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Introduction to Law Firms
Law Firms as Businesses - What Type of
Companies Are They?
- The legal market is highly fragmented
- The top end of the market mainly serves corporate clients and is dominated by large firms which can offer a wide range of legal services.
- Small firms can compete successfully by providing specialised expertise or by operating locally.
- London and New York house the greatest concentration of law firms.
- These cities house the world's largest capital markets and companies everywhere want to tap into them.
- International business is therefore often conducted under English or American law regardless of the client company's own jurisdiction.
- Demand is dependent on the volume of economic transactions.
- Profitability depends largely on the reputation and contacts of the partners.
- Happily for lawyers, salaries are the major operating expense.
- Unlike most other industries, marketing is often aimed at other lawyers since a large amount of work is done through referrals.
- Referrals are mainly inter-jurisdictional but some are inter-specialisation.
- Serving corporate clients is both the most profitable and the largest slice of the market.
Partners not Shareholders - Law Firms are Different
- Margin not Profit
- Unlike limited companies which aim to maximise total profits for their shareholders, almost all law firms operate as partnerships or LLPs.
- With no shareholders to worry about, the profits are distributed across the partners. Therefore they are incentivised to maximise profits per equity partner (PEP).
- This makes them potentially more concerned about maximising profit margins (by keeping headcount down, for example) rather than increasing revenues by adding fee earning partners.
- The same is not true about companies since the shareholders care only about margin in as much as it affects profit.
- Most companies would happily exchange a small decrease in profit margin for an increase in profit. Quite the opposite can be true of partnership law firms.
- Partners not Board Members
- Law firms usually take decisions by reaching a consensus amongst the partners. If they don't, partners can defect to rival firms or set up their own, leaving the firm to disintegrate.
- Therefore, legal practices tend to behave more cautiously than their clients.
Consolidation Trends
- Consolidation is driven by the desire of some corporate customers, who require a host of legal services, to have one firm handling all of their needs, a "one-stopshop".
- Firms typically add specialist lawyers and practice groups to do this. However, they can achieve this more rapidly and on a grander scale by merging with other firms.
- Non-global players traditionally share an international mandate with a local player, or refer the client to a firm which they recommend. An example of this is the Slaughter and May (UK) / Cravath (US) "best friends" relationship.
- One of the hottest current debates regards whether firms will consolidate globally to offer cross-border one-stop-shopping, or whether firms will be chosen on their ability to provide the best service in a particular jurisdiction.
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