Does the size of your law firm matter?

Mark Baines, Legal Sector Manager reviews LexisNexis’ Is the Future Small? - the latest discussion paper in their Bellweather Report Series.

With 95% of law firms in England and Wales billing under £500k each year, and 50% billing under £150k Lexis Nexis asks the question - is the future small?  This is a big question and one which seems more relevant then ever when you consider the size difference between the top ten firms, which turnover a £1bn or more, and everyone else.

46% of respondents were from ‘very small’ firms, with 2 to 10 fee earners; and a further 23% were from ‘small firms’, those with between 11 and 20 fee earners.  When you bear in mind that two out of three of all of the respondents had worked in medium to large firms in the past, a suggestion is made that there are very real advantages to working in a small firm, given the respondents’ decisions to downsize.

Advantages

The report lists thirteen advantages each of which receive an agreement rating of  greater than 55%. The bottom of these was surprisingly work life balance at 56%.  This suggests that, yes having a work life balance is a nice idea and people seem to be talking about it much more often nowadays, but your everyday solicitor, has more important concerns about their work and their work environment.

Here’s the top five:

1. Ability to remain in control                                                 82%
2. Better client experience                                                     79%
3. Lower level of bureaucracy/swift decision making            76%
4. Same person runs their matter from beginning to end      75%
5. Clients being service by more senior lawyers                   70%

It’s worth reading through that list again; every single one of them points in the direction of better client service that is driven by the fee earner being able to provide their service with less hindrance.  Better client service and a happy workforce is always a recipe for success, and one which when you get it right leads to a virtuous cycle, and those common goals: growth and profit.

Challenges

While the advantages of working in a smaller firm are numerous, and may come as a surprise to some, the challenges are all too apparent to many partners in small firms:

1. Hard to grow a model/succession plan if clients are buying “you” personally   91%
2. Increasing compliance regulation                                                                      85%
3. Lack of capacity which may necessitate turning good work away                    82%
4. Hard to take time off                                                                                          78%
5. Cost of PII                                                                                                          77%

The first three are incredibly important as they all work together to constrain the amount of work you can process and therefore your profitable fee income.  With only a small number of partners, and increasing regulation taking more and more time out of their working day, there’s less time to manage and even less time to fee earn and get the marketing message out there.  When you do have the chance of a good piece of work, there’s no one to do it.

If there are a few partners with some administrative support its tough enough, but when you are starting a law firm or you are a sole practitioner, these constraints will be very, very real as you reach the limit of the amount of time you can actually work.  It’s simple arithmetic; if you can only fee earn for half your time, then money earned has to cover the firms overheads, any salaries, and what’s left is available to cover your needs AND  investment in the future.

So what does the future hold?

According to the report 91% of respondents are feeling positive about the future with 51% saying that they are optimally sized to take advantage of the expected growth.  That’s a very positive outlook where the majority of small firms are saying that they are ready to take advantage of the opportunities rather than be constrained by the challenges.

There are also 41% of firms who think that they need to be bigger which is probably driven by the three big challenges noted above: if you haven’t got spare capacity you can’t take hold of the opportunity and you can’t match the investment and technology of the larger firms. 

So will size matter in the future?  In some cases potentially, and this is driving much increased consolidation in the sector right now – we have never been involved in as many law firm mergers as we are right now.  However, small and niche still works well in many cases and our benchmarking shows that some very small firms are much more profitable than their larger counterparts. 

Rather than size itself dictating future success, what’s much more important is your strategy, service and mind-set to be able to service clients profitably.  That tends to be based more on your attitude and the right culture and structural fit.  

However, size cannot be left entirely out of the question.  Too small and you’re stuck in the position of doing all the work yourself with no time to build, unless niche/value billing allows otherwise.  Too large and the Lexis Nexis survey indicates that client service could suffer or your solicitors could leave for smaller firms.

Armstrong Watson’s legal sector team, can help you get to that happy position, whether by the right strategy, merger/acquisition or organic growth.