TMG's Take...on The Emergence of the Midsize Firm
A perspective on legal management issues from The McCormick Group.

As the reports filter in on law firm financial performance last year, one theme seems to be gaining traction in the legal press----that midsize firms are poised to stage a comeback, and that the trend towards dominance by a relatively few large multicity law firm may be reversed---ostensibly forever. In addition to the somewhat sketchy financial results supporting this trend, there is some evidence that financially-strapped companies are now seeking lower-cost providers for mainstream, non-bet-the-company work. According to a recent study of BTI Consulting Group, small and midsize firms increased their presence on corporate counsel "short lists" from 24.5 percent to 38.2 percent in 2008 ("Pendulum Swings in Favor of Mid-size Law Firms", February 21, 2009). Another article, posted on the AmLaw Daily website, reports both consultants and in-house counsel looking aggressively to lower-cost and more flexible legal providers ("Will Regional, Mid-Tier Firms Emerge as Winners in the Current Crisis?," February 4, 2009).

While there's no doubt that midsize firms are currently the beneficiaries of today's unprecedented cost-cutting environment, it may be too early to declare a seismic shift in the legal landscape. It is true that in looking at some of the preliminary figures of the economic performance for 2008, it did seem that midsize firms based in second cities did better, compared to 2007, than their AmLaw 100 counterparts. But the recent performances say more about geography and practice mix than about any long-term reversal of the megatrends that have led to the dominance by the larger, multicity law firms.

Let's face it: few midsize firms had active New York offices, let alone Wall Street practices. And the recession has already spread to Main Street. So while some midsize firms from second cities may have avoided major fiscal woes in 2008, this year (and perhaps 2010) will not be pretty for anyone. In a business where acquiring and retaining talent is paramount, the name of the game will not be to increase profits, but to outperform the competition. In this era, the issue will not be size, but concentrating on the right practice areas.

Obviously, bankruptcy will be a premium practice, and the incredible revolving door of partners in that area attests to that. But from our vantage point, firms that have strong government contracts and infrastructure-related practices (transportation, energy, construction, etc.) are doing fairly well, and will continue to do so. As noted in an earlier edition of TMG's Take, firms with strong securities enforcement and financial regulatory practices are in the catbird's seat for a major restructuring of the financial regulatory structure. Everyone predicts that labor and employment law will experience a resurgence. And eventually, someone will have to solve the health care quagmire. In other words, there are lots of practice areas that will experience growth, and many can and do exist at the larger firms.

The rate issue is a more complicated one, but the big firms see the handwriting on the wall with regard to the yearly 10 percent-plus increase in billing rates. In the past, firms could afford to put pressure on partners with lower billing rates, with the idea that if they left, they would go to some smaller firm, not a major Big-law competitor---since everyone in the peer group were raising rates just as fast. Now that a number of erstwhile second-tier firms have made the jump into the global law firm pool, it is highly likely that many of those competitors---hardly midsize at this point---will be aggressively competing on rates. Moreover, in this economy, firms will have to look more closely to the overall economics of a practice, not just the partner or associate rates. So while midsize firms are definitely in a good position to pick up work, some big firms will adapt as well.

At the same time, there is a great opportunity in the current market for some midsized firms to pick up some good talent, which in turn should strengthen their overall financial position. Interestingly, arguments in favor of smaller firms that existed for many years may be more effective for the smaller firms now. For years, we've been hearing lawyers complaining of having to continually navigate conflict issues and yearning for the days that they actually knew all of their partners by name. Now, they may actually follow their hearts, rather than just following the bigger platform.

The McCormick Group has been keeping tabs of the publicly-reported 2008 revenue and profit figures of leading law firms. For a full report, please contact Steve Nelson at snelson@tmg-dc.com.

TMG's Take is a regular e-mail advisory produced by The McCormick Group. The company's Law & Government Affairs and Law Firm Services groups combine the expertise of more than 15 Consultants to help law firms fulfill all of their lawyer and administrative recruiting needs. TMG's Take covers topics across the spectrum of law firm management, including associate and partner compensation, growth strategies, marketing and business development, operations and facilities management, finance and accounting, professional development, and technology. Please direct all inquiries to Steve Nelson, Managing Principal at (703) 841-1700 or snelson@tmg-dc.com.