Biglaw, In-House Counsel, Partner Issues, Partner Profits, Shameless Plugs

Proof That 'Bigg & Mediocre' Has No Future

Does the future belong to super-large, global law firms? Not necessarily, according to in-house columnist Mark Herrmann.

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First, two plugs; then, crystal-ball-gazing about a certain breed of law firm. Plug one: Please take a look at “How To Write Articles That Don’t Generate Business.” I amused myself writing it; perhaps you’ll be amused reading it.

Plug two: I’ll be back in the States for a few weeks in June, and I’m taking advantage of that opportunity to give my “book talk” about The Curmudgeon’s Guide to Practicing Law at three “Vault 50” firms. So long as I’ve dusted off the notes to give those three talks, I might as well speak at your firm, too, Please let me know if you’re interested.

Finally, some crystal-ball-gazing: I’ve been picking for years on the fictitious law firm of Bigg & Mediocre. For good reason: To my eye, a fair number of firms have decided that adding more offices and lawyers is the cure to all that ails them and that relentlessly focusing on quality is a failed strategy of the past.

Recent empirical evidence now suggests that I may actually have a point. The Am Law profitability ratings for last year show that the super-rich firms are getting richer, and the run-of-the-mill big firms are doing okay. But one group is getting crushed, seeing substantial decreases in both revenue per lawyer and profits per partner: what Am Law calls “the giant alternatives” or the “vereins.”

My mental category of “big and mediocre” doesn’t match Am Law’s “giant verein” group. To my eye, a few of the global giants have managed to pursue both size and quality. But several have not. (I can’t say publicly which firms I would place in which category, because my employer is the world’s leading insurance broker for law firms, and I can’t go around offending the clients and potential clients. Let me just say that your firm is great. Not just great — stupendous! But the other guy’s firm? Not so much.)

So “big and mediocre” got its clock cleaned last year. I’m predicting that big and mediocre will get its clock increasingly cleaned over time, and within a couple of decades, will suffer the fate of the sundial.

Why?

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Most law firms don’t need to be huge.

You certainly don’t need global reach to handle litigation matters. Litigators aren’t pounding on the managing partner’s door insisting that they have no future if the firm doesn’t open in Dubai. Even the largest cases — the mass torts that consume 50 or 100 full-time lawyers — tend to be concentrated in the United States. If those cases have international tentacles, it’s easy enough to retain local counsel in another country or two.

So, too, for other cases that might seem to create cross-border demand. International arbitrations don’t tend to consume the time of dozens of lawyers (so those cases are not high-leverage, super-high-profit retentions), and international arbitrations don’t typically require a law firm to have offices in cities around the world.

Your firm thus isn’t growing for the sake of the litigators (or litigation clients).

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It must be the corporate guys!

But, no. If you talk to senior partners at law firms — even at firms considering opening offices in new countries — they’ll often admit quietly that they don’t know why they’re pursuing global expansion. (As one managing partner said to me over dinner within the last few months: “Everyone says that we should open in London. But we’ve never actually had a client tell us that we lost business because we didn’t have a London office. And why should we lose that business? If we need corporate lawyers in London, we know lots of good lawyers at London firms, and we work with them all the time.”)

And London is the least of it. What about firms that are opening offices in locations that I couldn’t find on a map? You acquire some little firm of uncertain quality and call it your Nicosia office. Is that good? If one of your partners in New York is then actually retained for a deal that needs a lawyer in Nicosia, your partner is stuck. As corporate partners have often admitted to me over drinks: “It’s easier for me if we don’t have an office in an overseas city where the client needs a lawyer. If we have an office there, I’m forced to recommend our local lawyer for the job. I don’t have any idea whether that guy’s any good, and the client blames me when it turns out he’s not. I’d much rather do deals in cities where we don’t have offices, so the client recommends local counsel, and the client doesn’t blame me if it’s unhappy with the quality of local counsel’s work.”

In an increasingly inter-connected world, one law firm in New York and a different one in Nicosia can work together just as effectively as the lawyers at Bigg & Mediocre, whose brochures proudly announce that they can handle matters in both the Turkish-controlled north and the independent south in Cyprus. It’s quite impressive that you have an office on an island paradise (and sounds as though it would make for a nice vacation), but why should I, a client, care?

But that’s not all! Remember that weak offices can cost you business. I’ve explained before that, at my company, we’ve packaged up certain (U.S. domestic) matters and entered fixed-fee deals for single law firms to handle that work. We’ve also explored the possibility of doing global fixed-fee deals, but our in-house lawyers around the world often object: “That firm’s okay in a couple of European cities, but it’s mighty thin in others. We wouldn’t want to commit to using them everywhere.” Or: “You might be okay using those guys in Europe, but not here in Asia. We’ve used them before, and they were terribly disappointing.”

Maybe you’d be better off without the bad offices that do no more than demonstrate massive geographic reach.

But that’s not all!  As folks who pay far more attention to these issues than I do have noted before, the practice of law does not typically yield economies of scale.  Thus, being bigger does not make you more price-competitive.  In fact, some studies suggest that firms with more offices tend to have lower profits per partner, so it’s possible that geographic expansion actually hurts a law firm’s bottom line. (To paraphrase something I heard over drinks long ago: “The managing partner’s been saying for years that our investment in Asia will pay off any time now. It’s already been more than a decade, and I’ll be retiring soon. When exactly is this supposed to pay off?”)

So you don’t need a network of international offices to handle litigation. You don’t need ’em to handle corporate transactions. They pose political difficulties for your colleagues, can hurt your reputation, and may reduce your profitability.

But that’s not all!

If you’re the best firm in Oshkosh, you may well be the employer of choice for top-notch law students who grew up in Oshkosh and want to return home. It won’t be easy to maintain quality in Oshkosh — because not that many law-student-superstars have personal ties pulling them to the city — but at least you’ll land the very best of the bunch who want to work there.

When Oshkosh’s finest firm opens in New York, look at the recruiting problem the firm has created. Small & Fyne has a great reputation in Oshkosh, and it’s the most attractive firm in the city for new lawyers. But Small & Fyne is unknown in New York, and it’s about fiftieth on the list of firms where new graduates would like to work. (I understand that there’s a glut of lawyers these days. But the powerhouse firms want to hire from the top of the class at the most prestigious law schools, and only a limited supply of those candidates exists.)

So you’ve acquired a New York office. You don’t really know the personal and professional qualities of your new partners. You know that you won’t easily attract the new lawyers that you want. And when the time comes for partnership decisions, your mediocre New York colleagues will tell you that “Jake Barnes is the finest associate we’ve seen in New York for years,” and he should be made a partner, while the partners in Oshkosh who had the misfortune to work with Barnes will tell you that he’s only mediocre by the standards of a high-quality office.

I know that the legal soothsayers say that the business of law is destined to track the business of accounting, and a very few monstrous firms will someday rule the world.

I’m not, however, convinced that’s true. Improved technology makes it easier for firms to collaborate, and massive geographic scope can hurt a firm as much as it helps.

To my eye, the law firm of Bigg & Great will probably survive and prosper. But Bigg & Mediocre is destined to fail.

Mark Herrmann is the Chief Counsel – Litigation and Global Chief Compliance Officer at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law and Inside Straight: Advice About Lawyering, In-House And Out, That Only The Internet Could Provide (affiliate links). You can reach him by email at inhouse@abovethelaw.com.

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