“Will there be a future for small and midsize law firms?”, we are often asked.
There seems to be a persistent idea that small and mid-size law firms are in decline and that ultimately only the big law firms will survive. Getting straight to the point: there is no evidence that does support this thesis. So let’s analyze the facts and find out why this rumor is so persistent.
Reading the legal press in various countries one could be forgiven to think that there is no future for the small and mid-size law firms. As far as there is public financial reporting available, it shows significant numbers of small and midsize firms that are not doing too well. At the same time big-law keeps reporting increasing revenue and profit. So maybe bifurcation is a fact?
Let’s start with looking more closely at the numbers. Taken as a group, mid-size and small law firms are indeed outperformed by big-law. Where in the US market the AML100 on average saw an increase in revenue of 5.5% the AML101-200 firms saw a 0,2% decline in revenue. In Germany numbers 1 -50 grew revenue by 7,2% on average as where number 51-100 realized 5,8% growth. The same trend has also been reported in other major jurisdictions.
Some small and mid-size law firms make a lot of money.
More in-depth analysis however shows a different image. Looking at the AML200 three smaller law firms make it into the top-10 as to revenue per lawyer: Irrel & Manella (106 lawyers), Korbe & Kim (92 lawyers) and Coate Hall (162 lawyers) find themselves in the same league as Sullivan & Cromwell and Quin Emanuel and with a RPL between $1,680,000 and $1,454,000 just above Skadden and Cravath. Looking at profitability a similar picture arises: some small and mid-size law firms punch well above their weight.
Some small and mid-size law firms punch well above their weight.
This is very much in line with our experience at TGO Consulting. We know several small and mid-size law firms that are equal or more profitable than some of the national champions. We equally know some big-law firms who are struggling to keep their revenue and profitability. This image holds true in most jurisdictions. Small and mid-size law firms can be tremendously successful and there are no signs that this will change.
The only distinguishing factors are alignment and strategy
After looking at the market in depth like we do, it becomes apparent that the single most decisive factor for success is strategy and the discipline to stick to it. Those firms that have a clear and relevant strategy consistently outperform the market. That strategy could be focused on any segment of the market and any delivery model as long as there is a market that is big enough and the firm does organize its business model accordingly.
Smarter lawyers, better management.
So why are big-law firms on average more successful? This has mainly to do with human talent and alignment. Typically big-law has better management. This is because they have a larger talent pool of smart partners and have the financial means to recruit experienced professional staff and the best outside consultants. Besides management and vision the partners in big-law firms are often better aligned. Due to the large number of partners it is almost impossible for an individual partner to meddle with the management of the firm. Partners focus on clients and matters while management manages the firm.
Firms who are most in need of help are the hardest to help
The opposite is true in many small and mid-size law firms. Few or none of the partners are well equipped for management, there is little or no qualified staff and no money is spend on external assistance. Partners typically are highly opinionated as it comes to management of the firm. Partnership meetings tend to end in no-decision or a compromise. Not all partners share the same vision on where the firm should go. We witness this time after time in our own practice: firms who are most in need of help are the hardest to help.
So size does not matter
The only things that matter as it comes to profitability are strategy and alignment. This has nothing to do with size. This has to do with the ability to define your unique spot in the market and a route to get there. This is one of the reasons why many modern day boutique law firms have become very successful. The partners who have founded the boutique have a shared vision on what their market is and who their clients are. Staring from scratch they have the possibility to organize the whole business accordingly. They know their price point, focus on one segment and manage their costs. Just look at the success stories and a pattern emerges.
What about mergers
Mergers of law firms just for the economies of scale are no recipe for success. Like in any other business more that half of law firm mergers turns out not to be successful. Only if both firms are strategically aligned a merger might pool talent or provide access to another market. It is modern day myth that law firms need to merge just to be able to cover future investments in IT. Yes, law firms will need to invest in technology but not to the extend that they cannot bear the cost. And IT investments should be part of a strategy anyway. So before you do anything else, make sure your firm has a viable strategy asap.