delivers dynamic and thought-provoking presentations to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.

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One Response to “Why is your law firm merging?”

  1. Lisa Rohrer

    Great article, as usual, Jordan. I completely agree with your notion that bigger does not always mean better. And in fact, as we saw in the case with Dewey, pursuing growth above all else can be a dangerous strategy indeed.

    I’m not sure I completely agree, though, with the suggestion that because lawyers are by nature individualistic, this puts an upward limit on size. In my view, this is more of a cultural issue and less of a personality quirk. On the whole, large law firms have encouraged an individualistic perspective by rewarding individual performance above all else. You can say “teamwork” until you’re blue in the face, but when virtually all incentives are built around individualism, it doesn’t carry much weight. Perhaps I am naive and hopelessly optimistic, but I do believe it’s possible to create a firm and a culture where lawyers work together for the best results for the firm — and the firm will grow and be much more successful because of it. And, dare I say, the lawyers would be happier too.

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