Size Is Not a Factor in the Law Firm Profit Formula

At the AltmanWeil seminar, Tom Clay had a slide under the heading Revisiting the Profit Formula that said, “Notice: Size is not a factor here.” (The formula is David Maister’s profit formula, which makes law firm economics a function of hours, rates, expenses and collection efficiencies.)

Imagine my satisfaction at seeing the leading “quants” confirming my favorite theme. In Nilofer Merchant’s magisterial phrase: “The competitive advantages of scale have been commoditized.”

“Size,” we are told, “only matters to a professional services firm in three situations.” (Go read what George Beaton says at the link.) In part he says, that size matters

  • To ensure that your firm has sufficient depth to survive the loss of a partner or major client,
  • To meet the needs of core clients for depth, range of services and locations, and
  • Where the cost of the service falls with the volume of services delivered.

I understand Merchant to say that these three imperatives will pretty much come off the table in time. They can be satisfied other ways.

In current lingo, scale or size can be networked, outsourced, or algorithmed. With every year that passes, in-firm scale or size will claim less and less of a premium.

By the way, I find this vision of the cloudy future (size-doesn’t-matter — or, better, size-need-not-matter) confirmed in Jordan Furlong’s recent discussion of The evolution of the legal services market: Stage 3

Well, there a few reasons still,  for practicing law in firms instead of dead solo. They are to be found in earlier posts and one day soon, I’ll draw them together in one place. In the meantime though, remember: “size is not a factor in the profit formula” and “the competitive advantages of scale have been commoditized.”

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