Lawyers Get Down to Business

Abstract

New pressures are hitting the legal industry. Now is the time to think through your strategy. Over the past 30 years, globalization, deregulation, and technological change have reconfigured many service industries, such as banking and accounting. In contrast, the legal industry has remained relatively fragmented, in part as a result of the historical importance of local relationships and local laws. Every significant city in the United States has its own handful of large, elite firms, but only a few of them aspire to national or global status. However, a flurry of mergers of unprecedented scale and geographic reach--as well as several notable failures--suggest that the legal business is losing its immunity to the macroeconomic forces that have propelled consolidation and stratification in other industries. Of the world's largest law firms (measured by revenue), all but the most profitable are in some peril, and even the profit leaders, historically viewed as untouchable, will find it harder to maintain their flow of first-rate clients and talent. Consider the year 2000 alone. New York's Winthrop, Stimson, Putnam & Roberts (265 lawyers) merged with San Francisco's Pillsbury, Madison & Sutro (490 lawyers). Paul, Hastings, Janofsky & Walker (610 lawyers), based in Los Angeles, merged with New York's Battle Fowler (120 lawyers). Chicago's Winston & Strawn (607 lawyers) linked up with New York's Whitman Breed Abbott & Morgan (178 lawyers). And Cleveland's Squire, Sanders & Dempsey (550 lawyers) acquired San Francisco's Graham & James (126 lawyers). Even as the value of mergers, acquisitions, and other capital-markets transactions raises profits per partner at most of the largest US law firms to new heights, the partners are searching their souls. They are appointing nonlawyers as chief operating officers, building up their more promising practice areas while dropping others, opening and closing offices, shifting certain kinds of work to cheaper offices, and rethinking their compacts with their own partners. Finally, they are considering significant mergers and acquisitions-in most cases, for the first time. The more farseeing firms will build national and, in some instances, global practices of distinctive depth and breadth of expertise--practices that can support high profits per partner and significant growth. These strengths will set in motion a virtuous cycle in which such firms cherry-pick top talent from other, less profitable competitors and invest in geographic expansion and technology. New talent and investments will help the leading firms put even more distance between themselves and the stragglers, which will be swept into an almost irreversible downward spiral, thus losing talent and stature at an accelerating pace until they unravel, get acquired, or reconstitute themselves as commodity players. Globalization and deregulation Capital today is moving across borders at lightning speed in order to pursue the most attractive investment opportunities. At the same time, deregulation has opened to competition significant parts of the US and European economies, including telecommunications, airlines, and electric power. As a result, companies that might have excelled locally or regionally suddenly find themselves competing against others with world-class expertise. To compete effectively, they must typically upgrade their skills, develop a distinctive basis for competition, and aggressively reduce costs. Such globalizing companies increasingly seek out law firms that can provide consistent multilocal support and integrated cross-border assistance for significant global M&A and capital-markets transactions, as well as antitrust and tax matters. We have no reason to believe that the trend toward globalization will stop at these practice areas. Moreover, as US and UK law have come to govern the activities of the world's leading financial institutions and corporations, first-rate law firms in the United States and the United Kingdom have gained a distinct advantage in cross-border legal transactions. …