Is bigger really better?
Remember the Airbus A380? It is the world’s largest passenger airplane. A humongous double-decker with a wingspan of 80 meters and a max take-off weight of 570.000 kg. The A380 has a maximum seat capacity of 853. The first plane was delivered in 2007, the last one in 2021. It certainly has not been the commercial success that everyone envisioned when setting off on its 30 billion Euro development.
Obviously the aviation industry and the legal industry are not comparable in any way. What both have in common is the paradigm that bigger must surely be better. Perhaps even more than any other industry, law firms can become obsessed with the scale of numbers. For many law firms size equals success. The bigger the firm, the more successful it must be, right? Well, in reality probably not. Let’s analyze the merits of size and while we’re at it, dismantle some myths along the way.
The metrics of size
On a basic level the required size of a law firm will depend on whether it is a full service firm or a boutique, and on having a national or an international practice. Boutiques that strongly focus on one practice area or industry do not need to be sizable to serve their clients and be commercially successful. Around the world there are numerous examples of extremely profitable high-end boutiques that are less than 100 lawyers in total.
High-end full service firms would by nature need to be bigger than the boutiques. For a full-service firm, the engine is typically the Corporate/M&A practice that will need to have a certain size in order to handle multiple complex transactions at the same time.
M&A is considered the ‘engine’ since transactions typically generate a lot of spin-off for other practice areas such as Competition, Finance, Employment, and so on. In order to deliver the required level of service, each of these departments also has to meet certain minimum size requirements.
If the firm is aiming at the top-bracket in their market, there are however not only minimum size requirements, but equally, maximum size-limits for each practice group. Allow me to illustrate this with the example of Employment as a practice group. Any full-service elite firm outside New York and London, would probably need about 2 employment partners with a team to service their transactional needs.
As it is unlikely that the Employment practice will get 100% of their work through M&A, they will also have to find employment clients of their own. The problem is that in most markets there simply is not enough high-end employment matters around, so the Employment team will feel forced to accept mid-market work which does not fit the firm’s strategy and for which it will be extremely hard to charge the normal hourly-rates. Not to mention that on top of that conflicts with potential M&A clients will further limit their market.
While there is, depending on the strategy and on the market, always a minimum size for a full-service elite law firm, there also pretty soon is a maximum size, after which the average quality of the practice will decline. Too many partners for the amount of strategic mandates, will inevitably increase the volume of less profitable plain vanilla work.
When practice groups become too large they will feel forced to take on lower quality work to meet their targets. This will in the end increase the profitability gap between the leading successful practices and the rest. This will over time result in a ‘two-speed’ firm, where part of the partners is highly successful and the others are structurally trailing behind. No need highlighting that this on the long run will create tensions.
Economies of scale
The past two decades have been the heydays of law firm mergers. Merging was not just fashionable, it was generally considered the ‘silver bullet’. Many firms that had a weak performance merged with another firm that often also had a weak performance, resulting in one bigger firm that still had a weak performance. Merging rarely is the solution to a fundamental problem.
Law firms also seek to merge for other reasons like entering into a new market. Take for example the UK magic circle firms looking for a foothold in the lucrative US market, or the mergers between UK and Australian firms hoping for a lucrative piece of the Chinese market. Both endeavors did not work out as planned.
Undeniably also some of these mergers have been a great success. In 1999 Allen & Overy set up shop in the Netherlands by grabbing the 35 best partners of the renowned Dutch law firm Loeff Claeys Verbeke, which then ceased to exist. A&O almost instantly became a top-player in the Netherlands.
It is not only hope and despair that drive law firm mergers. Increasing the power to invest in technology or marketing have also become motives. And there’s the FOMO category: fear of missing out. Others are merging, they must have a clever plan, so our firm should also merge because bigger is better.
The downside of size
When a law firm becomes too large for the market they are in, the average quality of the partners and the mandates will go down. The spread between partners and between practice groups will grow, and there will be a high risk of becoming a two-speed firm.
Also with every expansion of the partner group, the firm will become harder to manage. Beyond a certain size, partners do not really know each other, which will hinder strategic collaboration, team spirit and firm culture.
Above a certain size, partners will become more focused on their own interests and even less on the firm’s interests. Partners feeling the pressure to perform will increasingly feel frustrated by conflicts of interest that prevent them from taking certain clients.
Last April, Dentons, a global giant with more than 10.000 lawyers, lost a $32 million malpractice law suit as the court rejected their claim that their Swiss Verein structure would allow them to serve conflicting interest as long as the clients were in different countries that were technically independent. The court did not buy that.
Two weeks ago, at the end of May, it transpired that global accounting giant Ernst & Young is weighing a historic separation of EY’s audit and advisory businesses after years of criticism over perceived conflicts of interest between the two. Auditors are tasked with holding companies’ management to account and resisting pressure to sign off on numbers without proper evidence while their advisory colleagues prefer to keep clients sweet to generate fees in areas such as tax, deals and consulting.
The main message in this article is that law firms would be well advised to stop pursuing size for the sake of it. In the end profitability is more important than revenue, and strategic focus and a high-trust close-knit partnership have more value than having the highest number of partners. TGO Consulting would be happy to assist you in determining what would be the optimum size for your firm, your market and your ambitions. Why not schedule a meeting to explore?