As in the international legal industry, the Colombian legal market is undergoing a reconfiguration; the largest and most leveraged organizations (i.e., those with a higher ratio of professionals per partner) are accelerating their growth and concentrating the market by offering consumers a scale and quality of service that medium-sized firms cannot match, while medium-sized firms strive to offer the same service, sacrificing their profitability.

In order to compete, medium-sized firms must seek to grow rapidly by taking advantage of economies of scale so that they can provide their services with greater resource efficiency. This growth can be complicated if it is not accompanied by an evolution in their organizational structure toward a more formal model.

The competitiveness of the labor market, especially in the legal sector, is showing warning signs: a general increase in salaries for junior associates by the largest firms, with which medium-sized firms cannot compete; high turnover, difficulty in strictly complying with career plans and in appointing partners from the “pool” of associates, as well as an increase in alternatives to the practice of law, both in the public sector and in legal departments, are just some of the problems facing firms today.

Even so, the industry continues to grow and become more sophisticated, and the gap between medium-sized and large firms is becoming increasingly significant. In recent years, firms such as DLA Piper Martinez Beltrán and Garrigues Colombia have grown between 50% and 60% in turnover in a single period. In absolute terms, this percentage growth represents an increase in revenue of more than USD 2.3 million, an amount greater than the turnover of firms that we consider to be medium-sized in the country.

As the Colombian legal industry is a sophisticated but immature industry, in which the large “magic circle” firms of England or the “white-shoe” firms of the United States do not find it attractive to participate at the moment, the recent history of the market has been characterized by a certain “parallelism,” that is, sustained growth of both large and medium-sized and small firms, where for almost 10 years only a few events (such as the arrival of Garrigues in 2014, the takeover of Uría Menendez by PrietoCarrizosa (2015), the agreements reached by DLA Piper and Martinez Beltrán (2015), Dentons with Cardenas y Cárdenas (2015), among others) have managed to “significantly” alter the division of the Colombian legal market share. Currently, this parallelism is not so evident.

When analyzing what firms have done to alter market concentration and find the best indicators in terms of “revenue per lawyer,” “revenue per partner,” and their respective leverage, the case of Cuatrecasas Colombia is interesting because, with its disruptive entry into the market and in less than two years, it is already closing more than 13 M&A transactions annually in the country and has assembled a team of more than 60 lawyers with results very similar to those of the pioneering and traditional firms.

We could say that this rapid success is achieved, in part, thanks to the strategic lines on which large firms base their business, which we will explain below:

First line. Large firms have higher revenues with stable staff sizes.

Looking at the evolution of the number of professionals in Colombia, it would appear that larger firms are focusing on profitability and efficiency (as is the case in the global industry) rather than on growth in the number of professionals.

Without ceasing to continuously recruit professionals to provide career opportunities and remaining faithful to their talent pool model (as is most clearly seen in the Baker McKenzie market), growth seems to be more oriented toward improving revenue per professional.

In a segment where utilization—average hours per professional—is under so much internal and external pressure, it seems that improved efficiency comes from increasing the average hourly rate. This, in turn, has several sources, such as improving the learning curve with adequate knowledge management, incorporating technology that allows lawyers to free themselves from more routine work, and continuously improving business and support areas, which enable the organization to develop with the highest quality.

The scale of these firms allows for all these investments. As “formal” organizations, they can bear all these costs with the increasing productivity of their lawyers.

In this first line of action, it is worth highlighting the differentiated strategy of PPU Legal, which is simultaneously committed to efficiency and growth in size through organic growth and growth with the integration of external teams (as it did a couple of years ago with its criminal and environmental teams).

Second strategic line. Medium-sized firms grow through integrations to achieve scale.

In a market where the largest players define the playing field, medium-sized firms are adapting to compete on equal terms. Faced with a lack of sufficient scale to compete in the “three markets” (labor market -professionals-, services market -clients-, and capital market -partners-), they are reconfiguring their structures by integrating smaller firms with which to scale structural costs.

Third strategic line. Small firms that choose to integrate into a medium-sized firm (as a reversal and complement to the previous line).

Smaller firms see integrations as the solution to their lack of minimum scale. The small firm model is undoubtedly viable, but it requires a very specific strategy in terms of specialization, client type, professional compensation scheme, differentiation, and business development. Otherwise, the risk of losing talent, the problem of attracting clients, and the lack of profitability due to not having the right scale make the management of these firms very complicated.

The reconfiguration process involves a shift from the informal structure of small and medium-sized firms to a formal structure. This is the key to the growth process in firms. Acquiring the necessary scale requires modifying the informal organizational structure of the firm to configure a formal structure.

Without this change, firms remain inefficient. The biggest problem with this change is the potential loss of profitability in the short term, which means that the biggest obstacle is the organization itself and its short-term expectations.

As a law firm grows, its profitability may decline until it grows again after reaching a critical size. There is a relationship between profitability and size that depends on the degree of formality of the firm and its evolution.

In conclusion, medium-sized firms that want to grow have their best opportunity in integrating smaller firms to acquire sufficient scale to provide access to the necessary resources in business areas, without forgetting that the resulting growth must be accompanied by a modification of their structure towards a more formal model and assuming that in the short term profitability will be temporarily reduced.

In turn, the best opportunity for small companies (that want to grow) is to join a medium-sized project, advancing in their formality and giving up—equally and temporarily—a certain amount of profitability.

Antonio Gómez Montoya – Partner at Black Swan Consultoría