General Practice, Solo & Small Firm
DivisionMagazine
VOLUME 19, NUMBER 2 MARCH 2002
PRACTICE MANAGEMENT
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).
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