What Are the Prospects for Mid-Size Firms – and What Does Mid-Size Mean Anyway?

Posted on September 17, 2013 by Sterling

The Executive Committee of an AmLaw 200 firm (aspiring to become an AmLaw 100 firm) raised the following question. “(We’re at) an awkward size (roughly 500+ lawyers)…what should a mid-size firm like ours do (strategically)?” Given their aspirations, the answer was to keep growing and become a ‘big’ law firm. They certainly would not be the first to follow that road and some have realized their aspirations. For instance:

At the time of their merger in 1999, Piper Marbury was a 400 lawyer “Baltimore law firm” with most of its lawyers located outside money centers and Rudnick & Wolfe was a 350 lawyer “Chicago real estate powerhouse” with no New York presence at all. According to the American Lawyer DLA Piper is now the world’s largest law firm, with over 4,200 lawyers in 30 cities worldwide.

Similarly, at the time Elliot Portnoy became chairman of the Firm in 2007, Sonnenschein, Nath & Rosenthal was a 600 lawyer “Chicago-based law firm,” with less than 20% of its people in New York. Since declaring its intention to become leading global law firm, Sonnenschein scooped up over 100 lawyers from the disintegrating Thatcher Proffitt & Wood in New York, merged with UK law firm Denton Wilde Sapte, and simultaneously merged in international firm Salans and Canadian firm Fraiser Milner Casgrain. Dentons now has over 2,600 lawyers in 80 offices across 50 countries.

“Moving up market” (as some like to term the strategy) is certainly not impossible. But, the conversation with that aspiring AmLaw 200 firm raises a couple of pointed questions. Is a 500-600 lawyer firm actually “mid-sized?” And, is growth the only winning strategy for mid-size firms that intend to survive and prosper into future generations?

What is a Mid-Sized Firm Anyway?

Let’s deal with that first question – is a 500+ attorney firm mid-size? Sure, if your frame of reference is the AmLaw 50 or 100, then an AmLaw 200 firm is mid-size. That is especially true if your firm aspires to being part of ‘BigLaw.’ To generalize the point, defining what mid-size is depends largely on what you are comparing it to (e.g., an elephant is mid-size next to a brontosaurus).

That said, for many, many firms ‘mid-size’ is better defined in the context of nearby (i.e., local and regional competitors). In other words, mid-size is a function of your size relative to other firms/offices in your primary (or only) city. Firms that are mid-sized by that definition tend to share some common traits.

They tend to be general service firms (since “full service” is unattainable at any size) focused mainly on the legal needs of business clients and their owners.
They have a number (perhaps a majority) of clients who are classic middle market companies – and that means that legal costs are paid out of the owner/CEO’s pocket (if it isn’t insured risk).
They have people and/or practices that are the absolute best in the local/regional market in their areas of expertise.
They have at some point (perhaps frequently) been approached by another law firm (probably a larger law firm) interested in merging.

Is the only (or even the most logical) strategy to say ‘yes’ to merger overtures and/or launch a search for suitable merger partners with whom to grow aggressively?

Winning Strategies for Mid-Size Law Firms

So, is aggressive, merger fueled growth the best/most logical/only strategy for mid-size firms? After all the demise of the mid-size firm has been predicted for at least 25 years. Our answer: it is certainly not the only strategy, but it really depends on what your firm aspires to become. We addressed that broader question in a recent article regarding strategic direction.

Mid-size firms can adopt a compelling strategic direction that does not include substantial growth. Assuming there is widespread agreement among the partners regarding that direction (whatever it might be), there are a few things that you can (in fact should) do to turn that into a winning strategy.

Focus on a Few Things that Can Create a Competitive Advantage

Focusing a a few things that create competitive advantages requires a firm to do at least two things. First, honestly assess what the firm is (or can become) truly great at doing – strengths that can become the epicenter of genuine excellence that cuts across the firm. Second, get external validation that being great at those things is meaningful in the marketplace. Focus on a handful of things you are great at (or can become great at) that also have meaning in the market.

A basic SWOT assessment (strengths, weaknesses, opportunities and threats) can highlight your areas of strength (actual and latent). If you are not good at looking objectively at yourself, a good consultant can help.

External validation can and should come from your clients. Your best clients want you to succeed into the future – they almost certainly consider your partners to be among their most trusted advisers. So, ask your clients what you are good at and what you can do better. It will inform your strategy and improve your relationships to boot. It is amazing how few firms do this in any systematic way.

Think Strategically

What does that mean, to think strategically? Well at a minimum, think about competitive advantage (those areas you might focus your energies on) through three lenses.

Consider whether you enjoy size or scale advantages over competitors – or more likely face larger competitors who have size advantages with which you must cope. Large firms do have deeper pockets (or at least more equity partner pockets) over which to spread marketing, technology and other shared costs.
Identify factors that may help you to defend your firm’s market position against competitors (even much larger, better financed competitors). It may be your knowledge of the local courts and judges, your reputation and brand may have deep roots in the community, you may have very deep and broad relationships with clients. Consider how you can capitalize on and solidify those defensive advantages.
Finally and most importantly, take an indirect approach – occupy the unoccupied market positions and be willing to do things differently from competitors. Precedent is a horrible source of strategy – don’t do what others are doing, do things no one else is doing.

Implement – Do What You Say You Are Going to Do

We have written extensively on implementation – through the balanced scorecard and through other means as well. Successful implementation involves:

Cascading strategy implementation throughout the organization – from firm level initiatives to practice and departmental level activities to a vital and meaningful roles in implementation for all of the firm’s people (partners, associates and staff);
Measuring and monitoring implementation and the results it is producing – reinvesting in and celebrating the things that are working;
Adjusting as implementation unfolds – abandoning or recalibrating initiatives that are clearly not producing expected results and responding to new market challenges and opportunities as they arise.

In sum, if you think you are mid-size, you probably are – it is entirely a function of your perspective on the competitive marketplace. Being mid-size is not equivalent to being diagnosed with a fatal disease. You are free to reject the label and seek to grow – others have done so with remarkable success. But, you can also adopt other winning strategies by focusing on few sources of competitive advantage, thinking strategically, and implementing with discipline.

As always, we welcome your comments and insights below, via email at info@sterlingstrat.com, and via phone at (312) 543-6616.

Top Insights from 2012 Strategy Questions of the Month

Posted on January 11, 2013 by Sterling

Throughout the course of 2012, Sterling Strategies conducted monthly mini-surveys, each focused on a single strategy topic. The intent was to develop some empirical data on what works and what does not work relative to a variety of strategic management challenges.

We certainly learned something every month. Often the findings and insights were entirely new (if not entirely counter-intuitive). Occasionally, the findings confirmed something we believed, but lacked the data to support.

Before setting our sights on advancing the state of strategic management in 2013, we thought readers might enjoy a highlight reel of sorts of the most significant findings from the 2012 strategy question of the month series. The list is presented as a “top ten,” but the insights are ordered for readability and flow.

Grow your own – When developing a strategy for generational succession, it is best to develop people yourself (rather than seeking to hire future leaders laterally). Our November 2012 survey found that “high lifer” firms (i.e., firms with higher percentages of people who were hired at the entry-level and stayed) have dramatically higher confidence that future leaders exist within every experience level of their firm.
Confront the elephant under the rug – The August 2012 survey focused on what approaches to managing under performing partners actually work and which do not. What we found was that under performance rarely improves without frank discussion and accountability. More importantly, confronting under performance actually has a reasonable success rate.
Show me (more than just) the money – What characteristics make up a “model partner?” That was our question in July 2012 and what we found was that, while originations and billings are very important characteristics in a model partner, subjective factors (e.g., training associates, bringing legal acumen to the table, being a good corporate citizen) comprise nearly 50% of the mix of characteristics firms want from the hypothetical ideal partner.
See no evil, hear no evil, speak no evil (at least when it comes to partner compensation) – Our inaugural survey in January 2012 examined the question of what approaches to setting partner compensation lead to the highest levels of satisfaction. It turns out, objective (i.e., formula) systems correlate with the highest levels of satisfaction. And, so-called “closed systems” in which compensation and other data are not published are also closely correlated with higher satisfaction.
The “vision thing” is a key to effective strategic planning – We took an objective look at what tools and approaches lead to more effective strategic planning in law firms (beyond, obviously, hiring Sterling Strategies) in June 2012. The firms with the most effective strategic planning processes are much more likely to have articulated a vision for the future, a set of shared values, and measurable objectives to track progress toward achieving major goals and strategies.
Focus practice group leaders on things that make a real difference in group performance – Firms with the most effective practice group management experiences are much more likely to ask practice groups to focus on cross-marketing, on profit drivers for their respective group, and on aligning practice strategy with firm-level strategy. Meanwhile, the least effective groups get bogged down in administrivia.
Better budgeting practices – Firms with the most effective budgeting processes are more likely to plan for growth (in addition to looking for cost savings). And, the more effective budgeting processes are considerably more likely to involve practice group leaders in the budget development process.
2012 profit growth was driven by production and realization improvements – The bloom was clearly off the rose relative to using rate increases to drive profit growth (unlike the decade before the financial crisis). Bonus question – is leverage dead? On the surface the answer would appear to be ‘yes,’ but the reality is that leverage is wearing new disguises (e.g., more income partners, larger top-to-bottom compensation differentials, growing use of contract attorneys, etc.).
Data, data, data (if you hope to be successful with AFAs) – Alternative fee arrangements are growing across a number of categories. Law firm leaders were emphatic in noting that the key to success with AFAs is well analyzed data (both cost data and historical work load data).
Practice portfolios are driving domestic law firm mergers – Allowing for alignment of fundamentals (e.g., firm cultures and economic compatibility), the most important driver of mergers these days is finding a merger partner with complimentary practice area strengths.

As a bonus (since many may have missed it with the crush of year-end collections and the holidays), see our December 2012 findings regarding the use of objective measures and scorecards in law firms. Short summary – firms are universally good or excellent at measuring financial objectives and results, but do a poor job measuring the strength of client relationships, people development, or much of anything else related to their operations.

We are immensely grateful to the many, many law firm leaders who completed the short (usually two-minute) strategy surveys throughout 2012. That input enabled us to build a nice body of empirical data regarding a number of important strategic management topics. It was helpful for law firm managers – and to us as strategy consultants. We intend to take a slightly different approach in 2013 (shooting for five-minute surveys on a quarterly basis). That will reduce the number of times we have to pester you all for input over the course of the year. In place of some of the monthly surveys, we will share insights and proven approaches gained directly via other channels.

Best wishes for a very healthy and prosperous 2013.

Survey Results – Strategic Growth – April 2012 Strategy Question of the Month

Posted on April 29, 2012 by Sterling

Our April 2012 strategy question of the month focuses on strategic growth. The latest Am Law 100 found that headcount growth has resumed across the largest firms in the U.S. Further, those tracking law firm mergers found that activity in 2011 (i.e., competed mergers) had returned to pre-recessionary levels.

We wanted to get a sense for how integral mergers and acquisitions are to law firms’ growth strategies. So, we asked a very direct question, “Does your firm plan (hope) to complete at least one merger and/or acquisition by the close of 2013 that would grow headcount more than five percent from a single combination?” Those answering ‘yes’ were asked to rate the relative importance of a range of factors they consider when evaluating potential merger candidates. Those answering ‘no’ were asked to share the considerations that led their firm to opt out of merger and acquisition activities.

MERGERS AND ACQUISITIONS AS A GROWTH STRATEGY

The survey split almost 50/50 relative to whether firms plan (hope) to complete a combination that will add more than five percent to their headcount. Slightly less than 50% said that strategic combinations (of at least the scale noted here) are definitely part of their strategy. Meanwhile, just over half the respondents noted that they do not expect to complete a combination of reasonable scale over the next 18 months.

FACTORS DRIVING THE EVALUATION OF STRATEGIC COMBINATIONS

Factors driving the evaluation of prospective merger and acquisition candidates break-down into a few categories. First, there are a couple of factors that appear to be foundation – that is, factors that are not so much a driver for seeking merger partners, but that a lack thereof will squelch discussions with prospective merger candidates. Second, are factors that are clearly strategic to an overwhelming majority of the firms actively evaluating merger candidates. Third, are factors that are strategic for many, but not for a significant minority of firms seeking a strategic combination.

Foundational Factors
Cultural fit appears to be an unquestioned foundational factor – over 96% considering it to be an important or critically important factor (and over 60% rating it critically important). Similarly, the ability of a combination to deliver long term financial improvement appears to be a foundational factor – again, over 96% consider long term financial contributions to be important on some level (though only 46% rate it critically important).

Practice Portfolio Considerations – Most Strategically Important Factor
Over 90% of the firms actively seeking strategic combinations are looking (at least in part) for a merger partner that can close gaps in their own firm’s practice portfolio or capabilities (i.e., rate it important or critically important). In fact, as an evaluation factor for prospective merger partners, it rates nearly as highly as the foundational factors. We have written extensively on strategies related to managing practice portfolios – most recently in our book for the Managing Partner magazine bookstore. We will likely provide an abridged discussion here on the blog in early May 2012.

Geographic Considerations – a Mixed Bag
Adding size and scale to existing offices is an important strategic consideration – a geographic factor that figures into the strategy of roughly three-quarters of responding law firms. By contrast, adding a presence in a new city is important to many firms seeking a strategic combination, but not on the level of ensuring “critical mass” in existing offices.

Client Considerations – Clearly Important, But Not Universal
A very strong majority (over three-quarters) of firms do expect a strategic combination to add important client relationships that their firm currently lacks. Likewise, a large majority of firms noted that their evaluation of prospective merger candidates in part “responds directly to the stated needs of existing clients.” Stated client needs are not as universal a driver as closing portfolio gaps – or even as adding important new relationships – yet, it is clearly an important consideration.

High Profile People – Important, But Not Critical
Firms clearly want a strategic combination to add high profile people to their firm. However, it is not a critically important factor (only eight percent of firms consider the addition of high profile people to be “critically important”).

Growing Maturity
Finally, we were pleased to see an indication of growing maturity among those looking for strategic combinations. Specifically, a large majority of firms are not looking for a near term positive financial impact from mergers and acquisitions – over two-thirds of respondents consider near term finances to be either not a factor or only a minor factor. Had that question been asked 10 years ago, the responses may have been quite different.

OPTING OUT OF STRATEGIC COMBINATIONS

Most of those responding that they were not planning (or hoping) to make a substantial strategic combination of the next 18 months were kind enough to share their reasoning and rationale for opting out of merger activity. We have grouped those open-ended responses into the following points.

Nearly half of those not actively seeking a strategic combination noted that they are actively growing via smaller scale initiatives such as lateral hiring, smaller acquisitions (that would not meet the “five percent headcount growth” cut-off in the initial question), or via “strategic organic growth.”
Many noted – often in thoughtful and thought-provoking terms – that growth via mergers and acquisitions runs counter to their well-considered strategies (e.g., commitment to a “boutique” strategy, a “focused model,” or a solid existing market position).
Several respondents (roughly a quarter of those not actively pursuing a strategic combination) said that they remain open to discussing combinations when approached, but are not actively seeking a merger partner.
A couple of respondents recently completed major mergers and do not anticipate doing another significant combination over the next 18 months.
A couple of respondents noted that they are currently reevaluating their overall strategy and have not determined yet if they are in the hunt for a combination.
Finally, one respondent noted that they have looked in the past and do not believe there is an appropriate merger partner for their firm.

* * * *

As always, we thank the many firms that responded to this month’s strategy question. The response rates continue to grow, the insights are very helpful to us as strategy consultants, and we hope they are useful to you as leaders of your respective organizations.

The comments section is open and we welcome dialog – online here or off-line via phone and email.

Strategic Growth – Strategy Question of the Month – April 2012

Posted on April 19, 2012 by Sterling

When the National Law Journal published the new NLJ250 (now expanded to the NLJ 350) in late March 2012, the headline was “For Large Firms, Time to Grow Again.” We certainly see an uptick in merger and acquisition activity among our clients, but that is not representative of the industry as a whole. Both the Hildebrandt Institute and Alman Weil actively track merger activity – and their reports on mergers in 2011 suggests that law firm combinations have indeed returned (and even surpassed) pre-recession levels (see the links to their respective blogs).

This month we want to get a broader sense for what law firms’ future plans are regarding mergers and acquisitions. In that context, we want to examine the factors strongly influencing the search for (and evaluation of) merger and acquisition candidates. And, for those firms that are not pursing strategic combinations, to get a sense for the strategic considerations that went into the decision to forego mergers for the time being.

The survey embedded below (click here if you do not see the survey in the box) is entirely confidential and should take no more than two minutes to complete. Deadline to respond is midnight, Saturday, April 28, 2012. Thank you for your continuing help with these monthly strategy surveys.