For the past two decades, global expansion has been pitched as a clear choice for big law firms. Strong economic growth in emerging markets combined with the increasing global presence of Western corporations made a powerful case that law firms had much to gain and little to lose by expanding abroad.
ALM’s recently released Global 100 dataset suggests that the argument for global expansion was oversold. The Global 100 data, which provides financial and headcount information on the world’s largest law firms, shows clear tradeoffs to global networks. International firms are less efficient revenue generators than their domestic peers. They are also significantly less profitable.
Firm leaders should pay close attention to these trends. It is not that the lower revenue and profit numbers completely undermine the case for global expansion. But the data suggests that there are inherent downsides to geographically dispersed office networks, and the reality should not be ignored.
The Argument for Global Expansion
The conventional wisdom is that global expansion offered law firms two primary benefits: new customers abroad and increased competitive advantages at home.
In the emerging world, law firm leaders saw a raft of new large corporate customers that were maturing out of fast-growing markets. Companies such as South Korea’s Samsung, India’s Tata, and Brazil’s Petrobras were expected to fuel new demand for high-value legal services.
At home, law firms hoped that global expansion would increase their competitive advantage with large corporations. As Western corporations became more global, it was believed that they would have a preference for law firms with global capabilities.
These two forces led many law firm leaders to see global expansion as a straightforward solution to improve their competitiveness. New offices abroad, it was believed, would help firms capture new growth, which would ultimately lead to improved profitability.
Financial Performance of Global Firms
While expansion abroad may have fueled growth, it has not resulted in improved law firm financial performance. As the graphs below show, law firms that are more global tend to earn less revenue per lawyer (RPL) and less profit per equity partner (PPP).
The negative correlation between global coverage and law firm financial performance is clearly seen in the top 10 firms by revenue within the Global 100. Kirkland is the least global among the group and the most profitable. Dentons, on the other hand, is the most global and least profitable. Between these two extremes are firms like Latham, Freshfields, and Baker & McKenzie — all of which display the trend that greater globalization results in lower financial performance.
Why Global Firms Are Less Profitable
One explanation for why global firms tend to be less profitable is the volume of litigation work in the US. Litigation tends to have higher billing rates. The result is that US practices, due to their higher concentration of litigation work, tend to have higher revenue per layer and higher profitability.
But that isn’t the whole story. An analysis of domestic US firms tells a similar story to what is seen at the international level. Firms that are spread across a wider range of geographies, even at the domestic level, earn less revenue per lawyer and less in profits per equity partner.
The table above shows two groups of domestic US firms: 20 firms with a more national presence and 20 firms that are more regionally focused. Similar to the trends at the international level, firms that are more geographically dispersed tend to have significantly lower RPL and PPP.
This data suggests that there are structural costs to geographic coverage. This should not be surprising. Studies have consistently shown that as organizations get larger and more complex, they tend to be less efficient and less profitable.
What Does This Mean for Law Firm Leaders?
For firms such as Dentons and Baker & McKenzie, which each have more than 6,000 lawyers in more than 40 countries, the benefits of scale and global coverage may ultimately outweigh the costs. These firms’ vast scales allow them to invest in shared service centers, new technologies, and other efficiency-enhancing initiatives. While these firms are unlikely to be as profitable as their elite domestic peers, they may be able to develop strong market positions in a wide range of geographies while maintaining average profitability.
For firms like Freshfields and Latham, the story may be more complex. While these firms have significant scale, their focus on higher-value bespoke services limits their ability improve efficiency through technology and process improvement. This suggests that these firms will bear the costs of geographic coverage more heavily than larger firms.
For smaller firms, the benefits of global expansion appear even less certain. Offices abroad will reduce the overall financial performance of most firms, lowering partner payouts and income that could have been invested elsewhere.
ALM Intelligence Notes:
- Big Data: Paul Hastings has developed its own, in-house, document review system. The firm claims its software is superior to what is currently available in the market. This is yet another example of law firms getting into the business of technology development and of the evolving e-discovery space.
- Mega-Firm’s Strategy Shift: Norton Rose Fulbright’s chief executive unveiled the firm’s medium term strategy. The plan, which combines a new global technology platform, flexible working arrangements, and two shared service centers, provides a glimpse into how law firms are adapting to changing market conditions.
- A Return to Merger Mania: A spate of new law firm mergers were announced in the past several weeks, raising questions as to whether Q4 will usher in a new wave of consolidation in the legal industry.
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. He can be reached at NBruch@ALM.com.