“Bigger is better.” In recent years, many law firms have subscribed to that maxim to grow through office launches, mergers, or lateral acquisitions. Grabbing market share, adding substantive expertise, and establishing geographic relevance provided the justification for many an expansion plan. For some firms, growth appears to have been partly in response to the rapidly changing legal service landscape. Edwin Reeser recently has written two thoughtful pieces presenting a contrary view to some popular notions that stoke the enthusiasm for growth.
Mr. Reeser’s articles note that law firm growth is not necessarily a winning strategy. Indeed, for every benefit gained from an out of the ordinary course growth strategy, the bigger law firm assumes some corresponding risk. Only time will tell whether the financial benefits from expansion will outweigh the intangible risks. For that reason, it is a good idea to consider some of the by-products of an expansion plan before diving deep into the growth plan pool.
The Results of Growth Can Disappoint or Backfire. Bringing into your firm new people, new offices, and new expertise causes change. Change can be good, but it also can be unsettling. Moreover, all the promise justifying the growth can play out poorly. Indeed, as Mr. Reeser wrote in 2012 in an excellent five part series for the San Francisco Daily Journal about the economics of lateral acquisitions, there is an equal chance that the lateral acquisition won’t take (to review the terrific five part series, go to Mr. Reeser’s website). If this is the case, the cost of failure will be borne by the existing owners. Trying to maintain credibility among your partners once an acquisition struggles or fails is not an easy task. Beyond credibility, financial burdens caused by failed acquisitions can de-stabilize the firm.
The Excitement of Growth Can Become Addictive. Let’s face it; growing a law firm can be exciting. It really gets exciting if there is a series of acquisitions, openings or other growth steps that put the firm in the news and makes you the envy of your competitors. But growth can’t go on forever, and once growth stops some of your people will still want more even though sound business judgment says “no.”
Long Term Commitments May Be Difficult to Undo. Selling growth to prospects often entails promising them that their addition is all part of a grand strategy to dominate practice specialties and/or markets. Growth comes with new leases, contractual commitments, or bulked up loan facilities. When the additional floor of lease space can’t get filled up because the growth plan stalled, getting rid of that space along with all that came with it can prove difficult, expensive or both.
Growth Can Affect Morale. An unfortunate by-product of the growth plan, especially if it became addictive, is the impact on morale. There is some merit to Mr. Reeser’s contention that it sends a message to existing members that they are marginalized. For other members that are enthusiastically behind the growth initiative, however, a vacuum can be created when the growth stops. Excitement is replaced with disappointment, and enthusiasm can give way to concern-especially if the owners realize that paying for past growth will hit them in their pocketbooks now and in the future.
A Bigger Firm is Less Nimble—The Battleship vs. Speedboat. In the life of a law firm, no matter its size, internal and external changes arise, crises require attention and partners have issues. Getting bigger doesn’t save you from the headaches anymore than shrinking would. But addressing matters of grave importance will impose different requirements depending on the size of the firm. Navigating through a rocky sea passage may be more to your liking in a speedboat than a battleship. Dealing with any negatives that arise from growth will require great leadership and not all firms have that kind of leadership to draw on.
Not all growth is destined to failure. Judicious growth, analyzed and managed carefully can be the watershed event that propels a firm into a better place. But growth can come with risk and managing that risk is vital to the long-term health of the firm. If your firm has grown recently, how have you managed the risk? Did you do so through your underwriting, post acquisition management or both?