Economies of Scale for Law Firms?

Originally published by Toby Brown.

For years the prevailing wisdom has been there are no economies of scale for law firms. In the classic economics sense this is true. Having more lawyers does not reduce the amount of time it takes to perform legal tasks. So it does not matter whether you work at a firm with a few lawyers or with hundreds of them. The work has always been very manual so larger scale does not impact the time it takes to get things done.

However … there are other economies of scale to be gained from size in a law firm. These economies exist and are emerging on the business side of firms. One might jump to the conclusion these will primarily be IT based, automating lawyer functions and such. But those functions are still early stage and not yet having widespread impact. Instead these economies of what I will call value, are coming from other corners of the firm.

This thought came to be recently when discussing diversity goals with a client. My firm has just over 1000 lawyers. At this size we can afford to have a chief diversity and inclusion officer (who is awesome by the way). A firm with 100 lawyers is unlikely to afford such a role. A firm that size is more likely to task a partner with that function, so it is not their day job.

After giving this some more thought, I had one of my “duh” moments. My role is actually quite unique and very valuable to the firm and its clients. I have the fortune of having a lot of direct engagement with our clients. Only firms of a certain size can afford such a role.

Upon further thought it occurred to me there are a significant number of roles like this at larger firms. Consider these: information security, pro bono, professional development, client facing KM roles, information governance, …. I’m sure readers will have many to add to this list.

At my firm we have even packaged these into an offering for our clients – sharing our “legal operations” expertise with their legal operations teams. Although clients have sharp people on their ops teams, they are not staffed at a level to have such a wide variety of expertise. One client wanted our counsel on their document management system. Another asked for input on their e-billing platform. In both circumstances we were able to provide deep expertise to help the clients in addressing their challenges.

Back to the ‘economies’ point – small and midsize firms are not in a position to fund all of these positions at the same level as larger firms. If a $100m in revenue firm commits 1% of their revenue to a function and a $1b firm does the same, the $1b firm will end up with a higher level of expertise and resource.

Admittedly larger firms tend to have higher rates, but these “economies” provide an increase in value to support those price levels. If a client decides to save money by leveraging smaller firms, they need to realize they will be forgoing some of these value-adds. One value-add that I thought about this around concept is security. It is getting harder and more expensive for smaller firms to stay on top of this challenge. And it is unlikely these firms can commit the same level of security resource larger firms do. Clients going down-market to save money should realize there are other cost-benefit decisions being made when they do that.

With some firms now having thousands of lawyers, they will be able to make more investments than the 1000 lawyer firms like mine. Of course as the Big 4 continue their encroachment into the legal market, their scale dwarfs any law firm’s so their ability to add these allied professional experts is even greater.

So – apparently there are economies of scale in the legal market. And more are coming.

Who knew?

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