General Practice, Solo & Small Firm DivisionMagazine
VOLUME 19, NUMBER 2 MARCH 2002
How the Mid-Sized Survive
Survey Shows a Path for Smaller Law Firms Amid the Giants
By Carol M. Sánchez and Patrick E. Mears
We investigated what actions mid-sized U.S. law firms are taking to compete in the rapidly changing legal services industry. For our study, we defined the mid-sized law firm as having 25 to 250 lawyers.
Mid-sized law firms are facing several challenges that have intensified in the last five to 10 years, such as multidisciplinary practice, globalization, and the increased size of large law firms.
Multidisciplinary practice groups (MDPs), such as the Big Five accounting firms, have their own legal staffs and offer all types of professional business services to clients, including accounting, tax, and legal advice. MDPs market themselves to their large corporate clients as a place for "one-stop shopping." Mid-sized firms are wary of MDPs because their clients may hire an MDP and thereby deprive the mid-sized firm of lucrative work.
The continued integration of the global economy has stimulated law firms to expand worldwide. The increasing importance of the European Union as a new source of pan-European or "federal" law and the adoption of the Euro as a common currency have spurred many firms to open offices in Brussels, Frankfurt, and other centers of European commerce. The collapse of the Soviet Union and dismantling of the Iron Curtain have opened up new fields for firms attracted to Eastern Europe and Russia by the privatization of former state enterprises. The growth of certain Asian economies and the opening of the People's Republic of China have created additional incentives for firms to establish overseas offices.
These offices are no longer outposts staffed by two or three legal professionals. They now have many lawyers on staff and offer a broad range of legal services to home-country clients and local businesses. As businesses expand across national borders, management may conclude that its mid-sized law firm is incapable of handling international legal matters and opt to hire a "global" firm.
A related challenge is the geometrical increase in the size of large law firms nationwide. Mid-sized law firms lose clients to these large, multinational firms because the clients are acquired by companies or the firms are perceived by their clients as inadequate to service their more sophisticated and complex legal needs. Law firms most often merge with other firms in order to gain access to new geographic markets or to acquire skills in new practice areas. Within the last five years, the legal-services industry experienced an explosion of law firm mergers across national borders. As the pace of globalization increases, this cross-border merger trend should accelerate, and mid-sized firms may become acquisition targets.
What strategies can lead mid-sized law firms to superior performance? David Maister suggests that professional service firms must achieve three goals to survive: client service, employee satisfaction, and financial success. Client service involves selecting the type of work that will be done based on the skills that are required. Employee satisfaction requires meeting the professional member's expectation that he or she is joining the firm to make a career. Financial success means generating sufficient revenues at a low cost for distribution to equity and nonequity members of the firm. Leverage-the ratio of junior, middle-level, and senior professionals in the organization-connects the three goals and must be appropriately balanced.
Based on Maister's ideas, we proposed that successful mid-sized law firms would have three key strategic challenges or objectives: identify and market the firm's core competencies, manage the firm's knowledge and culture, and continually improve profitability.
We surveyed equity members of 250 mid-sized U.S. law firms. Thirty firms returned a completed survey to us, representing 20 states in all regions of the United States. According to the lawyers, the most important challenges facing mid-sized law firms are people issues, the creation of a positive firm culture, the need to establish and market core competencies, and profitability and compensation issues. Firms are meeting those challenges in the following ways: integrating lawyers and creating a more positive culture; using technology, marketing, advertising, public relations, and customer service to leverage core competencies; and increasing rates, curbing expenditures, changing compensation systems, and considering a merger to increase profitability.
Five of the firms experienced a merger in the past five years. Among the reasons for the mergers were to obtain new expertise, open a branch office in a growing area, attain the support of a larger firm, and increase the depth and breadth of the practice. Principal challenges of the merger included increasing space to accommodate new staff, integrating the merged firms, overcoming geographic distances, and updating/integrating technology systems. The 25 firms that did not merge cited the following reasons: adverse economic consequences; the cultures would not have integrated well; the firm was already profitable; and a lack of agreement on compensation, retirement, and overhead obligations. Lessons learned included the importance of having a common culture for a merger to function; the reality that without the merger the firm is still quite profitable; and the importance of addressing compensation, discipline, and partner profitability issues before merging.
The survey results generally supported our predictions. The challenges that most concern mid-sized law firms are establishing and marketing the firm's uniqueness, hiring and keeping good lawyers, and creating a strong firm culture.
Identifying and marketing the firm's core competencies requires a firm to review what it does best, and deliver services in a unique and inimitable way. A mid-sized law firm may diversify to offer a broad range of services to its clients to keep pace with services provided by larger firms, or it may use a focus strategy and niche the limited range of services it performs at a superior level. To have location advantages, mid-sized law firms may seek regional representation within the state or within their region of the state. Firms often try to increase their visibility before potential corporate clients in the state in order to attract business. Firms are increasing their technology investments to help in the provision of legal services and to promote services within the market. Increased competition with traditional large firms, newly merged organizations, and multidisciplinary practices require the mid-sized firm to identify what it does best and exactly what it can provide to customers in the legal service marketplace.
Managing the firm's explicit and tacit knowledge begins with effective recruitment of lawyers. This involves intensifying relationships with local law schools; providing competitive compensation to new associates; and offering a package of benefits that includes flexible scheduling, continuous training and development, and sabbaticals. Perhaps more important, strategic knowledge management involves the firm's ability to allow individuals to demonstrate their expertise and ensure that their abilities are widely recognized and appreciated. Knowledge management is more than the use of technology to capture a lawyer's clients and contacts into a database. Strategic knowledge management is a socialization process that could result in shared models of collaboration and technical know-how.
The third challenge, to continually improve profitability, requires a firm to consistently monitor and evaluate its costs of doing business. This includes managing overhead, current expenditures, fixed costs, compensation for new associates, and the firm's billing practices.
One striking revelation emerged. Although firm culture and people concerns dominate the thinking of the leaders of mid-sized law firms, consultants hired by those firms addressed these concerns least. Perhaps consultants are better versed in the "harder" issues of how to develop and promote core competencies and how to maximize profitability, and less experienced in the "softer" issues of how a firm can create a culture that is conducive to innovation, lawyer development, and performance. Firms seeking the advice of consultants should ask the consulting firm whether it has expertise in matters of firm culture and staff development.
Carol M. Sánchez is an associate professor of management at the Seidman School of Business, Grand Valley State University, Grand Rapids, Michigan. Patrick E. Mears is a senior member at Dykema Gossett, PLLC, in Grand Rapids.
This article is an abridged and edited version of one that originally appeared on page 45 of Business Law Today, September/October 2001 (11:1).