Law firm growth… when is being #1 not very impressive?

by Timothy B. Corcoran on September 16, 2013

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The global law firm DLA has overtaken Baker McKenzie to become the top grossing law firm in the world, according to the AmLaw Daily.  With a record-breaking USD $2.44 billion in top line revenue, an 8.6% increase over the prior year, DLA exceeds Baker’s USD $2.42 billion and 4.6% year over year growth.  Huzzah!  As reported in a breathless account on Bloomberg Law TV, DLA accomplished this feat through savvy branding and differentiation as well as through strategic growth.  But is this accomplishment meaningful to the firm’s two key stakeholder groups, namely its partners and its clients?  Opinions vary.

First let’s unbundle DLA’s growth strategy.  In the Bloomberg interview, Zeughauser Group consultant Kent Zimmerman reports that “DLA was not even around 9 years ago” so becoming the top grossing law firm in such a short period is indeed an impressive feat.  Problem is, that characterization is not entirely true.  Or not at all true, depending on your perspective.  DLA was formed by combining multiple law firms, many of which were considered “large” in their own right and which had respectable rankings on national and international lists.  The most notable of these are Piper Marbury of Baltimore, Rudnick & Wolfe of Chicago, Gray Cary & Ware of San Diego and DLA of London.  Can it really be called strategic growth when 1+1=2?

To draw a bit of an odd analogy, let’s think back to our favorite ‘70s television shows.  bradyRemember when Carol Martin and her three daughters with hair of gold joined with Mike Brady and his three boys to form the Brady Bunch?  What if Mike died in a tragic leisure suit accident and Carol sought another suitable mate.  Now imagine that she married Tom Bradford, the father of eight children in Eight is Enough.  The combined brood of 14 children is no doubt impressive, but it would be a bit of a stretch to laud Carol and Tom for their strategic wisdom in achieving such a large family, at least in part because it’s not clear how the size of the family benefits anyone involved.

Growth through acquisition is no easy feat.  Nonetheless, it’s a common growth strategy in corporations and law firms alike.  But let’s contrast this approach with, say, organic growth, which is defined as growth by increasing output and enhancing sales, and excluding profits or growth from takeovers, acquisitions or mergers.  A highly visible example of impressive organic growth is Apple Computer, which had USD $9.8 billion in revenues in 1996 when Steve Jobs returned to lead the struggling company he had co-founded, and which in 2012 generated USD $157 billion in revenues.  Pop quiz: name two or three acquisitions Apple has made that materially increased its overall revenue.  Too hard?  Then name just one.  Still can’t do it?  Simply put, Apple has innovated its way to success, eschewing the strategy of buying of revenue streams, profitable or otherwise, in lieu of launching new products that the market is eager to purchase.

DLA, as we’ve observed, in part combined its way to success.  But there’s more.  Turning back to the Bloomberg interview once again, Zimmerman reports that DLA used its growing wealth to “acquire talent with large books of business.”  Said another way, DLA recruited lawyers with established and portable clients, and paid these lawyers handsomely to bring their clients and client revenues to the firm.  Again, nothing wrong with this, but can it really be called strategic growth when 1+1+1=3?

What about DLA’s purported investment in branding and differentiation?  According to Acritas, a UK-based consulting firm that provides market research and benchmarking services for top law firms, DLA now ranks in the top 5 among US law firm brands.  It appears the survey methodology relies on “unaided response” – the questions are not multiple choice and the respondent is not prompted – and a high number of unaided responses is generally a good indicator of solid brand strength, though there are certainly more statistically rigorous methodologies.  Let’s turn to Dr. Ann Lee Gibson, trained statistician and advisor to law firms on competitive intelligence and business development, for a bit more context:

“Generally speaking, the larger the firm, the more likely it is that members of your sample will have worked with that firm and will offer its name. Large firms also spin off more in-house counsel and may receive more votes because of their alma mater primacy and status.  It’s also likely that recently newsworthy or notorious firms will come to mind compared to firms not currently in the headlines. “Which firms come to mind?” may produce lists that may have, metaphorically speaking, Miley Cyrus ranking higher than Meryl Streep or Anne Hathaway. It will produce lists that, un-metaphorically speaking, rank Fulbright higher than Wachtell and rank Foley Lardner higher than Davis Polk.”

Does anyone recall that DLA generated a lot of headlines a few months ago?  Does anyone recall why?  Does it matter?  When several hundred general counsel are asked which law firms come to mind, it’s no surprise that DLA ranks highly.

But let’s get right to the heart of the matter: is the distinction as the top grossing law firm good for partners and good for clients?  To address the partners’ perspective, let’s turn to Patrick Fuller, an executive at legal technology provider Content Pilot and previously a management consultant:

“The best way to analyze the financial implications for DLA’s partners is to compare its results to the market.  Has the growth in size and revenue generated greater profits for the shareholders?  Looking back to 2007, DLA generated revenue of just over USD $1 billion, with revenue per lawyer (RPL) of $0.8 million and profits per equity partner (PPeP) of $1.1 million.  In 2013, overall revenue is $2.4 billion, with RPL at $0.6 million and PPeP at $1.3 million. 

DLAThis represents a CAGR (compound annual growth rate) of 15.8% on overall revenue, -3.6% on RPL and 2.65% on PPeP.  Contrast this with the overall AmLaw 50 growth of 4% on overall revenue, 1.9% on RPL and 4.1% on PPeP.

In case your head hurts from so much math, the punch line is this:  Despite enormous growth in revenues, DLA’s profit growth has lagged the market, and in real dollars the equity partners take home, on average, only marginally more than they did before this tremendous growth spurt.  For example, the PPeP for DLA has increased 17% since 2007, while the average AmLaw 50 PPeP has increased 27% over the same period.  Additionally, the RPL for DLA has decreased nearly 20% since 2007, while over the same period, the average AmLaw 50 firm RPL increased 12%.  If one objective of growth through acquisition is to improve financial performance, then growing the numerator and the denominator in roughly equal proportion isn’t particularly effective.  Note that Baker & McKenzie grew profits in the last year by an astounding 9.1% even as it “slipped” to #2 in gross revenue, suggesting that its leaders’ focus isn’t on growing top line revenue, but growing profits.  As Kent Zimmerman reports in the Bloomberg Law interview, Baker accomplished this in large part by focusing on key clients.”

During my tenure as a corporate executive, my teams and I identified numerous acquisition targets and we were also approached regularly by suitors looking to sell their businesses to us.  In one role, my division was extraordinarily profitable – far more than our corporate peers, and far more than even the healthy profit margins enjoyed by large law firms.  As a result, practically any investment we made was dilutive, meaning that if we spent $1 and it didn’t immediately return the usual margin we enjoyed in our base business, our profit margin declined.  As you might imagine, our corporate parent wasn’t fond of profit dilution so the bar was pretty high for us – we couldn’t just add revenue streams, and we couldn’t just add profitable revenue streams.  We could only add profitable revenue streams that maintained our current margins.  Said another way, for us 1+1+1 must equal 6. Or 8.  So we didn’t pull the trigger on too many acquisitions.

In the corporate space growing profit through acquisitions can best be achieved by exploiting synergies.  As I’ve discussed elsewhere, law firm leaders tend to view mergers as an overall growth engine when in fact most result solely in revenue growth.  Profits don’t typically grow substantially after a merger because there are few synergies to exploit when you smash together two organizations, each with large compensation, benefits, real estate and overhead expenses.  Sure, you can eliminate a few redundant staff positions and maybe combine some technology, but these aren’t strategic synergies so much as minor operational savings.

For a law firm to generate strategic synergy, we have to turn to the other key law firm stakeholders, the clients.  As Patrick states above, Baker grew its profit margins. Could this mean it raised its rates while holding the line on expenses?  Possibly, though Zimmerman highlights the firm’s focus on key clients as a catalyst, and we have every reason to believe this is true.  The math supporting key client programs is simple and effective, particularly because it benefits both clients and partners.  Let’s drill into just two factors:  penetration and retention.

Penetration is how I refer to the impact of a law firm’s cross-selling efforts.  A client with high penetration has retained the law firm for multiple matters across a variety of practices in a variety of locations, and there are likely many lawyer-client relationships at all levels.  This reflects a positive match between the client’s needs and the law firm’s ability to understand and address these needs; perhaps it reflects a broad overlap between the firm’s expertise and the client’s business challenges; it possibly reflects a similar geographic footprint.  Without question, a client that becomes so embedded into a firm is a firm client, not an individual rainmaker’s client, and as such the firm can treat the relationship with a long-term view rather than maximizing hours on a short-term basis to satisfy a hungry rainmaker who might leave at any minute.  It’s nearly impossible to achieve high penetration without an organized client team approach, and this requires aligned incentives that go well beyond paying for origination or high billable hours.

Retention refers to the rate at which clients purchase services again and again from a law firm.  Much like penetration, a high retention rate results from deep relationships and a sense of shared purpose.  Of late, long-term relationships have suffered when partners adjust leverage to maintain high billable hours and delegate less to associates, or when billing rates are increased to make up for lower utilization elsewhere.  Clients also factor in predictability, the use of alternative fee arrangements, project management capabilities and other “service” components when creating a quality index.  Clearly, achieving the desired legal outcome is no longer enough.  Law firms that focus on retention rate adjust compensation schemes to reward behavior that provides long-term benefits to the firm.

There are other factors as well, but the key takeaway is that high penetration and high retention reduce the firm’s cost to acquire the next engagement (most firms spend a fortune pursuing new clients and relatively little delighting existing clients).  This focus also allows the firm to incorporate process improvements and project management to drive efficiencies – a must-have in a world where clients increasingly pay less for routine work.  And internally, of course, having stickier clients reduces the firm’s reliance on overpaying for lateral recruits with huge books of business to replace revenues lost from defecting rainmakers.  This is just a glimpse into the math supporting strategic synergy.  But there is much more.

I have no particular opposition to mergers and acquisitions as a growth strategy.  And I have no particular opposition to rankings.  I do, however, believe that equating revenue growth as a de facto demonstration of “success” — particularly when that growth stems primarily from business combinations — is a bit of a stretch.  While the combined Brady Bunch and Eight is Enough family yields sufficient children to field both a baseball team and a basketball team, this is not the same as declaring both teams to be league champions.  That distinction is yet to be earned.

Update: Here are a few additional thoughts to address a number of offline questions. I don’t think most law firm growth stems from ego, or, said another way, from law firm leaders beating their chests and playing one-upmanship with their competitors. I believe most growth stems from either a financial objective or an income-smoothing objective. I’ve addressed the former point above — growing revenue is not the same as growing profit and may generate mixed results — but to the latter point, sustainability across business cycles is a perennial challenge for any business.  Income smoothing, or the desire to maintain a steady profit stream despite uncertain and variable economic conditions, drives organizations to diversify.  The goal is to have one practice group that excels during one business cycle, say M&A during a period of low borrowing rates, favorable tax treatment, and a hassle-free regulatory environment, and another practice group that excels in a counter-cyclical time, say bankruptcy or securities litigation during a period of tight credit and increased regulatory scrutiny.  When one is up, the other is down; when one is down, the other is up.  This approach compels firms to not only build or acquire practices in diverse practices, but across geographies as well, since emerging markets and established economies often operate simultaneously under different business cycles.

A regular topic of debate in business academia is whether an individual company is the right vehicle for portfolio diversification, allowing an investor to buy one security and maintain steady growth despite troubling economic conditions in one or more of the company’s markets, or whether an investor is better off diversifying on his own, buying securities of different, narrowly-focused, companies in such a fashion as to maximize each company’s performance at the peak of its business cycle.  In the legal marketplace, the question is whether a firm is better off focusing intensely on one or two practices that are “hot” and riding the wave and generating maximum profits until the practice dies or is commoditized, and then reinvent itself and find a new focus, or even disband, or whether the partners are better off diversifying across practices so the firm is always generating modest profits.  It’s a simple risk/reward equation.  The question for law firm leaders must be “Does our practice mix and global platform provide a specific and unique benefit that compels our client base to engage our one-stop-shop services?”

Too often firm leaders stop at the feature, not the benefit, or, in other words, many believe it’s self-explanatory that clients will benefit from a diverse practice footprint.  Clients, on the other hand, often lament that a global law firm has few notable synergies:  business knowledge acquired in one practice or in one office is rarely translated to help other firm lawyers get up to speed, so there’s a constant learning curve; most firms have a differential service posture, which often stems from allowing the partners to practice law as they see fit rather than standardize how clients interact with the firm; and many firms present all practices as equally capable when in fact some are world-leading and some are merely mediocre, leaving the client to deduce what services are actually premium in nature.  Global clients are often quite capable of hiring multiple niche provider law firms across geographies to suit their unique needs, so a law firm seeking a global footprint had better know, and be able to clearly articulate, explicitly how its particular mix offers an advantage to the client.  Otherwise, the global law firm is really just a big collection of silo practices sharing a logo and letterhead, as well as sharing diluted earnings.

 

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

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{ 24 comments… read them below or add one }

Gene Rackby December 23, 2013 at 5:17 pm

I accidentally stumbled upon this article and couldn’t help but replying. First of all, trying to discredit the Acritas survey of strongest law firm brands by making an analogy between law firms and pop stars is ridiculous. Miley Cyrus might be ranking higher than Meryl Steep if you ask random people on the streets, but if you ask experts on the field, Meryl Steep would easily outscore Miley Cyrus. The survey was conducted among legal in-house counsellors for billion dollar companies who had (most likely) been working in BigLaw before they went in-house. Unlike you, legal in-house counsellors therefore -know- what firms are viewed as most ‘powerful’ and are definitely able to differentiate between frequent popular headlines and truly valuable content.

Furthermore, PPP is obviously lower at DLA than at, say, Wachtell. DLA has offices all over the U.S. and the rest of the world, thus in places where lawyers are not always able to charge $2,000 / hour. Dividing the total profit by the total number of partners will obviously result in a lower average. Hence DLA, Baker, Jones Day and even Skadden have PPP’s that are a little skewed.

Lastly, merger growth is not as easy and straightforward as you make it appear. Any M&A lawyer, banker or consultant can tell. I agree with you that DLA didn’t go from 0 to 4,000 in 9 years, but claiming the somewhat integrated firm they are today is not impressive, is a little ridiculous.

I rest my case.

John Grimley September 23, 2013 at 8:04 pm

what is “DLA Growth”? DLA is not a law firm. DLA is a brand. A large number of law firms use this brand name. They do not have collective revenue. So which DLA firm is “DLA Growth” referring to?

Timothy B. Corcoran September 23, 2013 at 8:01 pm

Great commentary! To be clear, I did not offer any one metric as ideal, nor did I claim that organic growth is always better than business combinations, and I did not overlook Apple’s many acquisitions. The central theme is to discuss the nature of DLA’s growth. The linked video commentary suggests it was thoughtful organic growth and those who value rankings tend to believe more revenue is better. My goal is to illustrate how these conclusions are not necessarily supported by the facts. As for Apple, I linked to a table of its many acquisitions, as I’m well aware of its history. While some of Apple’s acquisitions were intrinsic to its success, few had notable revenue streams that could be simply bolted on to Apple’s existing revenue to achieve a substantially larger trajectory. In this way, Apple’s acquisitions differ from DLA’s. I believe in, and have pulled the trigger on, both strategic and fill-in acquisitions, and I have generated significant organic growth from both innovation and price increases. Each approach should be considered by thoughtful business owners.

Mike O'Horo September 23, 2013 at 5:06 pm

Stats Jock: I don’t know about “willfully ignored”; “missed” I’ll confess to.

Stats Jock September 23, 2013 at 4:51 pm

Mike O’Horo: You willfully ignored my overall point (and the 47 other acquisitions by Apple). Companies, especially very large and successful companies, hit a threshold where growth through “organic” means alone cannot be sustained. They begin to merge or acquire competitors.

This article holds up Apple as the organic growth ideal. It acquired companies strategically to grow, of which NeXT was one. (And no, I do not consider it an extension of Apple just because of Steve Jobs. Apple fired Steve Jobs, then later acquired Steve Jobs over a decade later when they purchased NeXT). And if you look at the pace of acquisitions by Apple, it accelerates as the company begins to grow. Before 1997 Apple had made only 5 acquisitions, since then 43 (2-3 acquisitions per year on average).

The author challenges his readers, presumably to fail, to name acquisitions by Apple as proof of their “organic” growth. Just because he and his readers cannot name one does not mean his argument is valid. It just indicates a lack of knowledge of his example.

Mary A. Redmond September 23, 2013 at 1:30 pm

Loved the article, Tim. Can’t help but make the comparison to the acquisitions at GE Capital while I was there. Some made great sense and quickly contributed to the bottom line. Others—not so much.

I often found myself competing for a client along with 3-4 other GE Capital Divisions. Talk in the field was that Jack Welch did not care that 4 of us were chasing the same client, what mattered at the end of the day was that GE Capital was at the table when the deal was done.

Profitability of that client relationship was difficult to assess with so many marketing hours invested by so many GE Divisions.

Mike O'Horo September 23, 2013 at 12:10 pm

Stats Jock: Also according to Wikipedia:
“The NeXT Computer (also called the NeXT Computer System) was a workstation computer developed, manufactured, and sold by NeXT Inc., a company founded by Steve Jobs and several other veterans of the Macintosh and Lisa teams, from 1988 until 1990.”

Given its provenance, one could reasonably argue that NeXT is an Apple-developed product.

Stats Jock September 23, 2013 at 11:06 am

I left out another famous “Apple developed” product. Siri was acquired by Apple in 2010.

So, did Apple grow organically or through acquisition?

Stats Jock September 23, 2013 at 10:50 am

Several observations: I find it interesting that everyone, especially the author, focuses on percentage of growth as the ideal metric. If I start my own firm this year (note, it’s almost Q4 of 2013), I should see meteoric growth in revenue in 2014, when I have 4 full quarters of revenue.

To that point, the Axiom story is cute, but unrealistic. 72% CAGR over almost two decades is unrealistic; however 13% CAGR is far more achievable. I’m not saying DLA Piper will achieve 13% over that same time period, but I would wager a lot more money on that happening than Axiom’s growth rate.

As for growth by acquisition, let’s look at the Apple example. They’ve acquired 48 firms since 1988 (Wikipedia). Two of those acquisitions were integral to the iPod and iPhone successes that were pivotal in their growth: NeXT (iOS) and SoundJamMP (iTunes). Furthermore, Apple’s meteoric stock price increase has plummeted. It once traded at over $700 per share just one year ago. Now is hovers in the 400’s.

The Swiss Verein grouse is a bit more valid, but if those are the rules for the list, then anyone not exploiting that loophole is simply complaining.

John Grimley September 19, 2013 at 6:05 pm

to follow up on mergers and lost clients: Swiss Verein’s, when merging – erase long-standing and often lucrative referral relationships in jurisdictions where they’ve adopted new Swiss Verein partners. Ultimately the Swiss Verein model doesn’t work unless sophisticated BD is adopted to make up for the net loss that the Swiss Verein creates.

The Last Honest Lawyer September 17, 2013 at 4:03 pm

And that relatively low profitability, may help explain why there was some extra pressure to “Churn that bill, baby!”

Patrick Lamb September 17, 2013 at 3:49 pm

When this data was first release a few weeks ago, I immediately looked at where DLA stood from a profit standpoint. It’s profitabilty, relative to peers, is poor. So, putting aside the very legitimate points about its legal standing, the ethical issues it faces from sharing profits, andthe 1+1+1=2.5 growth strategy, the fact is that “big for the sake of big” doesn’t amount to jack.

Mike O'Horo September 17, 2013 at 3:14 pm

Good point, Patrick. It also suggests that firms will lose partners who must forfeit clients because the merger resulted in the firm inheriting a much larger client, whose representation conflicts with those partners’ clients. If Patrick Fuller leaves the firm because the merged firm’s $5million client conflicts with (and trumps) his $1.5m client, Patrick may take his whole $8m portfolio down the street. Net loss.

Patrick Fuller September 17, 2013 at 2:35 pm

So many outstanding comments and dialogue already, but I thought I’d weigh in with one additional point. Part of the problem with mergers, period, let alone 3- and 4- way mergers, is that it automatically increases conflicts, which can have an affect on existing clients, but almost always is a significant roadblock for future revenue generation, which puts the onus on law firms to excel at both retaining current levels of work from existing clients as well as expanding the scope of representation with existing clients, which is something many law firms struggle with.

Mike O'Horo September 17, 2013 at 2:03 pm

Since law firms aren’t scalable, I have no trouble believing that any business — set up as a business rather than an aggregation of well-paying jobs — would generate more revenue than the largest law firm. At $2.4B, Baker is a big business, but not on the scale of global corporations, a group in which their geographic footprint would logically include them. Anything that depends for growth on both demand for, and supply of, highly skilled labor has pretty finite organic growth limits, which is why consolidation is so attractive to them.

The Last Honest Lawyer September 17, 2013 at 1:56 pm

As Dr. Beaton has pointed out recently, on their current trajectories, Axiom Law would pass DLA as the largest legal provider in just 5 years. Is it too far of a stretch to see Riverview Law becoming larger than DLA as well, with DLA actually shrinking in size to a much smaller firm providing only high level advice?

Very good point by Mike about the danger of ancillary businesses outcompeting the core business. Aren’t the Riverview’s M&A’s doing exactly that? It’s also interesting that Riverview partnered with DMH Stallard, rather than DLA on those deals.

Mike O'Horo September 17, 2013 at 1:42 pm

Last Honest Lawyer’s comments remind me that law firm ownership of ancillary businesses (and unrelated revenue streams) isn’t new, either. Since the early ’90s, aware firms have created or acquired such entities. Forever, law firms have owned title- and title-insurance companies. In the 1930s some law firms, primarily in Boston, opened trust and investment companies alongside their law practices. They had clients who turned to their lawyers for investment advice and paid them to manage their investments. An informal 2003 survey found that 97 law firms throughout the country were running a total of about 140 ancillary businesses. Now-defunct Howrey had CapAnalysis, which used economic and financial analysis to help in litigation and advocacy, assess mergers, put a value on intellectual property, perform evaluations for insurance recovery and licensing, gauge the liabilities from environmental problems and more. Holland & Knight had a subsidiary that worked with corporations, communities, associations and nonprofits on policy advocacy, public relations and strategic planning.

The question surrounding such hedges is the risk of compromising the integrity of the firm’s core legal advice. In the ’80s, the then-Big Eight accounting firms all had executive recruiting services, until the blowback from placing somebody from a client (even if they didn’t actively recruit the candidate, who approached them), and the underlying discomfiture clients may feel if the advice they get coincidentally feathers one of the firm’s unrelated nests. For those reasons, all the public accounting firms discontinued recruiting services.

This is the problem with firms having so little business experience and acumen. Until 2008, most law firm leaders’ total experience was gained in the artificial environment referred to by AmLaw as the golden age of law firms. That’s not particularly good preparation for the competitive arena that will remain a permanent part of their future.

The Last Honest Lawyer September 17, 2013 at 1:27 pm

The DLA Piper story is very informative in understanding the current BigLaw merger frenzy. Their meteoric rise to No. 1 in the AmLaw Money Grab Rankings has been done largely by gobbling up as many firms as possible in the last decade. This keeps their “brand” at the forefront for clients who traditionally have chosen firms based on brand, equating high revenue with high quality. While that may have some relevance for a closely-knit firm like Cravath, how does a hastily-cobbled mishmash of firms, all brought under a Swiss Verein, making them distinct businesses, qualify as a proxy for quality? Short answer: it doesn’t. You’d have an equally good chance of getting the same quality by throwing a dart at the AmLaw 100 chart.

As Mike notes, the growth by acquisition model is hardly new in the face of competition, and it has worked as best as can be expected in the new normal. Their other less-reported move, a 21 percent ownership stake in Riverview Law, may in hindsight, be more important. Because BigLaw is going to lose badly in the competing on price battle – it already has – as Riverview has demonstrated 30% cost savings on M&A’s. What’s the saying, “if you can’t beat them, join them.” I love to beat up on DLA, but that was one savvy hedge.

John Grimley September 17, 2013 at 11:37 am

By permitting Swiss Vereins to be included in the AmLaw 100 rankings, the rankings have become meaningless as they purport to represent the winner in revenue, yet they don’t represent the winner in revenue. What I find remarkable is – why is sound accounting something one ought to consider rather than dispositive? DLA Piper is not a law firm. It’s a co-branded alliance of independent law firms. As long as legal sector institutions like AmLaw continue to support the perpetuation of a falsehood (eg that a Swiss Verein is one law firm) then no honest debate about anything related to legal sector change can occur in the sectors “public square”. What the legal sector needs is a good dose of objective journalism, which the AmLaw eschews in favor of the adoption of objective falsehoods about what is and is not a law firm. And these falsehoods have profound and negative impact on law firms that are indeed one firm and who therefore lose out in the rankings because they don’t “game” the figures. This could all stop if the editors at AmLaw chose object reporting.

Timothy B. Corcoran September 17, 2013 at 8:33 am

Good comments. I did not address DLA’s underlying business structure, which as John points out is a Swiss Verein rather than a traditional partnership. In essence there are two DLAs – one based in the US; the other outside the US. These two entities share a logo and report on a consolidated basis for the rankings publications, but they otherwise are precluded from sharing profits because they are two distinct businesses. Kalis suggests that the integrity of the rankings is suspect when two distinct entities can “game the system” by simply reporting as if they were one. A fair point, and an additional factor to consider when assessing whether DLA’s new rank as top grossing law firm is indeed an earned achievement or a mathematical one.

John Grimley September 17, 2013 at 3:07 am

The AmLaw 100 rankings do the profession (and consumers of legal services) a disservice by ranking Swiss Vereins as single entities. Peter Kalis’ (Managing Partner of K&L Gates) critique of Swiss Vereins is right on point.

Mike O'Horo September 16, 2013 at 8:05 pm

As always, Tim, great stuff.

If you’re at all aware of business history, it’s easy to see that when a long-protected industry becomes deregulated, or otherwise faces its first real competitive market, two responses are predictable:
1) Price competition
2) Growth by acquisition

We saw this consistently with airlines, banking and telecommunications, to name a few major ones from the past 40 years. (Amazingly, it took airlines 40 years to stumble across the idea of creating relative seat scarcity by cutting back the supply of flights. Without the accident of skyrocketing fuel prices, it’s doubtful they’d have figured it out yet.)

These knee-jerk responses are the product of having no history or experience with marketing (the real one, with a capital M) or sales. During a sustained demand boom, such as law firms experienced for 20 years until 2008, marketing means simply trumpeting one’s capability and availability and catching the attention of buyers who are already buying at prodigious rate in a Seller’s Market. There’s no need to know how to identify specific “product” demand and develop responsive products when you have general demand for all your products, or fret about distribution (marketing and sales), or pricing (cost-plus predominates).

When you face a real competitive environment for the first time, you’re not suddenly going to understand these business concepts and be able to execute them, but you’ve got to do something right now to get business, so you do the only things you know. You discount (however cleverly you think you’ve masked it) or you buy products and revenue streams via acquisition.

Law firms are simply demonstrating the immutability of this evolutionary requirement, and engaging in the predictable strategies and behaviors associated with the early stages of it.

Noah Kovacs September 16, 2013 at 6:01 pm

I agree with most of what you are saying in this article but simply put if you have more revenue and the same profit margin after a merger the amount of $$ you are making in profit is more. Still agreed that simply having the most revenue doesn’t make you number one and that spot is to be earned not acquired.

George Beaton September 16, 2013 at 5:57 pm

Tim, Axiom is the new Apple. Check out this analysis: http://www.beatoncapital.com/2013/09/2018-year-axiom-becomes-worlds-largest-legal-services-firm/. Very good read. Hear, hear, I say.

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