In mid-sized cities nationwide, the 250 largest law firms are invading markets, taking market share from regional law firms, picking off key partners and driving down profits. But now regional law firms are recouping their losses with four key tactics.
"Since 2001, the United States' largest 250 law firms by attorney headcount, known as the NLJ 250, have nearly doubled their geographic coverage," said Nicholas Bruch, a Senior Analyst at ALM Legal Intelligence. "When new entrants come into a market, there is increased competition. We've seen dramatic increases in the number of firms."
Bruch spoke at a recent webinar The 2018 NLJ 500: The Invasion of Regional Legal Markets moderated by Patrick Fuller, Sr. Director of Legal Intelligence at ALM Intelligence,
"Markets in regional cities are seeing increased competition -- from alternative service providers, the Big Four accounting firms, and competitive pressure from clients [taking work in-house]. But lawyers don't talk about competition from other firms," Bruch said.
"A large portion of the competitive pressure increase is actually big firms expanding into other markets. Regional cities have gone from cozy monopolies or duopolies to much more competitive environments. The big new entrants have advanced technology, they are significantly more profitable and use the profitability as a weapon. The most potent way they do this is to simply acquire laterals. National and international firms can go to local leaders and say, 'come to our platform, you can make $1 to $2 million more a year.'"
Biglaw vs. Local Firms
Law firms in the hardest-hit cities are in Atlanta, Austin and San Diego, Boston, Chicago, Dallas, Denver, Houston, Miami, Philadelphia, San Francisco, and San Jose, according to the to the ALM data. "The larger firms have advantages such as higher profitability, geographic reach, greater scale and stronger brands."
National and international law firms are also targeting mid-size legal markets for expansion in Denver, Detroit, Miami, Minneapolis, Philadelphia, St. Louis, and Nashville. "Regional cities have a large number of Fortune 500 companies and they are lower cost markets," Bruch said. "They are a natural place to expand."
The invasion by Biglaw follows a predictable pattern, starting with headhunting of local partners. "Houston's leading firms have lost 390 partners to lateral departures since 2001," Bruch said. "They can offer clients and prospective lateral hires a national or global platform."
"In some markets where there have been a lot of entries by NLJ 250 law firms, we have seen the talent pool for marketing and business development people dry up. So salaries increase, and regional firms find it difficult to find business development people."
"The expansion is coming at the expense of local firms," Bruch said. "If I were a local firm in Minneapolis or Denver, I'd be concerned. These things are very difficult to manage."
Local Firms Regroup
Despite losses in headcount, some regional firms (with more than 80% their lawyers in a single state) have managed to increase profitability. As examples, Bruch cited Allen Matkins, Cahill Gordon, Choate Hall, Irell & Manella, Jeffer Mangels, Kramer Levin, Miller Canfield, Morris Manning, Patterson Belknap, Porter Wright, Vorys Sater, Wiley Rein, and Winstead.
Bruch laid out three tactics for regional law firms to respond to the invasion of Biglaw outsiders.
1. Play where you can win. "There is no silver bullet – but some common strategies do exist." One approach is a tactical retreat from non-core practices, such as mergers and acquisitions, where local firms cannot compete with large, national law firms.
2. Invest where you can win. "We've seen targeted expansion by regional firms," Bruch said. An example is Baker Botts in Houston, which expanded its energy company transactions and intellectual property practices from 2001 to today. "The expansions were very targeted. That is a theme we see in Houston and other places."
Other tactics included investing in lateral hires and using technology to deliver services in a more efficient manner.
3. Managing levers of profitability. "Local firms have an advantage in pricing. They are 30% less expensive on a cost per lawyer basis," he said. To achieve this many firms will leverage their associates better.
Bruch added, "Partners must be compensated according to contribution. Firms get dinged for increasing nonequity partners, and people refer to it as artificially increasing their profits per equity partner. I look at it differently. You are simply making sure your equity partner membership reflects the people who should be compensated at that level. At some firms historically there were lawyers who were equity partners who shouldn't' have been. Firms need to adjust their partnership structure as a defensive play to ensure that partners are compensated at the level of their contribution. If you don't do that, partners will leave, particularly in a market that is being invaded by high profitability big firms. I'm sure Latham, Kirkland, and Skadden will be quite happy to pay partners what they're worth if you don't."
At this point, I'll add tactic No. 4.
4. Have a website that turns visitors into actual clients. A law firm website should answer the questions that a client would ask when they are sitting in your office or on the phone. Clients start by searching online for an answer to their legal problem, not for a lawyer. If a lawyer's website has the answer, only then will the person call.
This is why content marketing is so effective. LawLytics, where I am Sr. Legal Marketing Strategist, wrote 1 million words of copy for Maryland law firm Gilman & Bedigian to promote their Taxotere drug side-effect practice. It is now the go-to site for these kinds of cases.
The website should also be updated frequently, with a blog covering current events for potential clients. Blogging demonstrates that a lawyer is current on changing developments in the law.
Smart attorneys analyze which clients they like to work with, which have repeat business, and which generate the most profit (not just revenue). It's true that 20% of the clients will generate 80% of the profit.
Attorneys should focus their website on these profitable clients and potential clients, and their needs. Think about them as you choose pages to create, as you add content to those pages, and as you choose the voice, tone, and vocabulary for your content.
If you need a website that generates leads and actual clients, feel free to call or text me at (520) 400-0420.