Growth strategy in corporate law firms: internal influences and performance outcomes.
The present study on law firm growth strategy has two major objectives. The first is to analyze the influence of antecedent firm conditions, that is, internal strengths and weaknesses and product/market expansion objectives, on the use of internal versus external growth mechanisms. The latter includes both lateral entry and merger. The second is to analyze the impact of strategic choices on firm profitability.
Research on the use of internal versus external growth mechanisms is found in two distinct bodies of research. Promotion and lateral entry have been studied by researchers investigating environmental and organizational influences on intraorganizational and interorganizational mobility (Wholey, 1984). Most studies treat only one of the mechanisms rather than comparing the two (e.g., Pfeffer and Cohen, 1984; Doeringer and Piore, 1971). Research on the merger process is primarily found in the strategy literature. Merger is assumed to be the primary means for diversification (e.g., Porter, 1987) and scant attention has been paid to organization level reasons for merger beside the diversification motive. Moreover, the focus on merger to effect diversification has meant that little attention is paid to internal diversification.
Law firms (and other professional firms) are better able than firms more commonly studied by strategy researchers to use all three mechanisms for all types of growth. Unlike other types of organizations, the service and service-provider are not readily separated in the professional service firm (PSF). In a law firm, one attorney can open a new practice area or branch office. Internal development (which, in addition to the promotion of associate attorneys to partnership, includes the entry into new practice areas and the opening of branch offices by current partners) is therefore a viable mechanism for implementing a product or market diversification strategy. By the same reasoning, diversification can occur by lateral entry, that is, the acquisition of one or a small number of attorneys at the partnership level. Conversely, merger, the formation of one partnership from two previous partnerships, is not necessarily used exclusively for diversification but may also be a mechanism for enlarging the size of the existing practice.
BACKGROUND AND HYPOTHESES
Internal Firm Conditions
Traditionally, law firms have favored growth by internal development. Thus, they are included in the category of organizations that are considered to be internal labor markets (ILMs). Law firms recruit law school graduates who enter the firm as associates and progress through levels of increasing seniority until a partnership decision is made, a process which generally takes between seven and ten years. This promotional structure creates a need for growth due to the practice of leveraging the skills of senior professionals with efforts of junior members, that is, billing out more fees in junior hours than they earn in salary so that partners may share in resulting profits. Leveraging pushes firms to grow because once juniors become seniors, moving from salaried to profit-sharing positions, new juniors are needed or the rewards of top professionals will shrink. Thus, growth is needed in order to maintain desired ratios.
The "up-or-out" system is motivational to associate attorneys, as performance is the route to partnership. Within this promotional structure, the failure to promote deserving associates within normative time limits (usually seven to ten years) will erode the incentive central to the recruitment and motivation of junior members. While there is no shortage of lawyers, there is nonetheless a limited number of graduates of top law schools, and competition for those is fierce. Therefore, greater growth by internal development is expected in firms with a higher ratio of associates to partners.
Hypothesis 1: Associate-to-partner ratio is positively related to internal development.
Despite the aforementioned inducements to maintain a closed ILM, law firms are increasingly engaging in development through external mechanisms, that is, lateral entry and merger. Research on lateral entry is addressed primarily within the literature on internal labor markets (e.g., Baron et al., 1986). The focus of the literature is on the determinants of firm choice between staffing by lateral entry and the ILM policy of promotion-from-within. The motivation most often assumed to explain lateral hiring is the need for instant expertise, an argument which is supported by findings that specialists have greater interorganizational mobility than others (Leggatt, 1979). However, research has paid most attention to the benefits of internal promotion; reasons for the use of lateral entry in a predominantly closed ILM have not been empirically examined.
Merger has received considerable attention in the strategic management literature. A variety of motives to explain merger activity have been proposed (Trautwein, 1990; Mueller, 1980; Steiner, 1975; Pfeffer, 1972). Lubatkin (1983) suggests that merger can be understood as an attempt to attain technical economies (economies of scale), pecuniary economies (increased market power), and diversification economies (reduced risk). Research also indicates that mergers take place as a result of the advantages of size for organizational managers. For example, evidence of the positive relationship between organizational size and executive salary is consistently reported (Finkelstein and Hambrick, 1989; Lubatkin, 1983; Meeks, 1977). Other, more intangible advantages of size such as status and prestige also accrue to members of large organizations. The use of merger to achieve rapid growth is well documented (Mueller, 1980).
The greater reliance of the general practice corporate law firm on external growth mechanisms is largely a result of fundamental changes in the competitive environment of the legal profession, a major cause of which is the changing nature of the client/law firm relationship. The increasing use of corporate in-house legal staff for routine legal services has shifted the role of outside counsel toward legal work that cannot be efficiently handled internally, such as large scale litigation or highly specialized matters. Moreover, internal general counsel, sophisticated and powerful buyers of legal services who know what legal services should cost and have the authority to choose which firms provide their services, are increasingly spreading work among several law firms rather than conducting exclusive relationships with one or two firms. As a result, law firms have attempted to become more competitive by increasing their emphasis on client-getting, their size, and their product/market scope.
One result of client movement toward in-house legal services and away from loyalty to any particular firm is the need to develop business-generators throughout the firm. As the ability to attract and keep attorneys who can produce and maintain a strong client base becomes more critical, the basis of law firm partner compensation is shifting from seniority to a merit-based system with client responsibility as a primary criterion (Heintz, 1981), a shift which is increasing insecurity and decreasing the loyalty of firm members. Firms which are highly reliant on a limited number of "rainmakers," as business producers are called, are especially vulnerable to the loss of those attorneys. Such firms are expected to attempt to reduce their vulnerability by increasing the proportion of partners who are rainmakers through lateral recruitment.
Hypothesis 2: Reliance on rainmakers is positively related to lateral entry.
An emphasis on size is linked to an increasingly competitive environment through the advantages inherent in being large. Liabilities of smallness have been recognized by both economists and organization theorists (Penrose, 1959; Aldrich and Auster, 1986). Of the liabilities commonly identified by such researchers, those most pertinent to law firms include the difficulty of raising capital, a weak position in the competition for labor, and instability due to variation (e.g., unbalanced work loads). Besides reducing these difficulties, larger size provides the professional firm with geographical comprehensiveness, flexibility of operation, a wide range of specialities, the ability to attract the highest quality professionals, and confidence-inspiring prestige (Montagna, 1974). For law firms, the advantages of large size (e.g., the ability to create multi-specialty teams and the ability to put large numbers of lawyers on a matter on short notice) help to attract large clients, whence large fees are most readily generated. Moreover, the relationship between large size and large per-partner profits (Brill, 1994, 1993, 1992, 1991, 1990, 1989, 1988, 1987, 1986, 1985) contributes to the large firm's ability to attract and keep top lawyers. Finally, large firms are less susceptible to endangerment through the loss of clients (Pfeffer and Salancik, 1978) and are buffered also against the departure of partners insofar as sheer numbers limit the effect of departures. Given the usefulness of merger to effect large size increases, smaller firms are expected to merge to achieve rapid growth.
Hypothesis 3: Size is negatively related to merger.
Product/Market Expansion Objectives
The competitive structure of the legal profession has also been altered by efforts to become transnational and highly specialized. A growing number of firms are opening branch offices, and the creation of narrow specialty area departments or "boutiques" within large firms is also increasing.
Commonly held reasons for diversification vary in applicability to law firms. Financial economies like risk-pooling and portfolio management, that is pooling of cash flows, are generally associated with unrelated diversification (Hill and Hoskisson, 1987). The concept of risk-spreading as it applies to conglomerate diversification refers to the spreading of resources and concomitant reduction in investment risk (variability of returns over time) (Lubatkin and Chatterjee, 1994). This concept does not apply to PSFs, which are neither highly diversified nor publicly held. Some of the advantages realized by related diversifiers, such as vertical integration, also lack applicability to law firms.
Two other motives for diversification do obtain. First, diversification defends against decline in product demand (Galbraith et al., 1986; Salter and Weinhold, 1979; Ansoff, 1965). Diversification spreads risk by reducing vulnerability to exogenous changes in supply or demand stemming from reliance on an overly narrow range of services. Hence, law firms diversify as a means to compensate for the lack of opportunity for growth in their focal practice fields.
A second and more widespread motive for law firm diversification is the pursuit of practice area breadth in order to compete effectively as "full-service firms." For example, large firms which once disdained bankruptcy matters have developed bankruptcy practices as a result of the increasing number of bankruptcies brought about by events in the business environment. In addition, the increasing complexity and interdependence of legal fields has increased the need for multi-specialty teams, such as the necessity for lawyers with expertise in corporate law, tax law, real estate law, etc. for restructuring work. In sum, general practice firms face pressures to offer a full array of legal services. Similarly, client need for transnational legal services and the competitive advantage of maintaining a presence in major business centers induce law firms to open branch offices.
Considering the benefits of immediate expertise and, often, new clients, acquisition should be preferable to internal development for opening new practice areas. Furthermore, since law firms are able to begin new practice areas with one or a limited number of attorneys, expanding firms are expected to add practice areas by acquiring lateral partners.
Hypothesis 4: Practice development is positively related to lateral entry.
The benefits of acquiring an up and running operation with an existing client base should also make the external mechanisms useful for branch office development. However, integration difficulties associated with merger, and to a lesser extent with lateral partners, make it difficult to assure uniformity of the practice across offices and to maintain firm culture. Due to the importance of these professional issues, internal development should be preferred for opening branch offices.
Hypothesis 5: Branch office development is positively related to internal development.
In addition to product/market expansion, law firms also increase the size of existing practice area departments. In the absence of mitigating factors such as the need for rapid expansion, and given the PSF promotional structure, the preferred mechanism for this type of growth should be internal development. Wholey's (1985) finding that promotion was the dominant mechanism for staffing senior positions in the law firms he studied supports this supposition. However, under certain circumstances lateral entry may also be used to expand existing practice areas, such as when the firm has an insufficient number of partners to handle increasing business, or when there is an opportunity to acquire a good rainmaker. To the extent that an increase in size alone is perceived to be beneficial (irrespective of actual firm size), the use of merger to enlarge existing practice areas would also be expected. This variety of factors leads to the expectation that the enlargement of the existing practice will be related to growth by all the mechanisms.
Hypothesis 6: Practice area enlargement is positively related to internal development, lateral entry, and merger.
Profit Outcomes of Strategic Decisions
Studies investigating the difference between alternative modes of diversification (internal versus acquisitive) in affecting performance are practically nonexistent (Datta et al., 1991). One study by Lamont and Anderson (1985) found internal diversifiers to be more profitable than acquisitive diversifers. Other research has focused on the relative performance of merger versus non-merger firms; numerous studies have been undertaken in an attempt to discern the merger-profitability relationship. Results of these studies are contradictory and inconclusive. On the one hand researchers report that a wealth gain does accrue to shareholders as a result of merger (Chatterjee, 1986; Lev and Mendelker, 1972), while other results show the effect of merger on profitability to be neutral or negative (Davidson, 1985; Meeks, 1977; Melicher and Rush, 1974). Mueller's (1980) international study of merger determinants and effects found no consistent pattern of improved or deteriorated profitability across countries studied.
The relationship of diversification to performance has been investigated primarily in terms of the relative success of related and unrelated diversifiers in achieving profitability increases (Lubatkin and Rogers, 1989; Barney, 1988; Dubofsky and Varadarajan, 1987; Michel and Shaked, 1984; Rumelt, 1982; Bettis, 1981; Christensen and Montgomery, 1981). Again, study results have been inconclusive and contradictory (Datta et al., 1991), though on balance there is some evidence of better performance by related than by unrelated diversifiers.
Despite the inconclusive empirical evidence, prevailing wisdom holds that related diversification has the potential to be successful, that is, to increase earnings when diversification exploits synergies or scope economies (Nayyar and Kazanjian, 1993; Kazanjian and Drazin, 1987; Porter, 1985; Salter and Weinhold, 1979). One such advantage is the opportunity for cross-selling, which lowers the cost of finding new buyers (Porter, 1985) and provides the opportunity for tie-in sales (Ansoff, 1965). Cross-selling has received attention in recent years by management writers in connection with service industries such as banking and insurance. Building multiple relationships with clients is believed to improve competitive advantage by strengthening client loyalty (Sippel and Gouthro, 1987), as a high level of business with a single provider can serve to increase efficiency and accuracy (Costigan, 1987) and increase switching costs. However, the effect of cross-selling on the relationship between diversification and profitability has not been empirically examined. Applied to law firms, business unit cross-selling refers to multiple practice area use and multiple branch office use by clients, and can be measured as the percentage of firm revenues derived from clients who use the firm for multiple services.
The conventional measure of profitability in law firms, as in professional service firms generally, is net income per partner (Maister, 1993, 1984). As long as the associate-to-partner ratio remains stable, increasing the number of partners alone should not affect per partner profit. Rather, improving profitability requires that value is added to the firm such that more and higher paying business results. Therefore, per-partner profits should not increase as a result of growth by any of the mechanisms per se, nor from enlarging the existing practice, but rather from the cross-selling of services. Cross-selling should moderate relationships between practice and branch office development and per-partner profit irrespective of growth mechanism.
Hypothesis 7: Per partner profit is positively related to practice development and branch office development by any growth mechanism in the presence of cross-selling.
SAMPLE AND METHODS
Data were collected in structured interviews with managing or senior partners in a sample of sixty-one New York City law firms. The sample was drawn from a population of one hundred thirty-eight "general practice" corporate firms, which are firms that provide corporate clients a full array of legal services. Firms ranged in size from fifteen to over two hundred attorneys. There were twenty-seven firms with fewer than fifty attorneys, twenty-two firms with fifty to one hundred twenty-four attorneys, and twelve firms with one hundred twenty-five or more attorneys. T-tests were conducted to test the representativeness of the sample to the population. Analyses revealed no significant differences between the sampled and non-sampled groups.
Data concerning antecedent firm conditions, expansion strategies, and growth mechanisms were collected for each year from 1983 through 1987. Firm conditions included associate-to-partner ratio, firm size (the total number of associates and partners), and reliance on rainmakers (the ratio of "percentage of firm business attributable to rainmakers" to "number of rainmakers in the firm"). Expansion strategies included practice area enlargement (the percentage increase of new partners in existing departments), practice development (the percentage of new practice areas), and branch office development (the percentage of new branch offices). Within this period, all firms made new partners for a total of three hundred forty-one new partners, thirty-five firms added a total of seventy-nine new practice areas, and twenty-eight firms added a total of forty branch offices. Growth mechanism data were operationalized as percentage increases in the size of the firm (total number of lawyers) due to internal development, lateral entry, and merger. From 1983 through 1987, all firms had some type of internal development, forty-one engaged in lateral entry, and twenty-two firms were involved in a merger. In these analyses, a total pooled sample of two hundred forty-four was possible.
Hypotheses predicting the use of growth mechanisms were tested by multiple regression analysis. Each mechanism was regressed onto firm conditions and expansion strategies. Since strategic growth behavior is assumed to be based on information from the past, values of the firm condition variables were expected to have a lagged effect on the dependent variable. Given the expectancy of relatively quick implementation of strategic decisions, a one year lag was used. Also, a lagged value of the dependent variable was included as an independent variable in order to control for the portion of the adjustment that had already occurred (Judge et al., 1980).
Hypotheses predicting the influence of growth on per-partner profitability were also tested by multiple regression analysis. In this case, the strategy/mechanism combinations were operationalized as the percentage of partners added to a firm via each mechanism. For example, promoting three associates to partner in a firm with thirty partners would represent a ten percent increase in the size of the existing practice through promotion (i.e., practice area expansion by internal development). Given that some time is needed before strategic decisions can be expected to affect profit, growth data over the five year period of the study were combined and the per-partner profitability measure was obtained for the years 1983 to 1987 inclusive. Therefore, data were essentially cross-sectional and hypotheses were tested by non-lagged multiple regression analysis. Since the data were combined for the five year period, a total sample of sixty-one was possible.
RESULTS AND DISCUSSION
Table 1 presents regression results for tests of relationships between the growth mechanisms and the set of firm conditions and expansion strategies.
The prediction that associate-to-partner ratio would be significantly and positively related to internal development was supported. The relationship of ratio to internal development reflects the need for law firms to be responsive to the promotion expectations of associate attorneys in order to attract and motivate junior members. The implication of this finding is considerable, as it suggests that the promotional structure of law firms impels growth beyond that attributable to market demand for legal services. As hypothesized, internal development was also found to be related to the enlargement of existing practice areas and the opening of branch offices.
A positive relationship was found between lateral entry and reliance on rainmakers. There is a greater use of lateral entry in firms where a small number of rainmakers is responsible for generating a large amount of business. Apparently, firms seek to reduce this vulnerability by bringing in lateral partners. The objective in using this mechanism is thus not growth per se but rather the correction of an identified weakness through strategic acquisitions. Legal expertise is also more likely to fe imported than developed within the firm, supporting claims that lateral entry is used to bring important skills into the organization. The finding that lateral entry, and not merger, is the primary route to practice diversification is particularly interesting in light of assumptions about merger made in the strategy literature. Diversifying through lateral entry appears to allow the firm to "cherry pick" attorneys with preferred legal and business skills and avoids the threats to firm culture and other risks of failure associated with merger. These issues are especially ponderous in a professional firm, where the psychological investment of firm members in the culture and processes of their organization is considerable.
Lateral entry was also found to be inversely related to associate-to-partner ratio. The flip side of the internal development/associate-to-partner ratio relationship, this finding suggests that lateral entry is more likely in firms where a lower ratio reduces the pressure to make partners from the ranks of associate attorneys. The unexpected finding of a positive relationship between size and lateral entry suggests that larger size also contributes to the ease of bringing in lateral partners. Finally, there is a significant relationship between the amount of lateral entry one year and the next. This indicates that lateral partners can be found in a relatively short time period, allowing some portion of desired growth by lateral entry to occur quickly.
TABLE 1 Regression Results for Analyses of Growth Mechanism and Firm Condition Relationships and Growth Mechanism and Expansion Strategy Relationships Growth Mechanisms Internal Lateral Entry Merger Development Firm Conditions Internal dev. (lag) 0.013 Lateral entry (lag) 0.161(**) Merger (lag) 0.010 A-P ratio (lag) 0.336(***) -0.308(***) -0.125 Firm size (lag) -0.095 0.208(**) -0.054 Rainmakers (lag) 0.020 0.185(**) -0.115 Expansion Strategies Practice 0.525(***) 0.429(***) 0.374(***) enlargement Practice 0.071 0.343(***) 0.060 development Branch 0.132(**) 0.036 0.129(*) development F 31.816(***) 21.397(***) 6.674(***) Adjusted [R.sup.2] 0.49 0.39 0.15 N 228 229 229 Standardized regression coefficients are reported. * p [is less than or equal to] .05/** p [is less than or equal to] .01/***p [is less than or equal to] .001
Contrary to the expectation that firms would merge to reduce the liabilities of small size, no significant relationship between merger and size was found. On the other hand, the hypothesized relationship between merger and expansion of the existing practice was supported. This suggests that it is the perceived need to be larger, rather than the actual size of the firm, that influences growth by merger. Merger was also found to be related to the addition of branch offices. The use of both internal development and merger for branch office development confirms the salience of the dilemma posed by distance--the tension between the desire for control and the advantage of quick start-up and a local presence.
As expected, results of regression analyses of the relationships between per-partner profit and growth mechanisms and per-partner profit and expansion strategies showed that profit is unrelated to the use of any particular mechanism and to the enlargement of existing practice areas. Also as expected, per-partner profit was found to be related to product and market diversification. However, as seen in Table 2, which shows the moderating influence of cross-selling on per-partner profit, practice development and branch office development add value to the firm in different ways.
Per-partner profitability increases with the addition of practice areas even without cross-selling of the firm's services. Apparently, the capability to provide full service adds to the reputation and perceived value of the fin irrespective of whether clients benefit directly from the firm's greater breadth by utilizing the firm's services in more than one legal field. It may well be that the corporate client attaches some significance to knowing that a law firm has the capability to handle unexpected legal complications. However, results show that the effect of practice development on profitability is limited to growth by lateral entry. Since typically there is a primacy of the client-attorney relationship over the client-firm relationship, it may be the particular attorneys brought in laterally who add to the firm's reputation and increase its value to clients.
In contrast to practice development, branch office development without the multiple use of offices by clients was found to have a negative impact on profit, suggesting that without a ready client base the cost of such expansion drains firm resources, at least for the first few years. As hypothesized, per-partner profit increases for firms that cross-sell their branches. However, it is notable that the profit effect occurs when branch offices are opened by internal development and by lateral entry but not by merger. This result is surprising, since branch offices opened by merger have a client base different from that of the principal office, and should provide more opportunity for cross-selling than branch offices opened by internal development. The finding implies a lack of integration of the merged firms.
Implications for Theory Development
The findings of this study suggest the need for a broader approach in analyzing the motives for and effects of using internal and external growth mechanisms. In the literature on organizational mobility, reasons for staffing senior positions by promotion focus on the benefits of internal labor markets, (e.g., employee motivation). The results of this investigation indicate that internal development is also motivated by imperatives stemming from the promotional structure of the firm. This literature also pays little attention to organizational factors that influence decisions to staff senior positions by lateral entry other than the need for expertise not available within the organization. While results confirm the use of lateral entry for bringing specific expertise such as rainmakers into the firm, they additionally show that, at least for professional service firms, imported expertise can also provide a means for diversification.
TABULAR DATA OMITTED
Findings are also pertinent to research on merger and on diversification. The salient issue is the joint discussion of merger and diversification in organization and strategy literature, where merger and diversification are linked in a way which assumes that the strategic use of merger is to diversify. The present study demonstrates the limited utility of this assumption for professional service firms. The law firms studied used merger as a mechanism for enlarging the existing practice and expanding into new geographic markets. On the other hand, diversification into new legal fields was most often and most successfully accomplished by the lateral acquisition of one or a small number of attorneys. Thus, merger and acquisition serve different purposes for law firm growth.
Though this distinction between merger and acquisition may be most meaningful when applied to professional service firms, the consideration of merger objectives can provide some insight into the inconclusive body of research examining the performance outcomes of merger and diversification. Despite the discussion of both size and diversity as motives for growth, the strategy literature typically makes no distinction between merger motives, but simply compares the performance of merger versus nonmerger firms. Also, research on diversification has focused on performance outcomes of related versus non-related diversifiers, with limited empirical attention to the effect of diversification strategy on performance. The failure of the research to adequately assess performance outcomes may be a result of the failure to identify relevant contingencies. Greater clarity should result from conducting research that examines the performance outcomes of all these possibilities: merger of same business firms to effect size increases, merger of related and unrelated firms to effect diversification, and merger versus internal development to effect diversification.
Implications for Application to Law Firm Management
From an applied perspective, the objective of a study on law firm growth is to provide guidance to managing partners and firm administrators responsible for making growth decisions. The findings of this study suggest a number of salient issues to consider in determining how to grow. Though statistics confirm the trend toward larger firm size, results demonstrate that increasing the size of the existing practice is not in itself the key to increased profitability. Rather, that benefit appears to derive from increasing the value of the practice to the client. While a larger number of attorneys may serve that purpose for some types of practices, such as for mergers and acquisitions work requiring the ability to put a large number of attorneys to work on a matter on short notice, most firms will add value through the breadth of services offered and the stature of particular attorneys. Concerning practice development, findings have indicated that a broad complement of practice areas is important to profitability. Moreover, profitability accrues from entering new fields by bringing in lateral partners with established legal and client-management skills. Conversely, advantages to be gained from opening branch offices appear to be dependent on whether firm clients will make multi-site use of those offices. In addition, either internal development or lateral entry are appropriate for implementing the branch office development strategy, depending on particular firm objectives.
Results also have implications for firm structure. One finding of this study is that having a high proportion of associates results in a high level of promotion. Since promotions result in increasing size in response to the need for structural stability, this practice is contrary to the usual principle that demand for labor is derived from the demand for the product or service. In law firms, growth appears to be a response to supply as well as to demand. This imperative for growth may prevent the firm from effecting a firm/environment fit by precluding retrenchment. This finding is especially salient in the face of an environment characterized by cost conscious clients, expensive associate salaries, and no room to increase the billable hours needed to leverage those salaries. Law firms today are faced with declining levels of business activity and the need to rid themselves of excess human capital. Given a critical need to develop structures to accommodate slowed growth, law firms have introduced structural innovations such as permanent associate positions and nonequity partnership arrangements. However, these solutions have been limitedly successful, as they erode the meaning of partnership and reduce morale. The question of how best to grow slowly in the long term needs to be addressed. It appears important to set optimum levels of associate-to-partner ratio on projections about future demand for services.
Another instructive finding of this study is that law firms with a small proportion of business-generating partners bring new partners into the firm laterally to increase revenue through the introduction of new clients. This response is especially interesting in light of research suggesting that power in the law firm is inextricably tied to control of clients, and that it is the attorneys with client control who are responsible for the development of organizational policies (Nelson, 1988). Given the authority of rainmaking partners, their entrance into the firm during periods of economic uncertainty is particularly significant. It may be that law firms need to consider alternative approaches to increasing the rainmaking activity of their existing members. For one thing, it makes sense to restructure the ways in which profits are divided among partners so as to reward business-getting. Many law firms have already revamped incentive systems to encourage all members to consider business generation as part of their jobs. Incentive systems should also reward the contribution of cross-selling to overall firm performance.
An overarching issue for law firm management growing out of this study is that law firms need to plan their growth. Throughout the planning and conducting of this research, the author has spoken with many lawyers. Their responses to the concept of law firms as a subject for organization theory research were often funny and, in that humor, instructive. More than one lawyer expressed the thought that the notion of law firm strategic planning is an oxymoron, that law firms don't plan but rather grow by serendipity. Despite the drastic changes that have taken place in the environment for legal services, there is probably great truth in that statement. Most law firms don't plan, or at least don't engage in formal, long-range planning. The results of this study suggest that this approach is becoming increasingly less viable. Law firms need to be responsive to the ebb and flow of corporate business activity. For instance, the enormous amount of business generated in recent years by leveraged buyouts and other merger activity is likely to subside, while new areas like environmental work and intellectual property matters are burgeoning. Though it is difficult to plan for this type of change, the structure of the professional firm is well suited to small scale entry into new fields and even into new cities (though at a greater cost), allowing for flexible reactivity to environmental change. As the legal profession becomes, for better or worse, more embued with the conventional concerns of running a business, those firms behaving like businesses are more likely to survive and prosper.
Aldrich, H.E., and E.R. Auster. 1986. "Even Dwarfs Started Small: Liabilities of Age and Size and their Strategic Implications." In Research in Organizational Behavior. Eds. L.L. Cummings and B. Staw. Greenwich, Conn.: JAI Press. 165-198.
Ansoff, H.I. 1965. Corporate Strategy: An Analytic Approach to Business Policy for Growth and Expansion. New York: McGraw Hill.
Barney, J.B. 1988. "Returns to Bidding Firms in Mergers and Acquisitions: Reconsidering the Relatedness Hypothesis." Strategic Management Journal 9: 71-78.
Baron, J.N., A. Davis-Blake, and W.T. Bielby. 1986. "The Structure of Opportunity: How Promotion Ladders Vary Within and Among Organizations." Administrative Science Quarterly 31: 248-273.
Bettis, R.A. 1981. "Performance Differences in Related and Unrelated Diversified Firms." Strategic Management Journal 2: 379-394.
Brill, S. (Ed.). 1994. "The AmLaw 100." The American Lawyer (July/August) Special Supplement.
-----. 1993. "The AmLaw 100." The American Lawyer (July/August) Special Supplement.
-----. 1992. "The AmLaw 100." The American Lawyer (July/August) Special Supplement.
-----. 1991. "The AmLaw 100." The American Lawyer (July/August) Special Supplement.
-----. 1990. "The AmLaw 100." The American Lawyer (July/August) Special Supplement.
-----. 1989. "The AmLaw 100." The American Lawyer (July/August) Special Supplement.
-----. 1988. "The AmLaw 100." The American Lawyer (July/August) Special Supplement.
-----. 1987. "The AmLaw 100." The American Lawyer (July/August) Special Supplement.
-----. 1986. "The AmLaw 100." The American Lawyer (July/August) Special Supplement.
-----. 1985. "The AmLaw 100." The American Lawyer (July/August) Special Supplement.
Chatterjee, S. 1986. "Types of Synergy and Economic Value: The Impact of Acquisitions on Merging and Rival Firms." Strategic Management Journal 7: 119-139.
Christensen, H.K., and C.A. Montgomery. 1981. "Corporate Economic Performance: Diversification Strategy Versus Market Structure." Strategic Management Journal 2: 327-343.
Costigan, J. 1987. "Cross-selling: More Gain for the Pain." Best's Review (Life/Health Edition) 88: 45-48.
Datta, D.K., N. Rajagpalan, and A.M.A. Rasheet. 1991. "Diversification and Performance: Critical Review and Future Directions." Journal and Management Studies 28: 529-558.
Davidson, K.M. 1985. Megamergers. Cambridge, Mass.: Ballinger.
Doeringer, P.B., and M.J. Piore. 1971. Internal Labor Markets and Manpower Analysis. Lexington, Mass.: Lexington Books.
Dubofsky, P., and P.R. Varadarajan. 1987. "Diversification and Measures of Performance: Additional Empirical Evidence." Academy of Management Journal 7: 119-139.
Finkelstein, S., and D.C. Hambrick. 1989. "Chief Executive Compensation: A Study of the Intersection of Markets and Political Processes." Strategic Management Journal 10: 121-134.
Galbraith, C.G., B. Samuelson, C. Stiles, and G. Merrill. 1986. "Diversification, Industry Research and Development, and Market Performance." In Academy of Management Proceedings '86. Eds J.A. Pearce II and R.B. Robinson Jr. Chicago, Ill: Academy of Management. 17-20.
Heintz, B.D. 1981. "The Economic Future of Law Firms: 1984 and Beyond." American Bar Association Journal 67: 447-449.
Hill, W.L., and R.E. Hoskisson. 1987. "Strategy and Structure in the Multi-product Firm." Academy of Management Review 12: 331-341.
Judge, G.G., W.E. Griffiths, R.C. Hill, and T.C. Lee. 1980. The Theory and Practice of Econometrics. New York: John Wiley.
Kazanjian, R.K., and R. Drazin. 1987. "Implementing Internal Diversification: Contingency Factors for Organization Design Choices." Academy of Management Review 12: 342-354.
Lamont, B.T., and C.R. Anderson. 1985. "Mode of Corporate Diversification and Economic Performance." Academy of Management Journal 28: 926-934.
Leggatt, T. 1979. "Managers in Industry: Their Interorganizational Mobility." Human Relations 32: 851-869.
Lev, B., and G. Mendelker. 1972. "The Microeconomic Consequences of Merger." The Journal of Business 45: 85-104.
Lubatkin, M. 1983. "Mergers and the Performance of the Acquiring Firm." Academy of Management Review 8: 218-225.
-----, and R.C. Rogers. 1989. "Diversification, Systematic Risk, and Shareholder Return: A Capital Market Extension of Rumelt's 1974 Study." Academy of Management Journal 32: 454-465.
-----, and S. Chatterjee. 1994. "Extending Modern Portfolio Theory Into the Domain of Corporate Diversification: Does it Apply?" Academy of Management Journal 37: 109-136.
Maister, D.H. 1984. "Profitability: Beating the Downward Trend." Journal of Management Consulting 1: 39-44.
-----. 1993 Managing the Professional Service Firm. New York: The Free Press.
Meeks, G. 1977. Disappointing Marriage: A Study of the Gains from Merger. Cambridge: Cambridge University Press.
Melicher, R.W., and D.R. Rush. 1974. "Evidence on the Acquisition-related Performance of Conglomerate Firms." Journal of Finance 29: 1941-1949.
Michel, A., and M. Shaked. 1984. "Does Business Diversification Affect Performance?" Financial Management 13: 18-25.
Montagna, P.D. 1974. Certified Public Accounting: A Sociological View of a Profession in Change. Houston, Texas: Scholars Book Co.
Mueller, D.C. 1980. "A Cross-national Comparison of the Results. In The Determinants and Effects of Mergers: An International Comparison. Ed. D.C. Mueller. Cambridge, Mass.: Oelgeschlager, Gunn and Hain. 299-314.
Nayyar, P.R., and R.K. Kazanjian. 1993. "Organization to Attain Potential Benefits from Information Asymmetries and Economies of Scope in Related Diversified Firms." Academy of Management Review 18: 735-759.
Nelson, R.L. 1988. Partners With Power: Social Transforation of the Large Law Firm. Berkeley: University of California Press.
Penrose, E.T. 1959. The Theory of the Growth of the Firm. New York: John Wiley.
Pfeffer, J. 1972. "Merger as a Response to Organizational Interdependence." Administrative Science Quarterly 17: 382-394.
-----, and Y. Cohen. 1984. "Determinants of Internal Labor Markets in Organizations." Administrative Science Quarterly 29: 550-572.
-----, and G.R. Salancik. 1978. The External Control of Organizations: A Resource Dependence Perspective. New York: Harper and Row.
Porter, M.E. 1985. Competitive Advantage: Creating and Sustaining Superior Performance. New York: The Free Press.
-----. 1987. "From Competitive Advantage to Corporate Strategy." Harvard Business Review 65: 43-59.
Rumelt, R.P. 1982. "Diversification Strategy and Profitability." Strategic Management Journal 3: 359-369.
Salter, M.S., and W.A. Weinhold. 1979. Diversification Through Acquisition. New York: The Free Press.
Scott, R. 1965. "Reactions to Supervision in a Heteronomous Professional Organization." Administrative Science Quarterly 10: 65-81.
Sippel, E.W., and J.W. Gouthro. 1987. "Cross-selling: The Unfulfilled Promise." Best's Review 88: 14-16, 106-107.
Steiner, P. 1975. Mergers: Motives, Effects, Policies. Ann Arbor: University of Michigan Press.
Trautwein, F. 1990. "Merger Motives and Merger Prescriptions." Strategic Management Journal 11: 283-295.
Wholey, D.R. 1984. Organizational Influences on Career Patterns: An Analysis of Law Firms. Unpublished doctoral dissertation, University of California, Berkeley.
-----. 1985. "Determinants of Firm Internal Labor Markets in Large Law Firms." Administrative Science Quarterly 30: 318-335.
Ellen S. Weisbord Associate Professor of Management Pace University
|Printer friendly Cite/link Email Feedback|
|Author:||Weisbord, Ellen S.|
|Publication:||Journal of Managerial Issues|
|Date:||Sep 22, 1994|
|Previous Article:||The effects of experience and the firm's environment on manager's project selection decisions.|
|Next Article:||Environmental attitudes and knowledge: an international comparison among business students.|