Every law firm goes through a series of decision points at various stages of its existence. Sometimes a firm makes a conscious choice, sometimes choices are forced upon it and sometimes firms simply wait and let the critical moment pass, hoping that a clear market trend will emerge. If they wait, however, things could go in one of two ways. Either firms might lose a clear first-mover advantage and surrender lucrative business opportunities or they might gain the benefit of entering a market that has stabilized, where the major risks have already been taken and quantified and which is inhabited by relatively mature players.

In this column, I examine four such critical decisions that a number of firms have grappled with. This is not to suggest that this is the sum total of difficult decisions that a firm must grapple with, as any managing partner will tell you. Nor is it necessarily true that these decisions are the most difficult ones for firms. But these questions are common, complex, involve multiple variables and have comparatively unpredictable consequences. Some firms have chosen answers that have  moved them to greater heights, others have stumbled.

Personalities or Institutions?

Legendary corporate lawyer Joe Flom, one of the founders of Skadden Arps Slate Meagher & Flom once said that his goal at Skadden was, “To build an institution where my passing might be noticed but not important.” Today, with 24 Skadden offices worldwide and about a thousand lawyers, this seems more than likely. David Boies left Cravath to start Boies, Schiller and Flexner and now he has 200 lawyers to keep him company as his firm emerges as one of the most profitable ones in the U.S.

The numbers, however, do not tell the whole story. Some firms, like Skadden, have succeeded in outgrowing their founders and emerging as institutions. Others have never quite managed to outgrow the powerful aura of the lawyers who started them. Some firms have fully understood and internalized the processes of identifying the next generation of leaders, training them and giving them a stake in the firm’s future.  These have generally managed to make the transition to institutional status.

Firms also have to consider the issue of whether institutional relationships are stronger than personal ones. At the very top end, the largest commercial institutions tend to have institutional relationships with the top law firms – Goldman Sachs with Sullivan & Cromwell, IBM with Cravath or Google with Wilson Sonsini. Not only does this make it harder for partners to depart with major clients, when they move from one firm to another, it also makes a law firm’s growth symbiotic with the growth of its major clients.

Specialize or Full Service?

A Greek philosopher once said “The fox knows many little things. The hedgehog knows one big thing.” Law firms often face a similar choice – stay an IP or litigation boutique or go full-service? Some firms tackle this decision head-on at an early stage and reap rich rewards. Again, Skadden is a good example – the firm’s decision to go full-service helped to insulate it from the downturn in the U.S. merger market between 1969 and 1972 and to ensure that firm income stayed steady.

The decision to go full-service can entail significant costs that may not ultimately justify itself. Many firms spend years and millions on building up departments only to see key personnel leave, taking associates and client relationships with them. Moreover, there’s no point going full-service if you don’t have a critical mass of lawyers to take on projects of a certain size. Some expansion choices are natural – it’s important for a firm which does M&A to have strong antitrust and tax advisory groups to ensure that the merger goes through. A deals litigation group is a good idea too, in case things run into trouble. A banking and finance oriented firm may benefit from a good bankruptcy practice. A telecom firm may have the capacity to handle both regulatory as well as intellectual property matters. The golden rule seems to be that expansion without supervision is a recipe for disaster.

Some firms decide that going full-service is just a dilution of their core competence. New York’s Wachtell Lipton decided to concentrate on M&A and takeover-defense and have enjoyed a position of dominance as the most profitable firm in the U.S. And some diversification is inevitable – even Wachtell has strong tax, antitrust, bankruptcy and employee compensation departments. Similarly, full-service doesn’t really mean full-service – few Wall Street firms handle family law matters on a regular basis. No major Wall Street firm handles non-white collar criminal work, save perhaps on a pro bono basis.

Stay Local, Go Global?

Some law firms follow their clients and the results can be remarkably successful. Simpson Thacher Bartlett is able to provide a global service to private equity giant, Kohlberg Kravis Roberts (KKR) in many of the major jurisdictions where KRR operates (Mumbai might be an exception!). Latham & Watkins, a Los Angeles major, successfully entered the New York market by following Drexel Burnham Lambert, the investment bank that made junk-bond king Michael Milken famous.

Other moves can be more traumatic. Clifford Chance’s entry into the U.S. market was famously difficult, despite merging with a U.S. firm, Rogers Wells. Although things have undoubtedly improved, the firm was ranked last in a 2002 survey for associate satisfaction, key partners left and the firm was actually forced to shut down its California operations. Maybe there’s a lesson there – firms which enter a market pursuant to its existing client relationships are in a stronger position than firms which decide to enter a market and then develop relationships.

About the same time as Clifford Chance’s travails in America, their Magic Circle rivals, Slaughter & May, actually closed their New York office in the midst of an economic boom. The firm’s offices in Singapore were also closed, leaving outposts only in Hong Kong and Brussels. This doesn’t seem to have hurt Slaughter – its profits per partner have actually increased to a point comfortably above the £2 million-a-year mark. Clifford Chance does have a point – expanding outside one jurisdiction can ensure that you’re protected against a local downturn, but as Slaughter’s example shows, even downturns don’t necessarily hurt a firm that’s perceived as the best in its hometown. Nor does it mean that single-jurisdiction firms can’t help its clients out in foreign matters – a good best friends network can often be a powerful thing – ask AZB and Trilegal if you have doubts.

Laterals or Internals?

Writing in 1991, Marc Galanter and Thomas Palay suggested that the model of a big law firm was one of “deferred compensation” where the big pay-off, in both financial and professional terms, happened once an associate became a partner. Today, with more and more lawyers looking to spend a few years in a big law firm before branching out or seeking alternative careers, two kinds of associates have effectively emerged – those who are in for the long haul and those who are not. Some firms are able to identify the potential long-term associates early, compensate them accordingly and give them a limited role in the management of the firm. These firms often tend to be better at retaining young stars.

Other firms may believe that hiring laterally enables it to catch up with its competitors. After all, why pay yourself for the training of a junior associate when you can lure away a fully trained, impeccably networked partner from another firm? But that decision comes with its own set of consequences – firm loyalty may be compromised, long-term employees may be given the wrong message and a culture of belonging may be undercut.

So those are the choices that each law firm makes or needs to make at some point in time. There are no universal right answers – only right answers for particular firms. One thing is for sure, however, each decision involves costs, each has potential benefits and there’s no way you can tell how the story will end once you open the book.

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