Law Firm
Partnership and Benefits Report
November 1997 - Volume 3, Number 10
for Your Firm?
We
still like to believe that bigger is better, and growth for growth=s sake is a good enough reason to expand. In the legal profession, we have seen
patterns of growth where law firms surge forward, then retrench, then surge
again. Never washas
such
growth been as dramatic for law firms as it
was in the 1980s, when the largest firms
topped the 1,000 lawyer mark for the first time and when firms opened satellite
offices in the U.S. and overseas at an astounding rate. At that timeTen years ago,
consultants and lawyers alike predicted that, by the late 1990s, there would be only a
handful of A"mega-firms@ and the rest would be boutiques or small, local
practices.
The
early-1990s,
however, brought the uniformly, widespread growth trend to
a halt, although several of the largest national law firms continued to growth
steadily and new, regional Aplayers@ emerged to challenge the entered the large
firm, multi-office nationals. fray. But aAs the
economy has regained momentum in recent years, many smaller and mid-sized firms
again are wrestling with the issue of growth,. Spurred by hHigher per- capita
administrative burdens. and sStiff
competition from the mega-firms (of which there are many more than the
handful predicted a decade ago) or as well as the
meaner, leaner boutiques. are causing firms to
again consider growth. All too often, however, the arguments made
by firms for expansion still are not well-researched, substantiated or grounded
in economic and market realities.
Examples include:
·
AWe want to be the largest or at least among
the top 3 largest firms in our region.@
·
AOur competitors have grown and opened more
branch offices.@
·
AWell become stagnant if we don=t grow.@
·
AWe need to improve our partner-associate
ratio to provide partner opportunity and profitability.@
·
AWe need to be a full-service firm to compete
and therefore must bring
inhire laterals to fill voids.@
Growth
decisions should not be based on these sorts of rationale, particularly when
they have not been substantiated. While
some key economic factors are driven by size, economies of scale and
efficiencies, many small and mid-sized law firms are highly profitable and, in many cases, more profitable
in profits-per-partner than their gargantuan counterparts. Since growth does not directly correlate to
increased profitability (a criterion that seems to be driving most law firm
decisions these days), firms must be more thoughtful in their decisions
concerning whether to and/or how to grow their firms.
Growth
should be driven by two key elements, one is internal, the other external,
and both are long-term, pro-active and
strategic in nature.
1. A
Collective Vision: The Correct Internal
Criteria
Before
undertaking a detailed financial analysis of the advantages and disadvantages
of expansion, a firm should begin its strategic planning process with the
careful and thoughtful development of a collective vision among the
partners. Many firms skip this process,
deciding that it is too Asoft@ and not able to be substantiated with hard data, that
the partners will never reach agreement, or that it is largely irrelevant.
Law
firms may look a lot alike on the outside, Tto
clients, the general public and even the to lawyers
themselves, law firms may look a
lot alike..
But they
are actually are substantially different from one
another, in terms of their cultures, values
and institutional personalities. Some
firms have maintained a culture rooted in tradition, deeply embedded by the
founding partners. Others
firms have changed their cultures over time as a result of lateral
partners, a Anew generation@ of thinkers or regional market forces.
Before
embarking on a plan of growth, a firm must take a good look at itself and the Awill@ of its partners.
Through a carefully managed process, the partners must explore and
devise a generally acceptable set of common
goals. (rarely
will all goals be unanimous). Factors
that will affect the collective vision also include external elements: Aideal@ clients, competitor threats, desired visibility
and credibility, firm specialties and capabilities, and local
demographics. However, the most important vision factors are
collective, institutional goals. In coming
up with these goals, the firm cannot act in a void, but should consider such
external elements as what it considers the ideal client, who are its chief
competitors, what are its visibility and credibility, what are its specialties
and capabilities, and what are the local demographics.
Then, partners must
individually and collectively answer the following questions:
·
For Wwhat
do we want the firm to be known for?
·
What are our
per-partner profitability goals?
·
What policies are we willing
to criteria must we put into place in order to achieve and monitor
our measure profitability goals?
·
What are our proferssionalprofessional
goals regardingfor
the type of practice we have
and the types of
clientscutting-edge
or cookie-cutter?
·
What are our
institutional and personal limitations with respect to achieving our
goals? What are we not willing
to do or give up?-- For example, autonomy, control,
standardization, accountability, lifestyles?.
·
Do we have the
institutional will, structure and resources to make the choices necessary to
combat market limitations, and competition and to improve income?
2. External Market Factors
Historically,
law firms have engaged in discussions about growth based on largely internal
factors that often are dictated by individual partners, typically the Aheavy hitters@, and not by the collective partnership. Rarely do these discussions culminate in a
shared vision; they more often result from a review of revenues, expenses and
budgets. Growth becomes a perceived
panacea to address the increasingly burdened law firm structure and the lack of
progressive management and innovative client service practices.
Many
firms still aspire to the traditional pyramid structure of the Agolden days@, when high associate to partner ratios of 2:1 or 3:1
resulted in exceptional leverage and profit.
But this traditional mode of growth and client service will be difficult
to effectively replicate. Adding
associates who are at the lower end of the pay scale but still bill out at high
hourly rates may seem to compensate for top-heavy partnerships and provide more
opportunity for senior associates to make partner by building at the
bottom. Unfortunately, clients no
longer want to pay young associates to learn on their dime and often want a
more seasoned lawyer whose hourly rate may be higher but whose experience often
enables him or /her
to address an issue in a few minutes instead of a few days. Increasingly, firms will be outsourcing much
of their legal research and/or hiring more experienced paralegals to
simultaneously satisfy client needs and law firm profit goals.
A
partnerships= profitability goals should be considered when
developing a vision but can only be realized if the clients and prospective
clients are willing to buy the services of the firm where it expects to offer
them. Firms embarking on a growth plan
must first assess key external factors in both existing markets and new service
areas and especially in new potential markets.
External factors to be analyzed might include: competitor strengths and
pricing, client needs, existing service strengths and weaknesses, market
trends, service voids and positioning opportunities. Growth should only
be pursued only
after specific opportunities have been identified in specific markets.
The
Costs of Growth
Growth
can be expensive, financially and emotionally.
At best, it can greatly enhance a firms competitiveness, global reach,
market share and profitability. At
worst, it can break a firm apart or to a lesser degree, create major
dissension, morale problems, defections and be a financial drain. Common Acosts@ of growth include: more administrative bureaucracy,
burdens, and red tape; less collegiality; more cultural clashes among
laterals, branch offices, domestic and foreign; communications problems (of the
human, interactive sort, not technological); more travel; longer hours
(particularly with bi-coastal or international offices);
more client conflicts; and quality of life issues.
To
make a significant commitment to growth, the partners must be personally
committed to the Aexpense@ of doing so.
Some partners will willingly pay the costs to reap what they consider to
be worthwhile benefits. Others will
draw the line. A partnership must
determine its Acollective will@ and vision and then meld it with the market demands
and realities in order to be successful in its growth choices and strategies.