Is bigger better? 5 areas where it pays to have scale

Smaller, market-leading law firms have proven over the years that size is not a pre-requisite for success, but there are some areas where scale can be an advantage, writes Joel Barolsky.

Ranking law firms by size implies in some way that second position is better than 22nd. But is it?

As with many things in the legal business world, the answer is not straightforward.

Gilbert + Tobin is a wonderful case study of a relatively small firm – only 14^th in the AFR Law Partnership Survey – competing very successfully. The firm is widely recognised as a powerhouse in corporate, banking and dispute resolution, and is one of the most profitable commercial firms in the country.

With only 125 fee-earners, Arnold Bloch Leibler (ABL) is less than one-eight the size of Australia’s biggest firm, Minter Ellison. Despite this size disadvantage, many would consider ABL as having a market-leading client and employer brand.

In the US, Wachtell Lipton Rosen & Katz has only 260 attorneys, but it is No. 2 on the Vault table of best places to work for graduates, first for mergers and acquisitions work, and generates in excess of $US6.5 million ($A9.5 million) profit per equity partner per annum.

Russell McVeagh is regularly ranked as one of top three firms in New Zealand. Their website lists only 36 partners, which makes it the smallest firm among its peer group by a significant margin.

Despite these compelling examples, there are five areas where it appears bigger is better.

1. Lower-cost operators

Australia’s largest partnership, HWL Ebsworth, offers partner rates at a 30 per cent to 40 per cent discount to comparable firms. It is able to sustain these rates by having a low-overhead operating platform, maximising the utilisation of it, and consistently increasing the number of partners sharing its cost. Size does yield economies of scale to HWL Ebsworth and others that have adopted this model.

The general insurance market in Australia has converged significantly over the past decade, with four major companies now enjoying market dominance. The flow-on from this trend has meant that law firms specialising in insurance have had to get bigger to match the buying power of their key clients. Size helps these firms meet the unrelenting client demands for lower-cost legal services and still make a buck, just.

2. Large matters

Clients do seriously consider the size, or ‘bench strength’, of the legal teams that compete for large-scale transactions, major projects, investigations or litigation work. Clients want the assurance that there are ample resources in place to manage large workloads without a hitch. They also seek to limit the risk of being reliant on just one or two key individuals; they want the B-team to be just as good as the A-team.

A large practice team also helps firms cope with the volatility of demand. A larger team can smooth out the peaks and troughs over a wider base of work. A smaller team runs a bigger risk of boom-bust actually meaning bust.

3. Innovation

Many of the new legal technology products that are emerging are based on cutting-edge cognitive technologies. The rough rule of thumb is that 70 per cent to 90 per cent of new products fail. Firms need to be of sufficient size with sufficiently deep pockets to be innovators and wear the cost of failure.

One of the key success factors in legal product innovation is effective distribution. Large firms with a wide reach will clearly have a market access advantage relative to, say, a smaller firm or a start-up offering a similar application.

Firm size also helps in taking a few more risks when it comes to lateral hire or practice acquisition. Recruiting a cultural terrorist in a small firm can be an existential problem. Larger firms tend to have more options and a bit more resilience to bad hire decisions.

4. Client panels

Many large corporate and government buyers of legal services have reduced the number of business law firms on their legal service panels.

A by-product of this trend is that firms of scale, range and reach are often preferred to specialist boutiques. To target this market segment, law firms need to grow to ensure their full-service value proposition remains credible.

5. Regional focus

On a national scale, Coleman Greig is a minnow. But with 19 principals and five offices they are one of the dominant firms in Western Sydney.

Being the biggest firm in town does provide some advantages in brand awareness, local networks and referral relationships. Deep community engagement can make it harder for new entrants, especially from those out-of-town. Scale and market presence often creates opportunities to broker new deals, resolve disputes and shape local policy and planning.

A strong local brand helps attract local talent and reach into wider talent pools in other geographic areas.

In conclusion

So, is bigger better?

Larger firms will generally point to their strengths in critical mass and coverage. Smaller firms will make the most of their focus and agility.

It appears they are both right.

Joel Barolsky is managing director of Barolsky Advisors, Senior Fellow of the University of Melbourne and creator of the Price High or Low smartphone app designed to help with pricing projects. Visit  www.barolskyadvisors.com for more details.