Over 20 years ago, Steven Brill, creator of the American Lawyer, predicted that among the most successful law firms in the future would be what he referred to as “Super-regionals.”  However, as the legal industry evolved over the past couple of decades, many growth oriented law firms managed to hopscotch over regionalism to become national and global giants.  But the recessionary shake out and the beginnings of a recovery have shown that perhaps Brill was right and being positioned as a super-regional could turn out to be a highly effective strategy for some firms.

The Upstream Strategy
The traditional growth pattern of most law firms has been to add lawyers locally, then open offices in other cities in their state, then in cities in contiguous states and, eventually, an office in the capital market city closest to their main office.  This office structure satisfied the needs of regional clients and provided a network of offices that was manageable, comfortable for the partners and supportive of the firm’s culture.

For some more aggressive firms, however, their vision of the future called for a growth strategy that involved more than additional offices.  They became focused on Fortune 500 corporate clients with sophisticated national and international legal needs.  After all, these were the clients doing massive transactions and litigating “bet the company” matters.  Accordingly, such large clients were seen as having unlimited budgets, willing to pay New York rates and capable of bestowing favored law firms with a continuous flow of legal work.  Plus, big time clients build a firm’s reputation and are viewed as a source of interesting legal work on which law school recruits could build their experience.

Law firm leaders convinced themselves that major corporate clients demand “one-stop shopping” and that belief was reinforced by the announcement by many general counsels of their intention to reduce the number of law firms they employ.  For many law firms, this made having a national (and maybe even an international) capability a necessity for migrating their practices “upstream” to serve these larger and more lucrative clients.

However…the recession has caused many law firms to observe several factors about this upstream strategy:

  • Major corporations are becoming far more sophisticated in their buying habits.  This means that the selection of outside law firms is increasingly dependent upon proposal processes, price competitiveness and challenging demands by general counsels regarding diversity, use of leveraged staffing, billing formats and case management.
  • Large companies are becoming the least loyal of clients.  General counsels are constantly seeking the lowest pricing which discounts personal relationships and the value of knowing the business issues of clients.  Partners who have served a client for years find themselves competing with lawyers who have never even met the client.
  • Major corporations are neither an extremely large nor particularly fast growing segment of the legal marketplace.  The U.S. legal marketplace is approximately $255 billion which we estimate to break out as follows:

$115 billion     Legal services to business clients
$99 billion       Legal services to individuals (including plaintiff contingent fees and estates)
$41 billion       Legal services charged to government, non-profit and other clients
$255 billion

A recent study by BTI shows that the average legal spend on outside counsel by Fortune 1000 law firms is $19.5 million annually.  This means that the total annual  legal market made up of Fortune 1000 clients is approximately $20 billion.  So if the legal expenditures of business clients is $115 billion and $20 billion of that is Fortune 1000 clients, the remaining $95 billion represent the spending by sub-Fortune 1000 companies on legal services.  In other words, the market for small and mid-sized businesses is almost five time that of large corporations.

The result is that some law firms that have long sought opportunities to work with major clients are finding that middle market clients provide a larger source of legal work, as clients are more loyal and more enjoyable to work with, and, when the cost of servicing the client are included, can be more lucrative.  Even more importantly, many of these attractive midsized clients are less interested in the global capability and national footprint of their law firm.  Instead, their immediate concern is the marketplace their business serves — which may very well be regional.

So the law firms that have created dominant positions within their state or a couple of adjoining states may have, intentionally or inadvertently, chosen an attractive strategy for the time being in our current economy and marketplace.  And, while it is wise for large law firms to continue to seek opportunities for national and international expansion, they would be well served to make sure that their strategy doesn’t ignore taking advantage of their regional opportunities.
In short, success at any level of competition is based on a firm foundation.  That foundation comes from establishing a dominant local and regional market position.

In addition…
1.    The green shoots of our economy have many clients hopeful that the worst is over. The temptation is to look forward, plan the future, and relive the dismal past no more. But the demise of many well respected law firms during this crisis has no doubt made many lawyers either more nervous or at least more curious about the relative competitive position of their own firm. Does their firm exhibit any of the tell-tale signs of impending demise?  In a special article, my colleague, Melissa Hogan points out the urgency of law firms stopping to evaluate their current position on a variety of important issues.  Click here to read Skinny Dipping: The Anatomy of Law Firm Demise.

Cover2.    The increasing importance of regional marketplaces has caused us to devote a lot of energy toward understanding how these markets function and where each law firm is positioned within its market(s).  As a result we are preparing a series of reports analyzing various U.S. regional marketplaces.  The first of these reports for the Great Lakes region is now available.  This is a 120 page analysis that discusses the region as a whole, the separate marketplaces in Chicago, Minneapolis, Milwaukee, Indianapolis, Detroit, Cleveland, Pittsburgh, Cincinnati, Columbus and Buffalo, as well as the interaction of smaller marketplaces in the region.  The law firms in each marketplace are evaluated for market position and competitiveness.  For details go to Great Lakes Legal Marketplace.  We are currently working on additional reports covering the Southeast, the Mid-Atlantic, the Central U.S., the Northwest and the West.