The A&M Shearman and HSF Kramer mergers, amongst others, seem to have re-ignited debate about whether the legal sector is experiencing industry consolidation. The inimitable Bruce MacEwen posits that this is so, citing ever-increasing revenues concentrating into an ever-smaller pool of U.S. law firms. He writes that after adjusting for inflation, the revenue share of law firms exceeding $1 billion in 2024 dollars, as a share of total AmLaw 100 revenue, was:
in 2003, 25.3% (12 firms)
in 2013, 58.0% (20 firms)
in 2023, 74.5% (50 firms)
In a comment to MacEwen’s post, the equally inimitable Jeff Carr takes issue with whether this really represents consolidation. Jeff has impeccable credentials. Formerly Senior Vice President, General Counsel & Corporate Secretary at FMC Technologies (which is now part of TechnipFMC plc) his LinkedIn profile now describes him as “Husband, Race Car Driver, Manhattan Mixologist & Legal Rebel / Revolutionary / Activist.” He has been a thoughtfully strident critic of the conventional law firm business model since long before I advised my first law firm client, a quarter century ago. Jeff writes:
“ … law firm mergers generally simply create larger hotels for lawyers — not more efficient legal delivery service platforms. While back office cost may be streamlined & marketing costs leveraged, inevitably rates go up to the highest joint level, and “cross-marketing” to existing customers becomes even more intensive, irritating and intrusive. Law firm mergers, while touted as customer driven, are not. They are about lawyer hubris — growth in revenue, not in profitability. I’ve been waiting 40 years for a merger or a structure based on changing the way legal services are delivered at a deeply fundamental basis. To a focus on Delivered Value (Effectiveness | Efficiency | Experience), a dedication to outputs not inputs, to results not activity.”
Harsh words indeed!
Are we seeing consolidation in the legal industry/sector/profession, though? Let’s explore that question.
An opening observation: surely proper “consolidation” would have involved the twelve firms in 2003 becoming not more but fewer in 2013 and fewer still in 2023, yet still capturing 58% and 74.5%, respectively, of the Amlaw 100 revenues?
Industry consolidation as an idea has existed since the first industrial revolution but it really gained traction in 2002 when three A.T. Kearney consultants, Graeme K. Deans, Fritz Kroeger and Stefan Zeisel, published an article in the Harvard Business Review titled The Consolidation Curve. This was followed by a book: Winning the Merger Endgame: A Playbook for Profiting From Industry Consolidation. These were based on a research project that they undertook on mergers encompassing 25,000 companies across 24 industries in 53 countries. That study revealed much crucial information that was previously unknown about business consolidation. It suggested that consolidation is inexorable across all industries, without exception. Which I am happy to accept as true …. except for the effect of market disruption.
The A.T. Kearney study identifies four stages through which industries evolve from emergence to maturity. The key to a firm’s survival, so the theory holds, is to progress as quickly as possible through the stages, acquiring rivals along the way.
Stage 1: Opening
This includes start-up and spin-off industries buts also, importantly for the legal sector, industries that are regulated or protected by trade barriers. This can lead to one of two behaviours. On the one hand, intense innovation, opportunity-seeking and dynamic change. Or, on the other hand, protectionism-induced complacency or even hubris. In any event, M&A activity is rife as businesses are established, grow, combine and fail.
Stage 2: Scale
Firms complete Stage 1 by having claimed all available territories. Consolidation rates in some industries can reach up to 45 percent. To progress further along the consolidation curve, leaders must devise new strategies for expanding, growing, capturing market share, and defending their turf.
This is the stage in which true industry leaders shine. These leaders are constantly analysing their next acquisition target and developing other growth strategies, even if they don’t have a clear view of their endgame (which might be a decade or more away.) Examples of typical Stage 2 industries include banks, breweries, fast-food chains and restaurant franchises, hotel chains, and the pharmaceutical industry. Firms shift in their market positions as industry leaders capitalize on their strength to build sustainable competitive advantage over weaker competitors.
Stage 3: Focus
In this stage, the M&A flurries that characterise Stage 1 and 2 give way to far larger mega-deals and large-scale consolidation initiatives. The goal in this stage is to establish oneself as one of a small number of global leaders. Examples of typical Stage 3 industries include distillers, oil and gas companies, publishing houses, shipbuilders, and steel producers. While barriers to entry might still be low at the periphery, those to winning significant market share have become very high. Only external events (such as market disruption) or the actions of a major incumbent leader (such as accounting firm Arthur Anderson in 2002) can drive major changes.
Stage 4: Balance & Alliance
This is the consolidation endgame. Tobacco, aerospace and defence, shoe manufacturing, and soft drinks are among the industries that have been heavily consolidated in Stage 4. These industries are dominated by a small number of very large corporations. As undisputed leaders in their field, they enjoy sustainable competitive advantage that allows them to manage and protect their preeminence. If they do so well, they can sustain success for decades or longer. The leading technology and platform companies: Amazon, Apple, Facebook, Google, Intel and Microsoft are typical of this stage.
Large-scale mergers are no longer a viable option for growth, if not for reasons of antitrust/competition then because the industry is already consolidated so no candidates exist. The strategy focus shifts to optimising cash flow, protect market position, reacting and adapting to market changes and exploring technological advances. Strategic alliances and spin-offs become important.
Into which stage does the legal industry fall?
As a whole, it is hard to imagine that the legal industry is anywhere except in Stage 1. Despite revenue concentration into an ever-smaller subset of the Amlaw 100, the industry is very highly fragmented. Kirkland & Ellis, with revenues of roughly $7 billion in 2023, represented only 2.3 percent of the total U.S. legal services market of roughly $305 billion that year. The USA in 2023 furthermore had 428,302 law firms.
It makes little sense though to think monolithically about consolidation in the legal industry. This might make sense if all law firms were the “full service firms” that many still claim to be, but that is simply not the case. Law firms differ immensely in practice, industry and geographical focus, amongst other ways. A great deal of consolidation can be seen at the very top end of the market, with a small pool of ultra-premium firms winning increasing market share of advisory work on the largest, most complex transactions. Consolidation is also evident in very different parts of the market, such as property conveyancing and personal injury work, where sustainable competitive advantage is a function of processes and platforms rather than of knowledge that is captive to individual lawyers. In between these extremes lies a vast sea of legal advisory work that is highly fragmented and, as Jeff Carr (and many others including myself) argue, inefficiently delivered.
A similar principle can be seen in the accounting industry. Audit is in Stage 4 of the consolidation curve, but the “Big 4” accounting firms also engage in many activities that fall into Stages 1 and 2, where they compete with many other firms.
At a simpler level, consolidation is the process that occurs any time that a merger or acquisition transaction takes place. From this more ordinary perspective, the motives for consolidation mirror those for the merger. What is the compelling economic motive for firms to combine? Is it race through the consolidation curve as quickly as possible in order to be one of the global giants that make it to the finish line? (And several law firms do seem to have based their strategy on this, over the past two decades. In my PhD research I showed that mergers predicated simply on increasing scale are not consistently successful. Mergers that are based on multidimensional growth strategies, on the other hand, are consistently successful.)
So it is worth recapping on the benefits that come with greater scale. In general terms, these include:
Increasing Market Share: Greater market share tends to bring with it increased visibility, increased buying power, and lower client acquisition costs. However it should not be forgotten that some of the most successful law firms in the world are quite modest sized, with just one or two offices. The best example of this is Wachtell, Lipton, Rosen & Katz, with <300 lawyers.
Economies of scale: Seeking economies of scale is a common motive for mergers generally, but some argue that law firm mergers do not deliver economies of scale because costs per lawyer are typically greater in larger firms than smaller ones. The greater costs though need to be calibrated against what the additional investment is funding. If it enables the firm to enhance sustainable competitive advantage and performance, then it represents a gain. Certainly, mergers create opportunities for business rationalisation and greater critical mass enables investment in things that would not make sense in smaller firms.
Synergies: These are frequently overstated but where they allow a firm to double down on key strengths or acquire new ones, synergies can encourage firms to consolidate.
Withstanding disruption: At an industry level, market disruptions can both drive consolidation (as firm performance erodes in industry followers) and, in extreme cases, even push the industry back to an earlier stage in the consolidation curve as new entrants come into the market. Clayton Christensen explains why it is so difficult for industry leaders to transform in response to radical market disruption. David Maister used to apply this to law firms in his question: “How does one tell a room full of millionaires that their business model is wrong?” Larger firms that have diverse sub-businesses and are nimble and agile can respond more effectively to fundamental disruption.
So while consolidation is certainly something that law firm should keep in mind today, especially given the scale and depth of disruption that is expected in legal services over the next few years, it is important to take a nuanced view of the concept if it is to yield sensible strategic insights. As to the hypothesis that the global legal landscape will be dominated by a few giant global firms in the future – that consolidation in legal services will extend all the way to Stage 4 – I have my doubts. Unless the coming disruption brings with it the radically different business model that Jeff Carr has been waiting for, in my opinion the industry is unlikely even to extend to Stage 2.
If my hypothesis is correct, firms should be paying careful attention to the critical mass that they require in order to be able to acquire and deploy the resources that they need in order to execute their strategy. Referencing Jeff Carr again, that strategy should be based on delivering the value proposition that clients firms the most appealing. Not, as is so often the case, on what the firms’ partners think the clients should want.
Otherwise, they should be focusing on the coming disruption and developing what researchers call “organisational ambidexterity,” which means the ability to balance exploiting the current business model in order to sustain performance while simultaneously exploring emergent technologies that will in time disrupt that business model. This is very challenging to get right.
Graphic: Generated with Dall E 3, modified with Photoshop.
