Icing is not the Cake; it only serves to make the cake sweet

For some years, law firm strategists have talked about the concept of segmentation.   In a book I wrote four years ago I explained the concept: “Segmentation – which divides law firms into groups serving the different types of potential clients with broadly similar needs and perceptions of value – describes the layers of the cake from the thin layer of top level work (the icing) for mainly corporate clients and the super wealthy at the top of the cake down to the cake base and crumbs at the bottom of the cake.  Segmentation affects work types as well as client types with complex matters falling within the higher layers of the segmentation cake and standardised work being done at a lower level.”

The argument has been that the market for legal services has been segmenting rapidly and that accordingly only a few large firms – the so-called BigLaw firms – will in the future be capable of attracting the higher value work from bigger and more prestigious clients.  It’s a glib and seductive argument and is no doubt correct in many respects.  But there are other forces at work within the legal services market which make the dynamic more complex.  Take, for instance, the thin layer of high value work – the icing on the cake – that is said to be available only to top firms.  This icing layer is roughly estimated to be around 10% of the £25 billion market for legal services in the legal sector.  I am not sure from where the 10% figure comes from, but I think that it is undeniably small as a percentage and – what’s more – it seems to me that available top level work is shrinking fast as more and more work comes under pressure from the forces of commoditisation and processing.  If you take corporate and commercial work, for instance, there seems to me to be a greater and greater preparedness for general counsel to look around for regional firms, niche firms and smaller London firms that can do the marzipan layer of work (and lower) at competitive prices and satisfy quality demands.

As the higher layers shrink, so the lower segments of work become larger.  That trend in part is what seems to have led to the Mexican Wave. If less and less work falls into the “bet the farm” bespoke and guru-reliant mould, I think that large corporates will continue to increase their downwards pressure on legal fees across the board and will not feel hide-bound to appoint global firms. The same principle occurs in private client work.  There are not many firms that can survive if their business recipe is based on them charging more than £500 per hour for top tier private client work; there is just not enough of the critically important, higher level work around. Hence, the bitterest segmentation battles may well be fought at the more sizeable mid-tier levels of work where the forces of commoditisation are hard at work, and where the volume players also come into the equation.  The power of the prestige brand may help resist these pressures a bit, but I am just not sure any more that it is any longer always the case that “nobody ever gets fired for choosing IBM”.

We may not therefore always see the big firms eating the smaller firms, but the nimble and innovative ones biting into the ponderous behemoths with high fixed costs, conservative outlooks and ludicrously high profit expectations.  Hope is not lost for the mid-sized legal market.