Convergence and Profitability, or Bigger is Only Bigger
One of the more interesting developments in the law industry over the last couple of decades is the emergence of the mega-firm. Or what might be called the strange case of the temporary triumph of the delusion of efficiency.
"Convergence," the short-hand name of the corporate model for managing outside legal fees by reducing the number of preferred firms, was developed originally in the early 1990s by DuPont and then trumpeted by interested advocates--primarily consultants--who benefited from advising both sides of the aisle. Law departments needed to know how to evaluate firms for their preferred list, and law firms needed to know how to get on those lists.
The theory was that dealing with fewer law firms meant that a company would have more leverage in negotiating fees and conditions with those few that they did hire, that the company would no longer pay repeatedly for bringing firms up to speed on its business, and that this more holistic global legal approach would benefit the company in both concrete and intangible ways.
Leading the way, DuPont reduced its 350 outside law firms to 41 and its 150 legal vendors to 4. Five years after the program's introduction DuPont reported that
- Legal service expenses were reduced 39 percent from 1994 to 1997.
- Litigation savings amounted to over $30 million in the last four years of the program.
- Cycle time dropped from 39 to 22 months in two years and the docket was cut in half.
- Legal staff requirements can be forecast accurately.
- Purchasing power was leveraged.
- More women and minorities are employed in the PLF and supplier firms.
- True partnering was achieved: work is usually performed so seamlessly that outsiders have trouble distinguishing between DuPont's outside attorneys and in-house counsel.
Over 200 other major companies followed suit--General Electric's hundreds of outside firms were reduced to 140. Pfizer slashed its outside litigation counsel from 200 to 52. Pfizer eventually designated only 1 outside law firm to advise them nationally in some practice areas, a bold step again followed by others, such as Tyco and Honeywell.
Law firms were told that more types of business from a single client would guarantee a more consistent flow of work, again reduce the embedded cost of getting up to speed repeatedly and, with the more rounded view of a company's issues, ultimately make better lawyers of us all.
So law firms geared up to offer companies a broad range of legal services and it was only a short step from there to offering those services at locations all around the world. Whatever you need, we can do. Wherever you are, we are there.
Law firms started acquiring IP, land use and employment departments and boutiques to supplement their usual expertise. They opened offices in Hong Kong, Abu Dhabi and Omaha.
In 1992, an admittedly lean year because of a financial downturn, there were 9 law firm mergers, which accelerated into a record high of 75 mergers in 2001. By 2008, also a year of financial downturn, there were 70 mergers. And those numbers don't reflect the many acquisitions by firms that don't count as a "merger"-- acquisitions of groups of lawyers, practice groups or other pieces of firms. A 2007 Law Firm Inc. survey of AmLaw 200 COOs found that evaluating merger possibilities was the single matter on which COOs collectively spent most of their time.
Top US-based firms (NYLJ 250) grew from an average of 100 lawyers in 1985 to today's behemoths, topped by DLA Piper's 3,785 lawyers with 2008 revenue of $2.26 billion. As to profitability, before the current downturn, law firm revenues (along with expenses) had been ticking upward for years at double digit rates, fueled by pass-along billing practices that also rose without fail each year, resulting in compounded average growth in profitability of over 9%.
Corporations and big law firms seemed to be on to something. Consultants were in hog heaven.
But the economic slowdown has hit big firms particularly hard. Clients are turning increasingly to small and mid-sized firms who charge hourly rates 20-50% lower for large swaths of work that don't require legions of associates, firms which are also less likely to dump them because of the complicated conflicts arising from a global presence.
So where is the mega-firm now?
More than half of the 50 largest US firms have fired associates and staff in anticipation of or reaction to revenue declines and some firms, such as DLA Piper and Dewey & LeBoeuf, have cut year-end payouts to partners as well. Star partners at the country's biggest firms--DLA Piper, Skadden Arps--are leaving for smaller firms in order to offer clients more reasonable rates and avoid the thicket of conflicts. Regardless of the economy, the promise of cross-selling did not materialize and no one's sure if they are better lawyers for the mega-firm experience, or just poorer ones.
So did the DuPont Legal Model of convergence and its virtues fail?
If you ask DuPont, "the keys to the legal model’s success have been its ability to streamline legal representation through its designation of primary law firms (PLFs) and its commitment to the utilization of paralegals." And you should note that DuPont's current roster of Preferred Law Firms includes eight of the 100 biggest U.S. law firms but four times as many smaller firms, which General Counsel Thomas L. Sager says he prizes for their “flexibility and creativity” in billing.
Perhaps the real bottom line is, as was clearly stated in an analysis of law firm mergers done by Vanderbilt Law School back in 2005: “There are no obvious economies of scale or scope for law firms in a merger, where productivity is largely a result of billings by individual professionals.”
That conclusion has been born out by the financial statistics kept by Dan DiPietro of Citibank’s Law Firm Group, who said flatly at a recent conference forecasting future growth that "bigger has not yet proved to be more profitable."
