Eyes on the Prize: Survival Strategies for Midsize Law Firms Facing Big Law in Regional Markets

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While global expansion garners top attention in media outlets, another dramatic shift among law firms is taking place at home: Big Law is invading secondary markets (outside of the core New York, Washington, D.C., and Los Angeles hubs).

These markets, including Houston, Boston, Atlanta and more, were traditionally the purview of a small number of leading players. Yet in recent years, mega-firms such as Latham & Watkins, Kirkland & Ellis, Dentons, and others are taking aim at these strongholds — and doing it successfully.

In this article, we explore what Big Law finds attractive about these markets, what impact it is having on regional firms, and what strategies small and midsize law firms can deploy to effectively fight back.

Rise of the Supersized

In 2010, Latham deployed a novel (at the time) approach to entering the Houston market. Having witnessed the dismal failure of multiple law firms that attempted to open their doors in the Energy hub, Latham opted to try something different — it took aim at top talent from leading firms in Houston and cherry-picked their dream team. The strategy worked. Latham’s office grew from 21 attorneys in 2010 to nearly 80 today. Soon, other large law firms followed suit, expanding into Houston as well as into other attractive markets.

As these supersized firms enter, incumbent firms inevitably feel the impact. Research performed for clients indicates virtually all historic market leaders and even second-tier firms lost corporate lawyers when big players swooped in. In market after market, it is becoming a case of winners and losers, particularly in practice areas that include high-end transactions and bet-the-company litigation.legal tech

Fast forward to today. It has been almost a decade since Latham set the stage for effectively entering previously tight-knit markets, and Big Law’s domestic expansion shows little sign of abatement. Just this summer, Eversheds Sutherland added two outposts in Chicago and San Diego, drawing on local laterals from other large law firms. For Big Law, the moves typically fulfill two purposes: i) it skims the best-of-the-best in talent, clients, and matters from lucrative geographic areas; and ii) it allows the firm to service existing clients within these regions with resources closer to clients’ home bases.

Protecting Turf: How Middle Market Firms are Fighting Back

Meanwhile, regional and local law firms are grappling with how best to retain their clients and their talent in the face of this onslaught. Fortunately, there are proven strategies that are working, as well as newer ones that are already showing promise:

1. Leverage Big-Rate Backlash — Perhaps most noteworthy is the inverse trend to Big Law’s attempts to dominate local markets with premium offerings: Not every client, practice, or matter garners top-of-the-market rates. Clients pursuing efficiency and value are increasingly seeking out alternatives and intentionally looking to regional firms as viable options. Similarly, many lateral candidates, who may find their own clients “pricing out” of the Big Law model, are opting to join reputable middle-market firms, a move which allows them to continue to maintain and grow their practice and avoid losing clients unwilling to absorb the substantial annual rate hikes (that, sadly, are still the primary driver of revenue and profitability growth at many big U.S. law firms).

Middle-market firms can position themselves as the recipients of these Big Law refugees (both clients and talent) by evaluating and targeting which practice areas are subject to heightened rate pressure then cross-referencing this analysis against the firm’s client base and strategy to further isolate the best opportunities. Even better, consider using Big Law’s own recruitment coup against them. Combining small groups or solo lawyers, much in the same way the mega-firms have done as they enter new markets, can be a winning tactic to secure a market position and top talent.

2. Assess and Adapt — As the market transforms and businesses become increasingly global, clients and talent that were previously well-suited to the firm’s strengths may no longer be in primary target markets. Evolving client needs and competitive landscapes demand re-evaluation of the firm’s market position, strengths, and vulnerabilities.

Consider again, for example, the Texas market. As firms such as Norton Rose Fulbright, Vinson & Elkins, and Baker Botts set their sights on international growth, they shifted at least some of their focus away from their Houston roots. Latham, Kirkland, and others swooped in to extract high-profile lawyers and matters, leaving these prior stalwarts to determine how best to balance their growth aspirations with maintenance of their hometown bases.


Middle-market firms can position themselves as the recipients of clients and talent from Big Law by evaluating and targeting which practice areas are subject to heightened rate pressure.


Meanwhile, as these large law firms battled for the top of the market, the remaining players were required to make a decision — attempt to compete for work they had previously captured, such as high-profile transactions for local clients, or refocus efforts on areas where they may have a unique advantage afforded them by either their client base, rate structure, or local reputation and connections (e.g., real estate, state regulatory, etc.). Those firms that were unwilling (or unable) to retrench and embrace their new normal most often end up joining forces with a larger entity in an attempt to secure status quo (e.g., Foley Gardere [now, Foley & Lardner], Hunton Andrews Kurth, Dykema Cox Smith [now, Dykema Gossett]).

Other firms successfully managed to maintain independence, and even thrived from market shifts. In Texas, Winstead and Jackson Walker fall squarely in this group. For those interested in pursuing a route of independence, an objective, comprehensive evaluation is a powerful first step. It is important to keep in mind the future may look quite different from the past. Just as a merger has costs — most notably in loss of control and potentially culture — so too does successful independence. A full-service firm may need to jettison areas no longer suited to its model. A firm that has lost its corporate stars may need to invest in efficiency measures to recapture lost profits (rather than try in vain to recreate its former glory with oversized guarantees).

Yet just as with any difficult journey, despite the hardship, the destination — maintaining independence — can be well worth the effort.

3. Think Locally — As an addendum to the previous approach about employing a clearly defined and targeted strategy, regional and local players often find distinct advantage in being embedded in their communities. Savvy firms identify practice areas and verticals which play to this strength and where they can outperform the big guys. Specifically, look for opportunities where local expertise and networks are valued (e.g., real estate, infrastructure), where the firm can specialize in unique, local industries (e.g., gaming in Nevada, cannabis in Colorado) or where multi-disciplinary groups can align around a geographically vital growth area (e.g., Smart City in Columbus, Ohio).

4. Form Alliances — Alliances are an oft-used approach for midsize firms in other sectors to defend and grow their market position. Done well, they can provide the benefits of a larger platform without the administrative and overhead burden of traditional expansion methods.

Perhaps most common in the legal industry are law firm networks such as Lex Mundi and TerraLex. Alliances, however, can have a much broader connotation. Dentons’ recent announcement of its relationships with Cohen & Grigsby and Bingham Greenebaum Doll is one such innovative example. Established connections between the Big 4 accounting and auditing firms and U.S. law firms are another.


Regional and local law firms are grappling with how best to retain their clients and their talent in the face of this onslaught from Big Law.


Midsize firms can deploy a broad range of alliance strategies to remain competitive. Some, like those described above, are market-facing. Others that adopt a client-directed stance include: i) joining forces with high-profile local clients, referral sources, or associations to co-host targeted events; or ii) co-producing thought-leadership pieces with well-known regional leaders.

An equally interesting approach to alliances happens behind the scenes. For example, operational relationships, such as sharing back-office resources with other firms or leveraging outsourced lawyers or professionals to deepen the bench when needed, can help many law firms keep costs low while continuing to compete for larger matters.

Conclusion

McKinsey & Co. identifies one of its top ten global trends as rapidly changing industry structures. In describing this shift, they write, “productivity gains are being achieved by organizations with global scale, niche expertise, or the adaptability to work with flexible networks of suppliers, producers, and consumers.”

For midsize law firms, the ability to compete with Big Law in this changing environment demands new thinking. It requires a re-imagined vision away from the full-service, middle-market law firm of the past to pursuit of different tacts. Following on McKinsey’s astute prognostications, regional and local law firms have three options: i) become Big Law (merge or be acquired); ii) sharpen focus (niche strategy); or iii) increase agility (create alliances and networks).

Those firms who deliberately pursue one of these three paths will outpace, outperform (and ultimately outlast) those that don’t.