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Mid Market Report: Why a Difficult Pandemic Year Is Leading Midsize Firms to Target Virtual Expansion

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By Ben Seal

Editor’s Note: This story originally appeared in The American Lawyer as part of the Am Law 200 issue. For more Am Law 200 data and analysis, see additional coverage here.

For the Am Law 100, 2020 was a remarkably profitable year of nearly across-the-board growth. For the Second Hundred, it was a more understated success. For the firms on the outside looking in at the Am Law 200, it was something more like a struggle.

Out of 15 firms whose revenue places them within shouting distance of the Am Law 200, only two posted modest year-over-year revenue gains and several had significant declines. The 12 firms in this group with both 2019 and 2020 data available collectively averaged a 5% drop in revenue—something only 13 firms in the entire Am Law 200 experienced last year.

Revenue isn’t everything, as meaningful profits growth was still commonplace at firms of all sizes whose top line took a step back. But the results demonstrate that Big Law’s pandemic hot streak didn’t extend to all levels of the legal industry. As business gets back to something approaching normal, though, the past year could open the door for midsize firms to expand into new locations to better serve clients—and reach new ones—as they seek to carve out a niche in a competitive marketplace.

“What the midsize firms have to do is to take advantage of this new world we live in now,” says Brian Kennel, a Louisiana-based consultant who works primarily with firms on the smaller end of the midsize spectrum.

Kennel and other industry observers say that, by diminishing the need for brick-and-mortar offices, remote work has made it possible for firms to expand into markets they previously wouldn’t have considered.

At Nossaman, a Los Angeles-headquartered firm whose $89 million in 2020 revenue represented a 1% decline, managing partner George Joseph says the success of remote work has made virtual expansion a possibility.

“We’ve engaged in preliminary discussions with laterals in new markets where it would make sense for us to have a presence but not necessarily a physical office,” Joseph says. “We’ve had a handful of attorneys working remotely, well before the pandemic hit, so the concept is not new to us. It’s an expansion option that we are comfortable pursuing.”

Efficiency is the name of the game for firms in Nossaman’s bracket, Kennel suggests. And combining the benefits of expansion—more to offer geographically diverse clients; more clients to reach; more potential talent to attract—without the associated costs is an inviting proposition.

“If you’re trying to grow you need to be growing without spending capital as much as you possibly can. Get the geographic reach down without having to put in nonproductive resources,” Kennel says, referring to the pesky costs of physical real estate, furniture and all that comes with it.

Dan Scott, the Detroit-based director of Angott Search Group, says he’s seen firms in the Midwest—home to many firms in the Second Hundred and at its fringes—beginning to offer fully remote partner positions as they seek to expand not just in their home markets but in new ones as well.

And firms aren’t just considering moving into new midsize markets. Scott says some are eyeing expansion into major markets where their lower rates would strike clients as a significant discount from the costs of hiring a larger firm. The option to do so virtually simply amplifies the benefits of such a move and reduces its financial risk.

The rule of thumb, Scott says, is that establishing a new office is worthwhile if it will house at least a $5 million practice. But that number is significantly lower if the costs of a physical presence are removed from the conversation.

At Miller Canfield, a Detroit-based firm whose $97 million in 2020 was a 9% decline, Amy Johnston, chair of the firm’s managing directors, says expansion is underway, with a focus on growth in Chicago and Washington, D.C., the latter of which the firm entered in 2019.

Johnston attributes Miller Canfield’s revenue challenges to trends that had a limited effect on much larger firms. As clients paused projects in 2020 and delayed payments, the firm began seeing months-long delays, some of which pushed into this year.

“We have always considered ourselves partners with our clients, and when they are in trouble we want to help,” Johnston says. “That meant unexpectedly carrying some clients last year and not demanding the normal 30-day pay schedule.”

Joseph says he expects projects put on hold during the pandemic to return in 2021, giving Nossaman a boost as it looks to get back to expanding its ranks and growing in its current markets.

Barbara Duffy, president of Pacific Northwest law firm Lane Powell, whose $94 million in 2020 revenue was a 6% decline, says the firm set portions of its growth plan aside in 2020 to focus on more urgent needs, including the people already at the firm.

“We really intended last year to be a period of sustained growth,” Duffy says. “We had to pivot, but we’re very optimistic about our platform.”

While expanding to develop a bigger footprint is one path to growth, it’s far from the only meaningful step firms can take to climb closer to the Am Law 200. For Kennel, there’s another critical piece of the puzzle at smaller and midsize firms.

“They need to automate, automate, automate,” he says.

For those who can’t offer the same size and scale as the largest firms, efficiency and innovation offer a compelling case to clients, and automation is an important part of getting there, Kennel says. As legal departments bring more work in-house, the improved workflows and streamlined processes afforded by even low-end automation can simplify some work enough to safeguard it.

At Nossaman, Joseph says the pandemic has taught the firm it can successfully work with clients in a fully remote environment. But now he’s intent on taking it to the next level by developing effective solutions for clients, including enhanced client portals, and leveraging artificial intelligence and legal project management to maximize what the firm can offer.

After a challenging year that dealt a difficult hand to many firms outside the Am Law 200, expansion and automation offer two possible paths to go down, but the destination is clear.

“You’ve got to find your value and find your margin,” Kennel says.

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