Saturday, January 13, 2007

Categorizing Law Firms

I received an interesting comment on my last law firm post. Let me quote:
From ChinaLawBlog: "I had earlier that day received my first e-mail from the newly formed mega-firm of Kilpatrick Lockhart/Preston Gates. We all thought Preston had done the right thing in going mega. We felt it needed to do that to remain a "big firm." We all agreed with the oft-repeated view that there is not much reason for there to be mid-sized "do everything" firms. But then we started talking about how instead of dividing firms into large, medium, and boutique, maybe the better way to do it is international, regional, and local. We skipped national because most of the national firms (outside of maybe labor law) are also international.) There are many very good law firms in Seattle and Portland that have traditionally been considered large but probably no longer should be, at least in comparision with the Kilptricks of the world. At the same time, calling them medium consigns them to a category that also probably does not make sense. These firms, with 250+ lawyers are really regional firms and I think they can do just fine as that? We even talked about Wachtell, but saw it as somewhat of an anomoly due in large measure to its overwhelming quality and we viewed it as really being more of a very large boutique (ultra high end corporate) than as a big firm. So what do you think about categorizing firms as local, regional, and international? "

This fits with the research I have been doing with colleagues at the Institute for the Study of the Transformation of the State at Bremen University in Germany. Two of us, myself and Pablo Sosa, have been studying the work of law firms. My study has focussed on large law firms, but Pablo's was specifically on medium-sized firms. Both of us have gone to theoretical extremes to justify the differences between them. However, I don't think we achieved our goal. And ChinaLawBlog's comment is the reason. Large, medium and small don't really provide the analytical tools to discuss structures or types of work.

Pablo's study of "medium-sized" firms was based on an ethnography of a law firm in northern Germany. The firm had an interesting profile: it focussed to a large extent on German-Spanish cross-border trade. (Pablo was useful because he was a Spanish speaking, German qualified lawyer.) The firm had created a niche in which it was the leading expert. Yes, it needed a critical mass of lawyers, but not enormous numbers. It also did a range of work from transactions to dispute resolution. Indeed a few of its members were notable international arbitrators. This firm was extremely busy and had decided that it wanted to avoid becoming a megafirm preferring to maintain its particular international practice.

This fits with ChinaLawBlog's taxonomy because it means that size is not the main determinant of a law firm's status, but rather the way a law firm practices law. Is it focusing on domestic or international? We can cross-cut this with particular types of law, eg, labor, trade, intellectual property, tax, and so on. But I think there is one difference we must be aware of: namely, that some domestic markets are bigger than others. The most obvious comparison is between the US and the UK. In my 1996 article on Megalawyering, I argued that UK law firms had to take an international direction because the domestic market is quite small. Whereas in the US it's huge and so the impetus to internationalize/globalize has been attenuated in comparison to the UK. Of course events like the collapse of the Iron Curtain have inevitably drawn American law firms into the former communist bloc.

Let me take this a little further. Although we may argue that size shouldn't be the main determinant, it can't be ignored. Big law firms like Clifford Chance, Skadden, Freshfields are going to get business because they are the law firms they are--big and established. And size may be a critical factor in deciding if a particular transaction should go to such a firm or another. Their competitive advantage may seem unassailable but I believe it's not impregnable.

Big law firms have difficulty with the quality control of their product. What actually distinguishes them from others? These days everybody hires the "best lawyers" so there's not much to distinguish a Magic Circle firm from a second tier firm there. What makes if difficult for big law firms is their inability to retain good associates. These firms' churn rates are awful, somewhere around 30%. That's a lot of good talent to lose each year. Additionally, what makes their situation more parlous is their reluctance to promote lawyers to partnership. This is evidenced by the growing number of de-equitizations and burgeoning of multi-tier partnerships. The "tournament" is getting more and more remote.

So smaller law firms may develop an advantage in being able to offer high-quality services more attuned to clients' needs and more responsive as well. Recall Clifford Chance's faux pas when it announced that its clients should be stratified as international, regional, and national and dealt with accordingly. Many regional and national clients weren't very happy at being relegated to the second and third divisions. Clifford Chance soon dropped that, but it leaves a sour taste in the mouth.

Can we sum this up? Megafirms will continue to have an advantage, but that will accrue to those who already possess that status. For those trying to achieve it, it is going to be a big problem because there will be a suspicion about quality and professionalism. The big institutions, eg, investment banks, have already established their alliances and the barriers to entry for "new incomers" will be high. They will also have to deal with clients' propensity to be risk averse.

Yet law firms that have identified strong market segments that they can prove themselves in will thrive. And with imagination and determination they will be able to leverage themselves into other segments as they need--organic growth rather than forced. Add to this a perspective on the world that embraces globalization as something that is here to stay and that international business is the norm which law firms can't, or shouldn't, ignore. Their clients will lead them into the markets, but also, with an entrepreneurial eye, they will spot areas that should and could become valuable markets. Moreover, these firms will potentially be able to offer better career prospects to their junior lawyers. A megafirm may be good for the resume, but not for life.

This also fits with my critique of bad management. Another commentator, Wabisabi, quoted
"Office politics occurs where there is a lack of strong management, and people have to resort to political manouverings to get things done." This would characterize the two law firms I have worked at. The partners take no action in management as long as they could get away with it. I could cite you horrendous examples. Had there been someone whose entire responsibility is to improve workflow, reduce redundant or unnecessary work etc, the firm could have saved itself from a lot of trouble.
I agree with this and it seems this is more indicative of big law firms than the others I have been discussing. Of course, you can get these attitudes elsewhere, in other types of firms, but then I think the kinds of resource-allocation battles you get in law firms over associates and other key resources push lawyers into a more collaborative mode rather than a combative one because the returns are ultimately better. (See Emmanuel Lazega's excellent analysis, The Collegial Phenomenon: The Social Mechanisms of Cooperation Among Peers in a Corporate Law Partnership (Oxford), which I have reviewed here.)


Wabisabi said...

I left a commment before but Blogger seems to have eaten it up...

Anyway, may I ask you to clarify whether the 30% associate churn out rate you quoted means 30% per year? I think the same figure for Walmart is 50%. Surely those law firms can't be just a little better than Walmart...?

Thank you for your clarification.

Wabisabi said...

Sorry for spamming your blog, but I just compared the directory of my department half a year ago and compared with the directory we have now - the turn-over rate is roughly 20-25%. So it is not inconceivable that the yearly turn-over rate should approach that of Walmart...

John Flood said...

You've found out the truth for yourself in your own firm directory. Allen & Overy, for example, reported 26% turnover for associates last year which is why they started creating a load of new positions which they hoped would satisfy associates. I am not, however, convinced.

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