I was at a conference of “Canadian Law Firm Leaders” outside Toronto earlier this week, and one of the highlights of the event, to my mind, was a talk by a representative of PeerMonitor, ThomsonReuters’ data analytics arm, which compared the recent performance of AmLaw first hundred, AmLaw second hundred, and so-called “mid-size” firms (their nomenclature, but essentially all the firms in their member database which don’t qualify for the AmLaw 200. (The conference was held under the Chatham House Rules, but I view this report as faithful to their precepts since I am not identifying anyone in attendance by name and the PeerMonitor data is publicly available online and outside the confines of the conference.)

What I saw confirmed an instinct I’ve been feeling with increasing force over the past few years, but now we have data evidently in support of my hunch.

My hunch is simple: Mid-size firms are finding it tough going. They’re facing even stronger headwinds than the rest of the industry. (Yes, all the usual caveats apply, primarily that the experience of any given firm will always belie averages and generalizations, but I don’t talk indiscreetly about individual firms, as readers surely must know by now, so we will go with the PeerMonitor average data points.)

The heart of the presentation on this topic displayed information about the relative performance of these three groups of firms in the timeframe 2011—2013 on the following metrics:

  • Cash collections
  • Revenue growth
  • Growth in profits per partner
  • Growth in demand; and lastly
  • A snapshot of 2014 YTD revenue

In tabular and graphic format, here is that data:

TableMidSized

And this:

GraphMidSized

Recall that PeerMonitor data is real data taken straight from client firms’ financial reporting systems and not, ahem, marketing-driven data submitted to popular legal journals without even an affirmation of accuracy behind it, much less a certain future audit. A further methodology note: Their participant base consists of 58 AmLaw 100 firms, 50 AmLaw second hundred, and 51 mid-size, which are represented in the numbers above.

Enough with the data. “To anyone who cares to see,” in the famous phrase, it delivers a stark point about relative performance of these segments, with the AmLaw second hundred seemingly the place to be and mid-size firms bringing up the rear.

But what does it really mean?

For the AmLaw second hundred, I think the story is short and sweet: More and more clients are acting on the sane business judgment that sometimes “good enough is good enough,” and the $450/hour person outside a Top Ten metro area is every bit as competent as the $700/hour person in Big UrbanPlex. Guess which tranche of these three that benefits?

For the AmLaw first hundred, I think the PeerMonitor figures—being averages by definition—mask what last week’s release of the 2013 AmLaw 100 itself shined a spotlight upon: Namely, the AmLaw 100 firms are increasingly made up of the Top 20 (in terms of performance) and everybody else. In other words, when it comes to the AmLaw 100, averages don’t just mislead, they may be lying.

The batting average of a team comprised of Babe Ruth, Ted Williams, Hank Aaron, and six discards from the minor leagues is not .300 in any sense that matters. (Extra credit bonus prediction: Next year the AmLaw will begin to report its results by segment and not by 1—100 as a unitary category. If they don’t do it, I’ll reinterpret the numbers to do it for them.)

For the mid-size firms, it does not mean they are poxed, any more than it means AmLaw second hundred firms can dial in the autopilot. It shows relative headwinds and tailwinds, sunshine and clouds. As I said, the individual experience of any particular firm will vastly outweigh the importance of sectoral averages.

But.

Mid-size firms have been under stress for at least a decade, and I believe longer. Twenty years ago (say) it was simple to visit any metropolitan area in the US of respectable size—from the Bay Area to Seattle, San Diego to Arizona to Colorado, Texas, Chicago, Atlanta, Boston, Philadelphia, Florida, Minneapolis, St. Louis, Detroit, Cleveland, Pittsburgh, Washington, and so on and on, and find mid-size firms with genuinely talented lawyers in relative abundance.

As a managing partner of a global firm at the Canada conference pointedly observed in connection with the PeerMonitor presentation, that is no longer remotely so.

Those firms have by and large ceased to exist, through merger and combination from “above,” as it were, through lateral seepage of talent, and finally through the process of cell mitosis, if you will, splintering into smaller boutiques made up of groups of the original partnership—still talented but no longer “mid-size”).

I won’t remark here on the dynamics of combination with larger firms—gallons of ink (megabytes of pixels) have been spilled on that topic elsewhere—but the splintering into boutiques is worth a word.

Econ 101 teaches that, all else being equal, the less capital it takes to enter an industry, the easier it will be for newcomers to set up new entities and begin to compete. A corollary is that the smaller the “minimum economic scale” required for an entity to compete effectively in XYZ industry, the more new entrants there will be.

Law firms score astronomically high on both measures: They require virtually no capital—zero liquid assets on hand, in fact, if you have even one respectable credit card in your wallet—and even solo practitioners can (I’m not saying will, I’m saying can) earn a living.


A couple of trends have reinforced the lowering of even these door-sill height barriers to entry: First, thanks to the great real estate meltdown, Class A office space is available in many major metropolitan areas for less than it’s cost for years—particularly when you factor in the space available for sublet from major organizations who find they no longer have such a need for all that square footage they’re committed to. Second is simply the phenomenon of cloud computing and all it represents. Not only do you no longer need a rack of servers, you hardly need conventional desktop or laptop PC’s: Chromebooks are increasingly coming into their own in mainstream use, and depending on your personal preferences, a lot of work can get done on tablets.

It’s not just hardware, it’s software and services. Everything from generic data storage space to Microsoft Office “365” to better-and-better voice recognition/transcription services to business accounting software can now be rented monthly or annually with no minimum commitment and no upfront investment. Virtually anything you might want to accomplish in a law office in (say) the year 2000 can now be done for you by a combination of hardware, software, and human beings outside your office which you have no responsibility for maintaining, updating, or employing.

Perhaps the most powerful implication of this new reality is less economic than it is psychological: If you and a few of your closest colleagues want to set up Alpha, Beta, and Gamma LLC, you risk virtually nothing upfront to do so. Why not give it a try and see how it goes? What (literally) have you got to lose?

In this context, some of the periodic decisions law firms must make can take on existential dimensions—and quickly become existential threats.

What are those periodic decisions? Nothing out of the ordinary course. For example:

  • Renewing a long-term office lease, or moving to new long-term space;
  • Renegotiating a bank term loan or line of credit;
  • Being liable for a relatively sudden and relatively large obligation in the form of return-of-capital to exiting and retiring partners;
  • Or even going through an episode of busted merger discussions, which can occasion an unwelcome bout of self-examination as a firm.

Here we see the evil flipside of the virtually nonexistent barriers to entry to creating a new firm: The shocking rapidity with which existing firms can unwind if the reigning psychology suddenly flips from “all for one and one for all’ to something more querulous, myopic, or just plain pessimistic.

Is it any wonder the PeerMonitor numbers show what they do?

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