We are witnessing the end of the consolidation of the legal market and a very incipient beginning of a concentration phase, although it is difficult to predict how far it will go.

Without wishing to make a crystal ball prediction, this article describes the factors that can help us to understand, from a strategic point of view, whether the legal sector in Spain is being reconfigured, and whether we have reached the end of a consolidation phase to move towards an incipient concentration.

In any informal conversation on strategy, one hears that large firms will become increasingly large, and that medium-sized and small firms will find it more difficult to compete in the medium term. At the global level, mergers such as that of A&O Shearman, or the announced merger of Herbert Smith Freehills and Kramer Levin, invite us to think that gaining size is a trend and a guarantee of competitiveness. At the local level, the constant growth taken overall in turnover and number of professionals -both indicators depend on the firm- also seems to show that there is a competitive advantage with the size that everyone wants to achieve.

With the data in hand, and taking the last five years as a reference, it seems that the market is moving towards a very incipient concentration. The Spanish market, before the entry of Anglo-Saxon firms into Spain, was an atomized market (until the end of the 1980s), and it is beginning to consolidate as a competitive strategy. In the last 35 years, firms in Spain have become larger, with some size corrections along the way.

If we take into account the turnover of the top 25 firms in the market (turnover in Spain), the aggregate figure – net of inflation – tells us that their turnover has increased. The range of variation of this data in the firm-by-firm analysis shows us how this consolidation is taking place: the legal sector in Spain is not a merger market when we refer to large firms -at least until now-, but rather it opts for the so-called “lateral transfers” in which a partner or a team moves from one firm to another, transferring the business it can from one firm to another.

The growth of the larger firms outside Spain is also a factor that may be an indication of market maturity, and shows a view of greater opportunities outside than the “marginal” ones inside. The Spanish legal market has limits that seem increasingly visible.

Regarding the number of professionals in the firms, similar data is also observed: taken in general, firms have increased their number of professionals, which indicates a new symptom of consolidation, although there are very notable exceptions with practically similar sizes over a period of five years. These situations show an increase in efficiency that may have its origin in the application of technology to the firm’s accumulated knowledge.

What might lead firms to want to grow and move toward a slight market concentration? The answer is complex. In general, law firms have few economies of scale, and tend to be focused on their overhead costs. Service delivery can be made more efficient, and in some ways produces a similar, but milder, economy of scale effect. One only has to look at the increase in turnover per professional in recent years to contrast this.

From a competitive standpoint, size can help manage the labor market, i.e., recruit the best lawyers. Larger size offers more attractive career opportunities and compensation. Size also helps in the “capital” market – partners – which in principle offers greater access to internally provided cross-selling opportunities. Finally, in a process of internationalization and globalization of clients, size also helps to provide homogeneous services in different jurisdictions, either through own offices or alliances, with clients willing to pay higher prices for the service.

Until now, the “capital” market has focused on bringing in new partners. As professional services firms, the partners retain ownership of the firms and govern them. But we have seen some new developments in this area. A few weeks ago, we read in this medium how the Swiss fund Ufenau established an alliance with Sagardoy to boost its growth, and did the same with the firm Carrillo Asesores. Also, in July, the firm Ecija announced the entry of a private equity firm in its share capital to boost its growth. Although these operations must have many undisclosed nuances, once again we find ourselves with the growth strategy as a driver of competitiveness, this time through the entry of external capital -with the nuances that this matter also has, as highlighted by the recent ruling of the CJEU-.

Finally, for a correct analysis, the generational factor should be taken into account. Law firms that operate under the partnership system have a temporary ownership structure, and set up a partner replacement system that ensures the continuity of the business over time. If we look at the demographics of the legal profession, there are many firms where this replenishment has not been achieved, and this is one of the factors that favors concentration. In order to ensure a system of generational replacement of partners, it is necessary to have a certain size -here the incentive of size is clear- and, in general, many law firms in Spain are of insufficient size to ensure business continuity.

In summary, I believe that we are witnessing the end of the consolidation of the legal market and a very incipient beginning of a concentration phase, although it is difficult to predict how far it will go, because in general, the profitability obtained by medium-sized firms is good, but access to sophisticated clients and assignments becomes much more complicated as the market becomes more concentrated, and there are restrictions on access to human capital that greatly complicate the viability of the firms. If the entry of external financial capital solves the problem of access to human capital for medium-sized firms, we are going to see a very interesting scenario from a strategic point of view in the coming years.

• Miguel Angel Perez de la Manga, partner of black.swan