When it comes to law firm strategy, there is nothing lawyers like more than non-fee sensitive work. But with the exception of corporate investigations and tax-disputes, this coveted slice of the legal market pie is not much more than a sliver, and everyone wants a bite.
There was a time when most of the AmLaw 100 and even some of the AmLaw 200 were all able to secure a share of the highest value legal work, but that is becoming increasingly difficult — even for well-reputed firms. The reason rests with a new tier of Ultra-Profitable firms. These firms are so profitable that they are able to poach the most talented lawyers from other firms, essentially buying the clients with the highest value legal work. Although it is unlikely this group of 20-25 firms will capture 100 percent of the highest value legal work, they likely will own the majority of it. That will leave the remaining AmLaw 100 firms scrambling for what’s left — a market likely less than half the size than it was even five years ago.
What makes an ultra-profitable firm? The American Lawyer defined this group a couple years ago based on profits per partner. They looked at the Top 50 most profitable firms and found that there was a $1.3 million gap in average profits per partner of the top 25 firms compared to the average profits per partner of the next 25. My company, Legal Vertical Strategies looks at a combination of profits per partner and overall firm profit margins to predict the firms that will most likely make up a new tier of about 20 firms that will dominate the global market of high value legal services.
The impact of the Ultra-Profitables is not limited to high-end legal work alone. The strategy of poaching individual attorneys versus acquiring groups or firms in their entirety is having a trickle-down effect on the entire legal market. The Ultra-Profitables are shaking the AmLaw 100, adding to the destablization of the once monolithic sector known as Big Law. Today, the AmLaw 100 is increasingly fragmented — with four clear tiers of firms emerging. The Ultra-Profitables sit comfortably at the top.
Meanwhile, firms in the tiers below the Ultra-Profitables must make tough decisions when it comes to their top talent. The decision more often than not comes down to money. Firms either risk their top talent walking out the door and taking their most profitable clients with them, or they must compensate them accordingly to get them to stay. This makes money the driving force behind talent management, results in sharp disparities in partner pay and can contribute to the overall decline of law firm culture.
With the market for bet-the-company work saturated, firms outside the Ultra-Profitables must find new sources of revenue.
National firms face competing pressures as Ultra firms cherry-pick their talent. With the exception of non-price sensitive work, which will become increasingly difficult to retain, these firms will work to get bigger but many will have to lower rates or risk losing market share. They will cherry pick talent from the tiers below or combine with other firms. But if their business structure doesn’t change, long-term sustainability will be difficult. We’ve witnessed this with Howrey, Heller Ehrman and Brobeck already.
Regional Firms will continue to struggle to attract and retain high quality talent due to compensation pressures. If they try to be all things to all clients they will struggle to compete with national and global full service firms who offer greater breadth and depth of services and can, if needed, undercut you on price. In the short-term, there will be opportunities to acquire lateral partners from the big firm world that will help strengthen their credibility with larger clients. The challenge will be in ensuring the partners they bring on are productive.
Ultra-Profitables Have No Guarantees
Firms that fall into the Ultra-Profitable category face risks of their own. Look no further than Dewey for evidence of how special contracts to incentivize rainmakers to stay at the firm contributed to its ultimate demise.
Although demand has been flat in recent years, the need for legal services is not going away. Opportunities abound for lawyers to adopt new models for providing their services, and clients are open to these conversations. Done right, getting small can provide you with a competitive advantage over larger firms that lack the flexibility in your ability to adopt technology and legal project management skills that will increase profitability and provide greater client value.
But it will require firms in the lower tiers to rethink the way they are delivering legal services and how they are positioning themselves to compete in the market. Clarify what your firm does that no other firm can offer and use that to differentiate yourself in the market so you can then leverage your lower cost structure and high experience level to compete against large firm rates.