LAW FIRM GROWTH
LATINLAWYER
Should I stay or
should I grow?
First published in Latin Lawyer magazine Volume 14 • Issue 1, March 2015
LATINLAWYER
LAW FIRM GROWTH
Juan Pablo Cappello, the founder of the Private Advising Group Law firm in Miami, attempts to answer another
question playing on the minds of managing partners in Latin America: How should law firms adapt to changing
law firm economics? And is bigger necessarily better?
Image credit: ARTQU/iStock/Thinkstock
O
ver the past 15 years, I have met with
partners throughout Latin America and
learned that while legal markets may differ,
many concerns are often similar. Most often,
I encounter a variation of the following question:
“Our firm has grown by x lawyers in the past y years.
Why are we less profitable? Is it just me, or is everyone
working harder and making less?”
The underlying economics of law firms in Latin
America has changed in the past few years. Most
lawyers of my generation still intractably believe that
law firms need to be built around leverage to be more
profitable.
Lawyers in Latin America continue to believe that
a law firm’s ticket to success is to create a pyramid
with an ever-increasing number of young lawyers
joining the firm. As long as the firm keeps adding
younger lawyers, while limiting the number of equity
partners at the top of the pyramid, then the law firm
can effectively mint money for its partners. The logic
is: “If I add associates and charge clients double what I
am paying those associates, I will earn more and more
with each associate I bring to the firm.”
My observation is that in practice, increasing
leverage generally results in a less, not more, profitable
law firm. And any of us who have managed people
know that more employees invariably come with
more headaches, making the already difficult practice
of law even less enjoyable.
The increasingly competitive legal market in
Latin America has resulted in leverage becoming a far
less successful path to profitability. Twenty years ago,
managing partners at major law firms in Latin America
were only concerned about competition from around
three other large firms in their market. Today, there is
competition from dozens of capable, small upstarts.
There are two primary reasons for the “flattening”
of the legal market in Latin America:
First, clients no longer believe the best lawyers are
only at the largest firms. When I started practising law,
it was very important to practise at one of the largest
firms in a market. The handful of large firms handled
virtually all cross-border work.
How times have changed. As usual, education has
been the great equaliser. For each of the past 25 years,
hundreds of young lawyers from Latin America have
travelled to the US to earn an LLM from a leading law
school. Many of these young lawyers have also spent
a year at a leading US law firm working as a foreign
associate. There are so many Latin American lawyers
returning from their tour in the US every year that
large local law firms can only hire a very small fraction
of these returning lawyers. Most of these young,
extremely well-educated, bilingual lawyers have gone
to work for one of the myriad of smaller firms, thus
increasing the quality and the internationalisation of
these firms.
Not surprisingly, clients have realised that there
are talented, well-trained lawyers with world-class
pedigrees at medium-sized and even boutique law
firms. Thus, large law firms have lost their natural
dominance for the best legal work.
Second, it has never been easier to start a law
firm. The number of smaller firms with which large
firms compete increases every day. Starting a law firm
with world-class infrastructure used to cost hundreds
of thousands of dollars. Thanks to cloud-based IT
solutions for e-mail, documents storage, client billing,
and time management, creating the infrastructure
to properly service demanding, international clients
currently only costs US$50 to US$75 a month per
lawyer, with almost no initial capital outlay. And thanks
to the internet, just about any legal precedent or case
you will ever need as a lawyer is a click or a monthly
subscription away – no need for the expensive law
libraries of yesteryear.
This increased competition means that law firms
in Latin America are under constant pricing pressure.
Clients regularly ask several firms to bid for new
legal projects, ask for significant upfront discounts to
standard hourly rates, and make it clear that they will
not pay for the training of junior lawyers who are
learning while working on their matter.
Due to the supply of young attorneys, today it
is quite easy in Latin America to hire several well-
qualified junior lawyers and find months later that
those junior lawyers are underutilised and generating
fees that barely cover their “true” cost to the law firm.
So what should a law firm in Latin America focus
on if not on growth?
Develop a niche. Profitability results from being
able to charge clients a premium for premium work.
First published in Latin Lawyer magazine Volume 14 • Issue 1, March 2015
LAW FIRM GROWTH
Develop
a niche.
Profitability
results from
being able to
charge clients
a premium
for premium
work.
LATINLAWYER
Clients will pay a premium for work that other
law firms cannot handle, or do not have the same
experience in handling. The FCPA, regulatory advice,
complex tax structuring, structured finance, whitecollar criminal defence and administrative tax appeals
are all areas where there are relatively few “experts”
and these experts can charge a premium for their
work.
Or said a different way: in a relatively small, competitive legal market like that of Santiago, there are
probably several dozen law firms capable of advising
on an international, syndicated loan agreement. There
are probably three law firms that I would recommend
to an international client with a serious environmental law concern. Those three law firms will be able
to charge a premium for that environmental advice,
while the law firm out of a few dozen willing to
charge the least will be the firm that sets the pricing
for the next syndicated loan. (To give a sense of just
how dramatic this price pressure can be, one of Spain’s
leading firms recently handled a €35 billion (US$39.2
billion) restructuring for a legal fee of €1.)
Accept that normally a client hires a lawyer rather
than a law firm. Being a “rainmaker” is not what it
used to be. Back in the 1990s, if you had a knack for
developing business, you would bring the work to
your law firm and hand off the client to your colleagues. Rainmakers were the envy of the profession
because they were able to spend their afternoons on
the golf course rather than in the conference room.
Clients in Latin America no longer hire law firms,
but rather a specific attorney at a law firm. This means
that the senior lawyer who brought in the business
must continuously service the work to ensure repeat
business. Rainmakers must also be hard workers.
Wachtell, Lipton, Rosen & Katz, perennially one of
the most profitable law firms in the United States,
has among the lowest leverage among its peers, and
espouses a model of approximately one associate to
each partner.
The fallacy of leverage is that you can add more
and more junior lawyers and the quality of the
product you are selling will not be affected. Clients
want the very best lawyers at a law firm working on
their matters.
When your partners suggest the firm needs to
grow to be profitable, just look at them and say with a
smile: “Leverage? That is so 1990s.”
First published in Latin Lawyer magazine Volume 14 • Issue 1, March 2015