Global Expansion Junkies:  I have bad news.  Far
too many
law firms seem to enjoy expanding for its own sake,
in an intellectual vacuum devoid of strategic analysis
or rigorous consideration of the implications of growth
in both headcount and geographic footprint.

This is not, I am sad to report, a "glass half-full/half-empty"
story.  It’s more like the strategic consideration
glass is 90% empty.

Why do I say this?  Am I being harsh?

Let’s put together a confluence of recent pieces to
show you why I’m reaching this unhappy conclusion.

First up was The National Law Journal‘s
January 26 piece titled, "U.S.
Firms Making Steady, Selective Global Gains," which
leads with: "Top U.S. law firms are adding a steadily
increasing number of attorneys to
their overseas offices, but most are remaining cautious
about which cities to
choose."  Unfortunately, the assertion that
firms are "cautious" and "choos[y]" goes
almost thoroughly unsupported in the remainder of the
article—with
the exception of a handful of firms that are already
truly global.  The story, in other words, is not
one of "steady" and "selective" global expansion for
"top U.S. law firms" across the board.

Instead, one reads about firms going to London almost
willy-nilly:  "Everyone’s still going to
the U.K.; there’s [sic] over a hundred U.S. firms there
now,"
according to Ward Bower of Altman-Weil.  To find
remarks displaying a slightly more comprehensive reasoning
process behind expansion is to find the exception:  "Spain
is an increasingly important area in the European market," said
John Conroy, the chairman of Baker & McKenzie. "The
level of
activity and its role in the European Union has gained
increased visibility," providing at least a colorable
basis for why they’ve tripled their Madrid headcount
since 2000.

Similarly, Duane
Wall, the managing partner of White & Case, said
the firm is eyeing Spain. "I assume that we will
have [an office] in Madrid,"
Wall said. "We’re looking for the right opportunity."

Second, I direct your attention to an interview with
Guy Morton, newly minted co-senior partner at Freshfields.  He
is doing nothing less than "betting his reputation"
on achieving a game-changing merger with a U.S. firm
during his term:  "I’d count it a personal
failure if the opportunity arises and we let it slip
through our own fault."

This is news.

Not since late 2000, when the news broke that Freshfields
was exploring possibilities with Debevoise & Plimpton,
has there been an indication of such a move.  But
far more important than the news per se—which
of course is anything but a deal, yet—is the
depth and nuance of Morton’s (and his colleagues’)
thinking about the long-term strategic implications
of such a move.  He talks with conviction and
subtlety about:

• the non-negotiable fact that "quality and culture"
  cannot be compromised;
• international clients’ hunger for such a move;
• the implications for Freshfields’ lockstep; and
• the need for congruent financial performance
  between Freshfields and its future fiancé.

Ted Burke, an American who just moved from running
Freshfields’ New York office to "chief executive elect"
in London, has clearly thought hard about the lockstep
issue himself, and calls it "not insurmountable."  Compensation
structures, after all, can be changed; "it’s not so
easy to adapt reputation." 

Both are also
attuned to the reality that the question "But what
about our lockstep?" is at some fundamental level
the wrong focus.

“We’re a collection of people who are really
interested in questions like that,” Morton admits. “But
it’s not the right focus. The right focus is our clients
– making sure we’re refining the services we offer
so that clients want to give us their business.”

Pay heed that under no circumstances can this initiative
be characterized as a case of growth for growth’s sake.  Late
last year, Morton wrote in
a 10-page "manifesto" to the partnership
that “We
face increasing competition from US firms operating
from a highly profitable home market. We should
work towards a substantial US business in our principal
practice areas, if possible through a merger with a
high-quality US firm (emphasis mine).”

Translation: Morton has nicely analyzed the structural
advantage U.S. firms enjoy by virtue of the sheer size
of the U.S. economy compared to the U.K.’s.  (For
the record, the figures confirm this:  Fifty AmLaw
200 firms reported profits per partner of over $1-million
last year, but only 12 firms in the UK 100 reached
that level.)

Now let’s bring out the big guns.

In "Beating the Odds in Market Entry," McKinsey reports that "for
every successful market entry, about four fail"—largely
because of executives’ "cognitive biases."  What
are these biases?

• That the firm’s skills in existing markets are
  more relevant to the new market than they really
  are;
• That the potential market is larger than it is;
  and most tellingly
• That rivals won’t respond to the entry move.

Part of what tempts people into these traps is our
natural tendency to seek confirmation—in other
words, to selectively look for information that confirms
our hypothesis.  The best technique for avoiding
that is to look outside the firm’s four walls: 

"Companies have no reason to repeat the mistakes
of others.  Yet they frequently fail to learn
from history, because a myopic focus on the market
entry decision at hand prevents them from creating
a reference class of…similar entry decisions in the
past."

The "reference class" helps you understand the interaction
of what McKinsey identifies as the six predictors of
success in market entry. I’ll translate them from biz-consultant
speak to law-land vocabulary:

• "Size of entry relative to minimum efficient scale:"  Entering
  below minimum efficient scale and planning to grow
  is an exercise in the triumph of hope over experience.  Example:  Setting
  up a Washington, DC "government affairs" office with
  a single person.
• "Relatedness of the market entered:"  Private
  equity and hedge fund practices are highly related
  to other investment management practices—but
  not to bankruptcy or litigation.
• "Complementary assets:"  You obviously
  cannot hope to enter a new market without the core assets
  required—say, IP expertise if you’re expanding
  into patent prosecutions.  But as important
  are "complementary" assets such as your firms’ reputation
  for being technology-savvy.
• "Order of entry:"  If you just discovered
  private equity, you’re late to the party; but don’t
  take that as a counsel of despair.  There are
  such things, as McKinsey felicitously puts it, as
  "optimistic martyrs," and if your firm has the throw-weight
  to come in as a "powerful follower," you could still
  pull it off.
• "Industry life cycle stage:"  Need
  I remind you how many firms opened up in Silicon
  Valley in 1999 and 2000?  Nuff said.
• "Degree of inside industry knowledge:"  The
  more that success depends on possessing ‘inside’
  industry knowledge, the better for incumbents.  If
  you want to attack a market like this (say, the market
  for lobbying the FDA or the SEC, where former division
  chiefs and staffers are indispensable), be prepared
  for a learning curve.

In my opinion, the most frequently-overlooked aspect
of entering a new market is failing to anticipate what
existing and potential competitors will do; the world
is not a static place. 

Even a competitor as sophisticated
as Anheuser-Busch made this mistake when it diversified
into snacks foods with its Eagle Brand in 1979.  Initially,
it succeeded by staying small and limiting itself to
supplying airlines and taverns.  But when it expanded
into supermarkets, going head-to-head with Frito-Lay,
the competitive counterattack was so fierce Anheuser-Busch
was ultimately forced to sell Eagle to P&G. 

What
does this remind you of?  It reminds me of firms
that acquire expensive lateral practice groups in hotly-contested
markets, only to see them slowly disintegrate or leave
en masse because of unanticipated reactions by rivals. 

So if there are "one hundred" U.S. firms in the U.K.
today, don’t automatically extrapolate that to assume
there will be two hundred down the road.  If McKinsey
has its business  history statistics right, the
right number could be twenty.