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A lot of law firm strategic plans talk about “establishing a position of dominance” or “being pre-eminent” in an area of practice, an industry, or a geographic area. These are precisely the kind of market-driven, externally focused goals that law firms should be setting for themselves. The obvious question, however, is: How does a firm know whether or not it has achieved a position of dominance? Is there such a thing as dominance? In fact, some managing partners argue that the legal marketplace is so fragmented that no one firm could have a dominant market share. That is, if we were to consider a large American city to be a market, it might very well have 30,000 lawyers in private practice with total annual client billings of more than $4 billion. For a law firm to have a 10 percent market share, it would have to have locally generated revenue of $400 million. At an average revenue per attorney of $400,000, the firm would need 1,000 lawyers in that city alone. In reality, however, the entirety of legal services purchased in a geographic area is not a marketplace. In a market, sellers compete for available work. Yet the large corporate firms don’t do plaintiff “slip and fall” work or domestic relations. And small consumer firms and solo practitioners don’t handle securities offerings and antitrust cases. Therefore, a marketplace is really a three-dimensional matrix of factors that may include geographic area, practice discipline, industry, and type of client. The law firm gets to decide the markets in which it wishes to compete. At this highest level, legal markets are oligopolistic. That is, in any definable marketplace only two or three firms — in the largest markets, perhaps four or five — will dominate their competitors by getting about two-thirds of the very best work. This holds true no matter how large a market is defined. For example, hundreds of firms nationally are handling sophisticated corporate transactions or complex commercial litigation cases, yet a regular perusal of The American Lawyer‘s “Big Deals” and “Big Suits” shows that a limited number of firms always get the lion’s share of the work. For example, of major bankruptcies filed in the United States during 2002, 64 percent went to one of four firms: Skadden, Arps, Slate, Meagher & Flom; Weil, Gotshal & Manges; Kirkland & Ellis; and Jones Day. For a competitor to break into a position of dominance, it must create a strongly competitive differentiation or one of the dominant firms has to take a dive. THE ‘SAFE CHOICE’ Clearly, establishing a level of dominance in even a small niche of a marketplace gives a firm an incredible advantage. When a general counsel is seeking an outside law firm, the most important matters go to the dominant firms because they represent the “safe choice.” This is especially true at the highest levels where “bet the company” work is often “bet my career” for the general counsel if the results are unsuccessful. Accordingly, the work is often reasonably insensitive to fees and highly profitable to the law firm. And of course, each new major matter further establishes the firm’s dominance of the market. Not surprisingly, dominance can be difficult to achieve. The good news is that once a firm achieves a dominant position, it is even more difficult to lose it. This is because dominance is entirely in the eye of the beholder — the client. Because there are no accepted measures of market share for law firms, some firms hang on to the mantle of dominance long after any statistical evidence would support their claim. But a firm that is in a position to compete for dominance always seems to have these characteristics: • Critical Mass. The marketplace makes judgments about the pecking order of firms, in large measure, by their comparative size. This does not mean that a firm must be the largest to create a position of dominance for itself. Certainly, Wachtell Lipton is one of the dominant players in the stratospheric levels of corporate transactions — but, with 150 lawyers, it is far from the largest. What a firm must have is sufficient critical mass to be viewed as having the depth to handle the caseload that a dominant firm must handle. Many firms find critical mass to be 100 lawyers at the firm level. At the practice group or industry level, size is much more relative to the competition. Some firms dominate niche areas of practice or specific industries with just a handful of lawyers because they have greater strength in that area than all but their closest competitors. • Name Recognition. Dominant firms tend to have an institutional name that is well-recognized by clients. A dominant firm that no one has heard of is an oxymoron. It is, however, important to understand that name recognition is targeted. If a firm wants to be dominant in the representation of insurers in the highest-risk directors and officers’ liability cases, it really doesn’t care about name recognition much beyond Lloyd’s of London and a handful of other carriers. On the other hand, if a firm is seeking dominance in a more general area, developing name recognition in that area may require substantial efforts over many years. • High-Profile Cases. Because dominant firms are expected to get the lion’s share of all of the best available work, the market anticipates that high-profile transactions and cases will go to the dominant firms. Accordingly, when a firm develops a track record of getting high-profile cases, it has taken an important step toward dominance in the eyes of the marketplace. By the same token, consistent failure to snag top engagements is the greatest risk to maintaining dominance. • Clout. A dominant firm in a city is expected to have some measure of influence within the marketplace and in political and industry circles. At high levels of practice, dominant players are expected to be able to “get things done.” This is not to imply that a dominant firm need apply influence that is illegal or unethical. Most often, dominance is demonstrated by having partners who are involved in civic affairs or by hiring partners who were formerly highly placed officials in government or industry trade associations. For example, a firm that has a dominant communications practice would be expected to have former FCC lawyers, not to exert any special influence but because that firm would be the logical place for FCC lawyers to go. • Signature Clients. It is expected that a firm in a dominant position would represent the largest businesses in that area. Firms that are dominant in a city would most likely represent most of the city’s major employers and the corporations that are headquartered there. It is inconceivable that a dominant firm in an industry would not represent the major companies in that industry. One interesting aspect of dominance is the effect it has on the market’s view of the law firm. A firm that’s dominant in one area of practice is regarded as a boutique even if it has strong capability in a variety of other areas. For example, many cities have a firm that is known as a “real estate firm” by virtue of its strength in real estate, even though it is a full-service firm. On the other hand, firms that have two or more dominant areas, particularly if they are not directly related, are viewed as being dominant in all their areas of practice. We see this frequently in market studies where firms are considered to be in a dominant position in an area of practice in which they have virtually no capability, on the basis of other areas of strength. STRATEGIC PLANNING Management theorist Peter Drucker suggests that a firm should be in a position to achieve dominance in its marketplace (i.e., should be among the top three firms) or get out of the market. While this may sound draconian, it makes complete sense. If something like 70 percent of the best and most profitable work is going to the three or four dominant firms, why would any rational law firm create a strategy to be No. 5 or 6? The difficulty is that some firms are competing in markets where achieving dominance is virtually impossible. The answer is in the ability of the firm to choose the market in which it wishes to compete. So, while the 50-attorney Chicago firm may not have a prayer of becoming the dominant real estate firm in the city, it may become dominant in commercial transactions where historic preservation funding is being sought. Of course, selecting the slice of the marketplace to achieve dominance in takes some planning. As a general rule, dominance in anything is probably better than dominance in nothing, but it makes sense to focus on growing full- or premium-rate work. In fact, the bulk of strategic planning efforts ought to be focused on the areas where the firm wants to invest its financial and management resources. The cornerstone of success for law firms in competitive markets is the ability to dominate. What aspiring firms need to do is identify a city or region, practice, industry, or a combination of these and other segments that the firm has a reasonable opportunity to dominate with its existing strengths. How the firm goes about creating that dominance becomes its strategic plan and the focus of its business development and recruitment efforts. H. Edward Wesemann is a partner with the legal consulting firm Edge International. His practice is limited to strategic growth issues. He can be reached at (877) 922-2040 or [email protected].

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