How many times do you hear lawyers roll out the line about mergers having to be two-plus-two-makes-five? True in many regards. Getting bigger doesn’t make you better or necessarily solve structural and strategic issues and mergers are hard to pull off effectively.
But when it comes down to it, this truism has become pretty misleading in Law Firm Land 2013.
Because scale does indeed matter in law, all things being equal. Bigger firms have the economies of scale – and these advantages are only getting more important given the continual shift towards smaller and more process-driven panels.
Scale also gives a diversification benefit as law firms are surprisingly prone to annual volatility in revenues (why, I have never entirely worked out). Size also makes it easier to project the brand, fund investment and attack new markets and commercial opportunities.
And, ultimately, the equation for law firm leaders has changed on this point over the last five years. Consolidation in law was much predicted during the 2000s but largely refused to turn up, either globally or in the UK.
But since the banking crisis gripped the market in 2009 – something fundamentally shifted in the legal industry, triggering a run of mergers. The latest to hit the market, SJ Berwin’s apparently impending union with King & Wood Mallesons, is only the latest significant development. As we address in this month’s examination of the aspiring national firms typified by DWF, the rules have changed.
This decade is already looking more like the 1990s in heralding a period of upheaval, consolidation and fluidity in the profession than the comparatively staid 2000s. Hierarchies are shifting, winners and losers are emerging and risks being taken.
We are rapidly approaching the point where the price of having a sustainable practice with any pretension towards a national reputation and a plc client base is a £100m annual turnover.
Those operating on a smaller scale can be viable but they will have to carve out clear market positions and, in their chosen area of focus, be better than larger rivals. Or at least better value. If that’s you, fine. If not, I’d rethink the status quo.
Put it another way – law firms still focus on profits per equity partner to an excessive degree. The most important indicator of success in a turbulent market isn’t PEP, it’s your ability to grow the top line (allowing for normal caveats about not butchering your margins or moving into strategically duff product lines).
That’s not to say law firms should rush into misaligned mergers or that bulking up can inject excellence and focus where there has been only mediocrity and drift. But in a rapidly changing market – where the wait-and-see option is less viable – scale can be its own reward.
alex.novarese@legalease.co.uk