Is There a Size Limit to Global Firms? The People Have Spoken

Two
weeks ago I posed the question, "Is there a natural
limit to the size of global law firms?," and I invited
you all to vote on various possible answers starting
with "No; like global accounting firms and banks, they
can grow to the sky," through "Yes; at some point the
proliferation of conflicts will become insuperable,"
and " Yes; it will simply become impossible to manage
such complex enterprises," and so forth.

I want to recap the results and offer some thoughts, but
first I want to blend this discussion thread with another
one that—I was about to say I "launched," but it’s
actually been more or less in continuous session—is
about the
analogy, or lack thereof, between the emerging
structure of the legal industry, and the structure of the
financial services industry. 

In this I am greatly aided by a reader who is something
of a student of the banking industry, who writes as follows:

 Although consolidation has begun in the legal industry, there’s not
much of it yet and I think it will be very significant if it’s anything like
what happened in banking.  I do not know how many firms there are in total
in the US now compared to 5, 10 and 15 years ago but I will try to find this
out. I know there are about 1 million attorneys.

I know that the banking
industry generated about $100 to 120 BILLION in profits in 2005.  I do not
know the comparative number for all law firms in the US. Do
you?  I know I can calculate it for the top 200 firms and that would
probably be close.

I do have some
statistics from the banking industry on the number of banks over a 20 year
period:

1975                                                         
18,769

1984                                                         
14,483

1995                                                             
9,941

1998                                                             
8,817

2000                      
        8,357

2005                      
        7,600 

So, in the 30 years
from 75 to 05 there was a 60% reduction in banks, and in the 10
years from 95 to 05 there was a reduction of 24%.

When you google
“consolidation in the US banking industry”, there are a
slew of references but when you google the same thing for the legal profession
or law firms, there’s almost nothing.

Anyway, what we saw in
the banking industry was what we discussed yesterday: a few major international
global consumer players like Citi, HSBC, RBS, some national/regional players
like B of A, JPM Chase, Wachovia etc, some large specialists like Goldman Sachs,
some local community banks and lots of small specialist boutiques, but very few
medium/small banks that can be all things to all people.  What is
interesting is that technology spending has been financed by consolidation
savings.  The railroads were all going to the same place and they were
getting too expensive to run, so they had to eliminate duplicated railroads e.g.
Chemical, Chase, Manufacturers Hanover, JP Morgan all consolidated now as JPM
Chase and of course now including Bank One to expand the footprint into more
states.

This same thing
will probably happen in the legal industry.  It’s interesting
to see on the one hand that a firm like Baker and McKenzie, the
largest firm in terms of size is towards the bottom of the AmLaw 100
in terms of profitability per partner. Also, I see M&A activity
lower down the ranks of law firms e.g. Bingham McCutchen, one of
the firms you directed me to.  I would not be surprised to see
firms like this doing “mergers of equals” with other
similar sized firms with key competitive advantages and quickly
jumping up the ranks. I see these firms eliminating redundancy in
overhead, jettisoning under performing partners and investing in
state of the art technologies, client service, knowledge management
etc. and changing the game entirely.  I don’t understand
why this is not happening yet.  Mergers of equals do not cost
money. Admittedly, they can be ugly and disruptive but that’s
what had to happen in the banking industry.   Those that
could not see it or resisted change got eaten.

How many law firms do
you think can see this coming?

I told you he had something to contribute to the dialogue.

In terms of his final point—the relative paucity
of "mergers of equals"—this is something
I plan to write about further, so I shan’t pursue it
now other than to say that the concept of "equals" is
more complex and nuanced in law-firm-land than it perhaps
is in banking-land.  One of the very few possible
examples I can think of recently is Wilmer-Cutler/Hale
& Dorr.

On to the poll!  Here are the results:

Apologies for the scale; permit me to help
decode.   Over 150 votes were recorded, with
fully 41% (63 total) electing "the proliferation of conflicts
will become insuperable."  Only 15 votes (10%)
went to "they can grow to the sky."

Interestingly, every other reason but one
that I put on offer as creating a ceiling on a
global firm’s growth received more votes
than "they can grow to the sky."   Specifically:

• it will simply become impossible to manage such complex
  enterprises:  25 votes, or 16%
• differences in profitability between practice  groups
  will be fatal:  21, or 14%
• differences in profitability across geographies will
  be fatal:  14, or 9%

I also give you all great credit for optimism:  Only
3% voted for the limit being "only if a firm collapses
in a spectacular implosion."  Finley-Kumble,
we hardly knew ye.

My own view?  I think the limitation will prove
to be the quality of management.  In other words,
firms blessed with exceptionally capable management will not face
insuperable limits; but they will need, like GE, to have
as a core competence the ability to develop and train
leaders—and if they’re really like GE they’ll operate
as a law firm management finishing school, generating
a surfeit internally, and watching their alumni populate
the AmLaw 50.

Conflicts?  I admit this is a tough one.  The
key to dealing with is being candid about the firm’s
global footprint and its potential implications with
clients up-front.  And reminding them and reminding
them.  No, this isn’t a bulletproof solution (there’s
no such thing), but it will help greatly with the close
calls.

Oh, and profitability differences?  Manage them.  They
are essentially inevitable, so dealing with them is a
fundamental part of your job description at one of these
firms.

Now, do we have any nominees for firms that enjoy exceptionally
gifted management?