I had a recent discussion with Eric Fletcher, a talented marketing executive author of Marketing Brain Fodder about law firm growth and specifically revenue growth. The somewhat obvious conclusion was that law firms grow revenue in four ways, each with its own challenges and issues by.
- Raising rates
- Hiring “laterals” who come with a book of business
- Adding large groups of lawyers through merger or some other combination
- Organically growing new business
While firms frequently attempt to address net revenue issues by cutting expenses butunless a firm is in a position to profitably reduce staff/attorney headcount or restructure cost associated with office space, this is typically a losing proposition.
In the marketplace of late, raising rates is becoming increasingly difficult. Clients are pushing back hard against the once common practice of increasing rates each year. If you’re managing a firm today you know that rate increases are far from automatic,…and tough to get approved in almost any situation.
Interestingly, over the last decade as rates have increased there has been a corresponding and consistent reduction in the collected realization rate. Increasing revenue by increasing rates is becoming a very difficult approach to increasing revenue.
Hoping portable business will grow the size of the pie and increase profits per partner comes with unique challenges. The realty of up-front costs, the fact that often portables don’t rise to the projected level, and the cultural impact of a move that is driven by the dollar sign can make this a rough adventure.
According to numerous reports fewer than half of surveyed managing partners have found their lateral hiring efforts to have been successful overall. Nonetheless, following attempted rate increases, lateral hiring continues to be the go to strategy for the vast majority of firms seeking to increase revenues.
Banking on a merger or combination to solve growth aspirations and/or profitability woes is the most risky gamble a group can make.
In the best of situations mergers brings significant positive change but can come with enormous cultural clashes and requires a ramp-up time that can be lengthy. Nevertheless, the M&A road is an alluring one. When successful and taken to the extreme it has a two-pronged benefit for a firm: revenue growth (though impact on profitability is another discussion altogether); and perhaps more seductive, a combination shrinks the competitive landscape.
When the situation isn’t the best? Well…the overall success rate for law firm M&A efforts is dismal – again, fewer than 50% of law firm mergers reportedly realize their intended benefits. Might a firm do better at a table in Vegas?
Old Fashioned Organic Growth
This leaves us with the least turned to approach to revenue growth on our list — actually developing new business with the current core of talent. And while today many (maybe most) firms in the NLJ 350 have someone in house with the words “Business Development”or “Marketing” in their title or job description, proactive business development is anathema to most lawyers and firms.
It isn’t nearly as seductive as growing the size of a firm. Bigger just seems a better solution…providing us with something instantly quantifiable.
But the real problem with business development efforts that impact the bottom line is that it is hard work and takes time — sometimes a long time. And while no top lawyer is afraid of hard work, most firms aren’t willing or prepared to invest the necessary time. In fact, many seem to wait until there is little time left to address the need.
There are, of course, firms that have become strategic, building new capabilities around an identified need among clients and prospects. A handful of firms have unlocked the profitability of organic growth. They are not necessarily the biggest. Their lawyers don’t necessarily demand the highest rates in the marketplace. But the increase in the bottom-line is real, and profitability is solid.
A sustained focus on the organic growth of a law firm is the smartest and most enduring approach to revenue growth – by far.
How are you growing the revenues of your firm?