I read with interest yesterday‘s news item in the UK’s The Lawyer that Jones Day intends to double in size in Australia – with a particular focus on its Corporate practice following the recent lateral hire of ex-Herbert Smith Freehills (HSF) deputy senior partner Mark Crean.
I am increasingly coming to the opinion that headlines like the one in yesterday’s The Lawyer represent as close as we will get to ‘clickbate’ in the legal industry.
Why do I think this? – because it is now well established that “growth isn’t a strategy, it’s a result“.
So, aside from being potentially good media exposure for the firm – in which case I do wonder why none of the Australian legal press picked up on this story – all this article does is highlight the misnomer that “growth is always good”, when all research around lateral hiring and aggressive purchasing of market share points to the opposite (think Dewey & LeBoeuf).
Going a step further, in a recent (23 November 2015) article in the Am Law Daily, Felix Oberholzer-Gee, professor of business development in the strategy unit at Harvard Business School, argues:
“If you start by saying that we want to grow our market share, or we want to be a particular size, as a strategic goal that is a terrible choice for a number of reasons”…
… “First, and most important, is that market share is not that correlated with profitability. The second is that the most natural way to gain market share is by charging lower fees, which is what we see throughout the industry in this misguided effort to gain size and market share.”
Have to say that I agree with Professor Oberholzer-Gee: – market share [ie, size] doesn’t matter, what matters is if your firm is profitable.
And therein lies the problem: I have yet to be convinced that any firm on an aggressive growth trajectory in Australia – and there are a few out there who are taking the same approach as Jones Day – are any more profitable for it. Conversely, I think that while being larger in partner numbers and office outlets many are probably less profitable with a lot more administrative headaches to boot.
So, while I feel for law firm partners who are continuously being told post-GFC that mergers and market growth are safe haven ways to continue their existence post-2020, I would caution this approach and recommend, at an absolute minimum, that the firm:
- take an audit of their client base to see who they do profitable work for;
- ask your most profitable client if your firm’s growth plans will have any impact on them giving you greater levels of profitable work and, if so, who you need to bring on board to do that work;
- analysis what your increased cost-base (and there will very likely be an increased cost-base) is going to mean in the medium and long term;
and to share this information as widely as you feel comfortable doing with your top clients so there is transparency around your strategic growth plans.
Otherwise you could always remember the idiom:
“Marry in haste, repent at leisure…”
While I largely agree with you, there is an argument that size does matter in some practices and that growing to a critical mass is important. For example, a one-man band is unlikely to be hired to handle a major cross-border M&A deal. Fighting major class-action litigation requires a certain scale and depth of talent. Similarly, more and more multinationals are seeing the value of large global business law firms with extended range and reach. Growth in these instances is probably more a “ticket to the game” than a winning strategy, but nevertheless, it is part of the strategy narrative.
Another element of growth as a strategy is in the talent space. Top people like to work for successful firms. Attracting the best and the brightest is somewhat easier if your revenue line is expanding at +20% rather than -20%.
Agree Joel that critical mass can play a part in the type of work you do, but I still question if lawyers undertake a profitability analysis prior to doing work or do the work because it “interests” them.
I would also caution the thinking that global companies require global firms. Is there any element of that? – yes. But my experience is that this thinking is very overplayed (after all, one of the most profitable firms – Slaughter & May – seem to get by just fine).