Leader or Laggard? (There's No Such Thing as "Average")

In a piece in this month's American Lawyer titled "Turning Point," Dan DiPietro, the head of the Citigroup Private Bank's Law Firm group, provides quantitative financial support for a theory I've long held, that our industry is not just "consolidating" or "globalizing," but that a fundamental and soon-to-be unbridgeable chasm is opening between firms who are dominant winners and the rest who fail to establish critical mass in terms of either scale or prestige.

First, a recap of Dan's analysis:  It's drawn from Citigroup's ongoing survey of 250 firms, including 91 AmLaw 100 and 65 AmLaw second hundred firms.  Essentially, the survey finds that while "average" revenue, productivity, "inventory" (a/k/a "work in progress," or accounts receivable), and margins, are all showing healthy year over year growth, there's an underlying sense of unease among a significant cohort of managing partners—unease over whether these happy trends are sustainable for their firms. 

What's going on?  This sums it up nicely:

"A look at the trends behind these statistics indicates that such anxiety is not unfounded. It shows that the "average firm" is becoming more and more of a fiction. Since 2001, the range in performance among firms has become wider, with a sizable group of highly successful firms outpacing the rest of the industry, and a smaller, but still significant, group underperforming the average. In other words, although the average firm seems quite healthy, fewer firms today are average."

And when you look at the three primary cohorts of firms represented in the Citigroup survey, you find a direct correlation between size and financial health:

• AmLaw 100 firms
  enjoyed stronger across-the-board revenue growth, as well as productivity gains;
• AmLaw "second hundred" firms, by contrast, saw expenses increasing faster than revenues (decreasing margins) as well as higher growth rates in the ranks of equity-partner; and
• Finally, the non-AmLaw 200 firms relied almost exclusively on improved collection cycles for financial health; this is great so long as you can do it, and at a non-trivial level it's merely sound financial hygiene, but it also falls into a category of developments nicely described in the words of my New Jersey-accented high school physics teacher:   "You can't play dis game fuh-evah."

Other changes are afoot in the industry, primarily driven from the client side.  These include "convergence," a/k/a the DuPont Legal Model, a/k/a cutting the roster of law firms a company relies on, as well as the increasing commoditization and concomitant price sensitivity of certain practice areas.  As Dan drily puts it, clients are both becoming more demanding in terms of service quality and exerting higher price pressure:  "It is unusual for these two factors to happen concurrently." 

If any single number encapsulates the industry's increasing bifurcation, it's this:  Taking the 45 firms out of 153 tracked over the past five years that had profits per partner over $650,000 in 2001:

• The top performers have grown PPP at a compound annual growth rate of 16.2%
• Average performers have a PPP CAGR of 9.6%
• And underperformers scored just 3.3%.

And then there's this, speaking to our dear friend, globalization:

• Top performers had, on average, 18% of their lawyers based outside the US by 2005
• The average performers had 16% abroad
• And the underperformers just 8% abroad.

Here we must especially beware confusing correlation with causation.  If your firm is sub-optimally managed, driving a flag in the ground in London or Brussels or Hong Kong is not going to vaunt you into the top tier; but if you are extremely well-managed, you may be better-positioned to navigate the atypical, unforeseeable, unanticipated, and multi-dimensional challenges of operating internationally on a meaningful scale. 

And indeed, doesn't so much of what we're witnessing in this shockingly fascinating period for our industry boil down to the quality of management?  Or, should I say perhaps more wisely, to the quality of leadership? 

I believe the quality of leadership will, over the next decade or two, increasingly distinguish the high-performance firms from the laggards.   Who within your firm is up to it?