A mistaken and dangerous belief pervades much thinking about the U.S. legal market: that it is consolidating as larger firms grow more quickly than the market by taking share from their smaller rivals. A thoughtful look at the numbers reveals that no such consolidation is happening. This is an important correction to the prevailing wisdom. The mistaken perception of consolidation drives firms to bulk up—by merging, acquiring and hiring laterally—to avoid being at a competitive disadvantage. Such moves are high-risk, disruptive distractions for leaders whose attention is better focused elsewhere. Despite the intense effort involved, they create no strategic advantage. Wise partner groups and firm leaders will see past the prevailing dogma and focus instead on optimizing the performance of organically growing businesses.
Consolidation Is Simply Not Happening
Let’s start with the data. The graph below shows the share of worldwide Am Law 200 revenue that has accrued to the Am Law 10, Am Law 25, and Am Law 50 (respectively, the largest 10, 25 and 50 Am Law firms) over the last 20 years. The data shows that the shares of these groupings grew by 5, 8 and 10 percent, respectively. Surely this is consolidation? No, not at all.
The graphs mix two completely different things: (1) the domestic revenues of all Am Law firms and (2) revenues from the disparate set of international markets in which individual Am Law firms chose to compete to varying degrees (or not at all). What the revenue graph shows is merely that larger firms grew worldwide revenues more quickly than did smaller firms, but there is nothing to say they did so by taking share from smaller rivals and thus are realizing a competitive advantage from their greater scale.
To get an accurate view of consolidation, we have to look separately at the U.S. and international positions of the Am Law firm groupings. While we don’t have discrete U.S. and international revenue data, we do have numbers of lawyers by market, a close parallel. The middle graph shows the shares of total Am Law 200 lawyers working worldwide at the different Am Law groupings. The lawyer shares of the Am Law 10, 25 and 50 have grown by 8, 10 and 10 percent, respectively, over the last 20 years. These “lawyer share” gains are comparable to the “revenue share” gains, affirming the validity of looking at consolidation through the lens of share of lawyers.
The third graph looks only at the share of U.S.-based lawyers for the same Am Law 10, 25 and 50 groupings. Here, a different picture emerges. The 20-year share gain by the various groupings is a modest 2 percent. However, even this overstates the share gain, as it is an average across two very different business cycles—that of the boom between the legal world peaks of 2000 and 2007, and that of the Great Recession and subsequent “new normal” of 2007 through 2017.
By separating the share gains by Am Law grouping for these two cycles, we can get a better understanding. Focusing on the more recent 2007 to 2017 cycle, Am Law 10 firms roughly held share, the Am Law 25 slipped slightly, and the Am Law 50 lost 3 percent. Thus, the data is clear: There is no consolidation among the Am Law 50; indeed, the Am Law 50 have lost share to firms below the top 50 over the past decade, the inverse of consolidation.
We’ve gotten a lot of pushback on this analysis. A typical first reaction has been to question the validity of the data. In particular, the analysis seems at odds with the high volume of law firm mergers we read about. There are several counterpoints. Most of the mergers one reads about are of very small firms. Some of the larger mergers have proven spectacularly unstable (Dewey LeBoeuf and Bingham McCutchen, for example), so there is no sustained consolidation. Many combinations are de facto takeovers of struggling firms that have been shrinking, so that the merger (at most) stems a fragmentation trend. Almost all firms shed lawyers after combining, diluting any consolidation effect. And, lastly, most firms grow organically, so that, over time, the benchmark against which a consolidating entity should be compared is constantly rising.
Another argument has been that we shouldn’t separate out international revenues in looking at share. We don’t agree. Consider this analogy: Imagine that last year three companies each produced and sold 100 widgets into a U.S. widget market sized at 1,000 widgets per annum. As together they sold 300 widgets, the combined market share of these three companies was 30 percent (300 divided by 1,000); a large number of smaller companies held the remaining 70 percent of the market. This year, everything is the same as last year, except that, in addition, one of the top three companies enters the German market and sells 50 widgets there. So, for this year, the big three companies sold 350 widgets between them and U.S. companies in total sold 1,050 widgets. Did the combined market share of the top three companies increase from 30 to 33 percent (350 divided by 1,050)? Did the three larger companies take share from the smaller ones? Clearly not. The only accurate statement one can make is that domestic shares were unchanged while one player entered a new international market (their share of which we don’t know).
It is the same with the Am Law 200: the market share of the larger firms has not increased; larger firms have not taken share from their smaller compatriots. There simply is no consolidation. Rather, some larger firms have expanded overseas more quickly than have their smaller rivals.
Yet another reaction has been that the data understates the importance of having a strong international platform to the competitiveness of a firm’s domestic business. But it doesn’t. If the expanded international presence were creating an advantage in the domestic market, then we’d see this reflected in share gain domestically—the firms that grow internationally would be gaining share domestically, too. This is not happening. Indeed, over the last decade the very opposite is occurring: International growth is coming with domestic share loss—a risky tradeoff, as most practices are more profitable domestically than internationally.
A last counterargument we’ve heard is that all markets consolidate, hence law must, too. But not all markets consolidate; they only do so when there is benefit to either the buyer or the seller from a large-scale provider. Typically, the root of this benefit is economies of scale in the providers’ production processes. Commodity chemicals is an example of such a market. Markets where rivals focus on specific segments or seek to compete through differentiation rather than on cost tend to remain fragmented. Haute couture is an example of such a market. Law is less like commodity chemicals and more like haute couture. It’s an amalgam of distinct services offered by very different providers in settings that have widely varying balances of power between buyers and sellers. Law exhibits no economies of scale. The notion that law must consolidate is simplistic and misleading.
The Groundless Growth Imperative
Consolidation is not happening. The imperative for law firms to grow is groundless. Smaller firms that don’t expand internationally are not losing share; in fact, they’ve gained share through the Great Recession. The data could not be clearer. And yet we know that this simple truth will be ignored. Facts are an ineffective counterweight to long-held belief. It’s too bad. Running a U.S.-centered, organically growing law firm well is a strategy with enormous validity and tremendous potential for strong profit growth.
Hugh A. Simons is formerly a senior partner and executive committee member at The Boston Consulting Group and chief operating officer at Ropes & Gray. He welcomes readers’ reactions at email@example.com.
Nicholas Bruch is a senior analyst at ALM Legal Intelligence. His experience includes advising law firms and law departments in developing and developed markets on issues related to strategy, business development, market intelligence and operations. His email is firstname.lastname@example.org.