Law firm growth may be an obsession, but it is not a strategy.
(Reprinted with permission of the Daily Journal Corp, copyright 2014)
February 20, 2014
By Edwin B. Reeser
Which one of the following three statements do lawyers not understand?
1. The London Underground is not a political movement.
2. The Gettysburg Address is not where Abraham Lincoln lived.
3. Growth is not a strategy.
Growth is being pursued by a great majority of firms, endorsed as a laudable objective by many. But the approach is not delivering higher profits. Indeed in many firms pursuing growth, operating margins and profits have been steadily declining beyond the initial investment period, when recovery of margins and increased returns were forecast. (This may be contrasted in some of these firms with reported increases in profits per partner, which they achieve by reducing partner rolls. This is not a strategy either.)
Law firms are a service business, with units of production being people. Growth typically entails adding people, supporting facilities and equipment, and that costs money. Usually the short term operating margins are reduced, as are distributable profits and cash reserves, while the firm invests capital to underwrite the investment and incurs increased expenses associated with growth. Raising rates and flogging more hours from people can improve margins and profits, but client limits have been reached for rates, and growing overcapacity/underutilization within many firms has seen hours per attorney decline. There is not a positive correlation in growth of headcount size with growth in profits per attorney, nor with improved quality of work. Bigger has not been better for clients or law firms, it has just been bigger.
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