Legal Business Blogs

Comment: Slashing to victory – the most dangerous law firm myth

‘Turnover for vanity, profit for sanity.’ How many times have you heard that phrase or variations of the theme espoused in the legal industry? A lot since the banking crisis recast the profession.

Commercial firms are forever chasing the grail of higher profitability to the extent of fashioning strategy around the notion of slashing the business to achieve it. People used to forecast consolidation and the dawn of the $10bn law firm – now it is as common for law firm leaders to talk of City-bred institutions getting smaller.

The professed reasons for the doctrine vary, among them striving to focus on what you do best; technology and commoditisation; a focus on premium work; and competing with US rivals. To a point all have merit. Yet what is the evidence for the belief that law firms can continually shrink as a successful strategy or even that such an approach typically leads to high profitability? Legal Business recently took a 20-year view on the winners and losers of the Legal Business 100. Far from indicating that staying small was highly profitable, the figures showed that firms with the knack of prolonged organic growth usually sustained and often improved profitability. Firms in this camp included Watson Farley & Williams, Fieldfisher, Osborne Clarke and Stephenson Harwood. Likewise, the blistering 25-year expansion of the Magic Circle from the late 1980s onwards coincided with dramatic increases in profitability. The strongest post-Lehman performance of the Magic Circle has been Allen & Overy, the only one of its peer group to maintain an expansionary stance.

Take a look at the most upwardly mobile firms in the world’s largest legal market – among them Kirkland & Ellis, Latham & Watkins, Ropes & Gray, Quinn Emanuel Urquhart & Sullivan, Gibson, Dunn & Crutcher – none of them bred in growth-phobic Manhattan – and it is clear that super-growth hardly hurts the bottom line.

Let us add some nuance to this debate. There are most certainly times when it makes sense for law firms to restructure, whether that means closing offices, downscaling practices or the last resort of slashing the partnership. But there is a fundamental difference between a once-a-decade reboot that you then draw a line under and the idea that a firm can perpetually cut. That is why a wave of generally well-handled restructurings at leading London firms worked effectively in 2009 only to be applied with diminishing returns ever since. Law firms are intensely people businesses – it is hard to overstate the importance of partner morale to financial performance. If all you can offer the troops is a war of attrition and struggle, sooner or later they will yearn to work for a firm with a different story… or quit law altogether.

Of course, turnover can be elevated to a pointless and counter-productive goal and appropriate financial aspirations will vary enormously for individual firms by peer group and practice model.

But as a general approach for most firms, the pursuit of healthy, sustained organic growth should, alongside strong financial management, be a far more central goal. The notion that you can retrench to global victory is becoming a dangerous myth at the upper reaches of the legal profession. Far from sanity, the never-ending dash for partner profits above all other considerations is starting to look more like a form of collective madness.