For Some Law Firms, Trading Growth for a Midmarket Sweet Spot
These firms have taken a hardline stance against growth for growth's sake.
December 18, 2017 at 05:53 PM
6 minute read
Editor's note: This story is the third in a series looking at how law firms fit into the middle market. Read our earlier coverage here and here.
Law firm mergers and large lateral group acquisitions have dominated legal industry headlines this year, from regional tie-ups to Big Law mega-mergers.
But for some midsize and regional law firms, success can have a smaller footprint. These firms have rejected combinations and major head count growth in favor of preserving a niche practice focus or unique law firm culture.
“I don't think there's any magic size. It's really a function of the lawyers we have and the clients we're able to bring in,” said David Pudlin, managing partner of Philadelphia-based Hangley Aronchick Segal Pudlin & Schiller. “Where other firms have decided to invest in geographic areas, to invest in practice areas … that's a strategy we've never pursued.”
Hangley Aronchick, which was founded about 24 years ago with 11 lawyers, now has a head count of 49. The firm has clients all over the country, Pudlin said, but has chosen to keep its physical presence in the greater Philadelphia region, where it has three Pennsylvania offices and one in South New Jersey.
It's not that Hangley Aronchick has forsaken all growth. The firm's chairman, Ronald Schiller, was actually a lateral hire who came from DLA Piper with a larger group in 2009. The firm also added groups from Wolf, Block, Schorr and Solis-Cohen in 2008.
But Pudlin said Hangley Aronchick has been approached by many other groups that it turned down, and by many firms that wanted to absorb it. While its transactional practices are largely regional, it's litigation team is “really a large-firm practice,” he said. But the firm wanted to stay unique, he said.
'Frankenstein' Effect
New York-based Kobre & Kim had a similar outlook when the founders launched it nearly 15 years ago.
“For us, growth ends up chipping away at some of our core value propositions, like being conflict-free,” said Michael Kim. “We don't really get that much marginal benefit from hiring more people.”
While Kobre & Kim made it onto the Am Law 200 in 2017 with $101 million in revenue and just over 100 lawyers, Kim said the firm has not aimed to compete with other, larger law firms. Instead, its focus is providing niche litigation and investigation services, he said.
“Firms focus on growth because they think it will help them acquire partners with books of business,” Kim said.
But midsize firms that do so run the risk of losing their “unique brand,” he said. It's like a small organic grocer growing to become a general store, he said. If the small store doesn't retain what made it unique, “then people just go to Whole Foods,” Kim said, for the convenience of buying from one place.
“To take a firm that's midsize and turn it into something that's big enough to compete with really large firms … you have to do so many acquisitions,” he said. “Eventually what you have is a Frankenstein you've created … an amalgamation of all these different practices all at different margins sitting under the same brand.”
Ronald Schectman, managing partner of 166-lawyer Pryor Cashman, agreed. The firm is based in New York, with a small office in Los Angeles.
Pryor Cashman has grown by about 30 percent in the last four years, Schectman noted, so it has added some lawyers. But the firm has no head count goals for the coming years, he said. Instead, its focus is on maintaining firm culture and low turnover.
“We have received overtures from many large law firms to merge,” Schectman said. “We have not pursued any of those discussions, because we do not want to give up what we have.”
Pudlin said his firm's model has also made budgeting an easier task. The partnership has posted major revenue growth over the past two years.
“To project or forecast revenue is very difficult,” Pudlin said. But “we are always within 1 or 2 percent of budget [on expenses].”
Controlling Head Count
Keeping a law firm successful while keeping its size in check takes deliberate planning, just as growing would.
“Midsize firms can be vulnerable in three respects,” said Schectman, adding that Pryor Cashman had avoided these pitfalls.
For one, he said, a midsize firm can become too dependent on a small group of clients or a particular industry. Secondly, the firm could lean too heavily on one or a few partners for most of its business or origination. And third, he said, a firm could fail by neglecting talent development at the lower levels.
Schectman said his firm has focused on fostering young talent organically and through lateral hires. More than a third of partners originate at least $1 million in business, he said, and no single client makes up even 5 percent of the firm's revenue.
Pudlin said his firm has turned down opportunities to add partners with substantial books of business. Their experience or reputation didn't quite fit what Hangley Aronchick aims for, he said.
“There were some lawyers out there who have been successful, but that we just didn't feel it was a good fit, and we'd rather err on the side of not bringing someone in like that,” Pudlin said. “It's worked for us.”
Kim said Kobre & Kim has fought hard to avoid growth, “but it's a losing battle.” The original plan was to stay conflict-free, but over time, the firm has become less reliant on that element of the business model, he said.
Still, he said, the firm doesn't need to be any larger. Size stopped being an impediment to success once the firm reached a head count of about 50, Kim said. Still, once a firm grows, it's hard to go back, he noted.
“A law firm, it's a little bit like a party, where there's a certain mood and people have to believe it's fun,” Kim said. “I don't think historically there are any law firms that have successfully shrunk themselves.”
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