For all the predictions of economic recovery in the U.S. in 2014, large law firms will continue to face challenges in the new year, according to legal search consultants at Major, Lindsey & Africa. “Our message in our last advisory was clear: BigLaw, it is time to adapt or die,” a report they released on Thursday concludes. “We think this same message is equally true as we head into 2014. Only more so.”
That message has been hanging over the leaders of large law firms for years now, and the issues covered by the report—as those to confront sooner, rather than later—shouldn’t come as a surprise: declining demand for legal services, continuing demand by clients for alternatives to the traditional billable hour fee arrangement, greater competition from smaller firms and other types of legal service providers, and growing numbers of firm mergers and dissolutions.
There were no law firm failures on the order of a Dewey & LeBoeuf or a Howrey in 2013, but industry watchers say they are unavoidable. Too many large law firms chase not enough business with too many unproductive partners and associates. Efforts to save or boost struggling law firms have, in part, driven up the number of law firm mergers over the past year, a record-setter for tie-ups. Eighty-seven mergers were announced in 2013 for firms of all sizes, with nine in December, according to data from law firm consultants at Altman Weil.
That’s hardly a positive development, according to Major, Lindsey’s assessment. Often a merger makes little sense:
In our view, the combination of two firms, both of which are struggling to survive, will yield little synergy. Furthermore, while some of these combinations are being classified as mergers, the reality is that in many cases the firms being acquired stand little chance of surviving absent being acquired, so one has to wonder what the benefit will be to the acquiring firm. Nonetheless, we believe this merger mania will continue unabated into the New Year.
Ward Bower, a principal with Altman Weil, also predicts that the pace of law firm mergers in 2013 will continue this year. But, he says, the push for mergers will come largely from the resurgent economy and the work that will follow—more corporate mergers requiring larger law firms with more offices. Law firms thus have a chance to strengthen by adding to practice areas or bolstering weak ones and they can access new markets and clients through a merger.
A further tricky area for law firm leaders: cutting equity partners who aren’t bringing in enough business. Little movement has transpired on this front over the past two years. “Ultimately,” Major, Lindsey reports, “most firms will have no choice. In order to remain competitive, they will need to address this issue. Similarly, many firms are now re-thinking their capital structure, and are either asking their partners (including non-equity partners) to contribute more capital in order to reduce borrowing costs, or even doing away with the two-tier structure altogether.”
The key to a firm’s long-term success will depend on strong and flexible leaders whose strategy reflects the realities of the legal market and a will to change the status quo. Leaders must “query whether the traditional leadership models and strategies have run their course, or, at the very least, whether firm chairs and managing partners should continue to practice while attempting to oversee such a vast business enterprise,” the Major, Lindsey report says.
Steven Harper, an author covering legal business and a former partner at law firm Kirkland & Ellis, expects little change soon. “Clients will continue demanding fundamental change in the way outside firms deliver legal services, but most large law firms will ignore those pleas,” he says. “Eventually, short-sighted leadership will take its toll on many firms as long term values—including institutional stability—suffer. Unfortunately, far too many law firm leaders regard the future as someone else’s problem.”
Are the messages hitting hard enough? The answer will determine whether, at any given firm, change will come deliberately or accidentally. But one thing is certain: Thanks to advances in technology and increasing client demands and pressures, change at America’s largest law firms is inevitable.