Is There a Size Limit to Global Firms? The People Have Spoken

Two weeks ago I posed the question, "Is there a natural limit to the size of global law firms?," and I invited you all to vote on various possible answers starting with "No; like global accounting firms and banks, they can grow to the sky," through "Yes; at some point the proliferation of conflicts will become insuperable," and " Yes; it will simply become impossible to manage such complex enterprises," and so forth.

I want to recap the results and offer some thoughts, but first I want to blend this discussion thread with another one that—I was about to say I "launched," but it's actually been more or less in continuous session—is about the analogy, or lack thereof, between the emerging structure of the legal industry, and the structure of the financial services industry. 

In this I am greatly aided by a reader who is something of a student of the banking industry, who writes as follows:

 Although consolidation has begun in the legal industry, there’s not much of it yet and I think it will be very significant if it’s anything like what happened in banking.  I do not know how many firms there are in total in the US now compared to 5, 10 and 15 years ago but I will try to find this out. I know there are about 1 million attorneys.

I know that the banking industry generated about $100 to 120 BILLION in profits in 2005.  I do not know the comparative number for all law firms in the US. Do you?  I know I can calculate it for the top 200 firms and that would probably be close.

I do have some statistics from the banking industry on the number of banks over a 20 year period:

1975                                                          18,769

1984                                                          14,483

1995                                                              9,941

1998                                                              8,817

2000                               8,357

2005                               7,600 

So, in the 30 years from 75 to 05 there was a 60% reduction in banks, and in the 10 years from 95 to 05 there was a reduction of 24%.

When you google “consolidation in the US banking industry”, there are a slew of references but when you google the same thing for the legal profession or law firms, there’s almost nothing.

Anyway, what we saw in the banking industry was what we discussed yesterday: a few major international global consumer players like Citi, HSBC, RBS, some national/regional players like B of A, JPM Chase, Wachovia etc, some large specialists like Goldman Sachs, some local community banks and lots of small specialist boutiques, but very few medium/small banks that can be all things to all people.  What is interesting is that technology spending has been financed by consolidation savings.  The railroads were all going to the same place and they were getting too expensive to run, so they had to eliminate duplicated railroads e.g. Chemical, Chase, Manufacturers Hanover, JP Morgan all consolidated now as JPM Chase and of course now including Bank One to expand the footprint into more states.

This same thing will probably happen in the legal industry.  It's interesting to see on the one hand that a firm like Baker and McKenzie, the largest firm in terms of size is towards the bottom of the AmLaw 100 in terms of profitability per partner. Also, I see M&A activity lower down the ranks of law firms e.g. Bingham McCutchen, one of the firms you directed me to.  I would not be surprised to see firms like this doing “mergers of equals” with other similar sized firms with key competitive advantages and quickly jumping up the ranks. I see these firms eliminating redundancy in overhead, jettisoning under performing partners and investing in state of the art technologies, client service, knowledge management etc. and changing the game entirely.  I don’t understand why this is not happening yet.  Mergers of equals do not cost money. Admittedly, they can be ugly and disruptive but that’s what had to happen in the banking industry.   Those that could not see it or resisted change got eaten.

How many law firms do you think can see this coming?

I told you he had something to contribute to the dialogue.

In terms of his final point—the relative paucity of "mergers of equals"—this is something I plan to write about further, so I shan't pursue it now other than to say that the concept of "equals" is more complex and nuanced in law-firm-land than it perhaps is in banking-land.  One of the very few possible examples I can think of recently is Wilmer-Cutler/Hale & Dorr.

On to the poll!  Here are the results:

Apologies for the scale; permit me to help decode.   Over 150 votes were recorded, with fully 41% (63 total) electing "the proliferation of conflicts will become insuperable."  Only 15 votes (10%) went to "they can grow to the sky."

Interestingly, every other reason but one that I put on offer as creating a ceiling on a global firm's growth received more votes than "they can grow to the sky."   Specifically:

• it will simply become impossible to manage such complex enterprises:  25 votes, or 16%
• differences in profitability between practice  groups will be fatal:  21, or 14%
• differences in profitability across geographies will be fatal:  14, or 9%

I also give you all great credit for optimism:  Only 3% voted for the limit being "only if a firm collapses in a spectacular implosion."  Finley-Kumble, we hardly knew ye.

My own view?  I think the limitation will prove to be the quality of management.  In other words, firms blessed with exceptionally capable management will not face insuperable limits; but they will need, like GE, to have as a core competence the ability to develop and train leaders—and if they're really like GE they'll operate as a law firm management finishing school, generating a surfeit internally, and watching their alumni populate the AmLaw 50.

Conflicts?  I admit this is a tough one.  The key to dealing with is being candid about the firm's global footprint and its potential implications with clients up-front.  And reminding them and reminding them.  No, this isn't a bulletproof solution (there's no such thing), but it will help greatly with the close calls.

Oh, and profitability differences?  Manage them.  They are essentially inevitable, so dealing with them is a fundamental part of your job description at one of these firms.

Now, do we have any nominees for firms that enjoy exceptionally gifted management?