The Year of Merging or Remaining “Intentionally Independent” – Law Firms

The legal landscape is changing.  While the industry is much unchanged from the work output perspective, the way that work is completed and who is completing the work product has changed substantially.  Many of the recent challenges of staffing and changing company culture within the industry have allowed Private Equity entry into the sector.  And while those law firms that decide to accept Private Equity funding through partial or full investment can benefit from access to new capital, operational expertise, and enhanced competitive positioning, law firms that desire to remain independent now face even more steep competitive pressures.

While the desire to remain independent as a law firm continues to be a noble aspiration, the importance of intentional strategic planning will increase the longevity of these selective companies. 

Companies will need to actively address four key areas to remain competitive and grow their tax and/or audit practice:

• Pressures from outside capital infused into the industry; including protecting their current competitive position while being more efficient in gaining new market share.
• Being competitive for talent, including a well thought-out and stated culture, aggressive compensation plans, and culture-based work environments.
• Identifying areas where work product may be completed by alternative methods, becoming considerate of off-shoring, contract, and seasonal employees.
• Creating a scalable operating structure that clearly differentiates operational fixed-costs from revenue generating variable costs.

The Decision to Resist Outside Capital Infusion

Private equity continues to be a major driver of the strong US economy and the increase in the US GDP.  Additionally, the opportunity for increased revenue and scaled operating costs help to strengthen the argument for asset infusion from a Private Equity firm.  However, the challenges of bringing in new capital from the equivalent of an outside investor requires strategic pause. 

Company owners desiring to maintain independence must think of competing on a new level.  Ultimately, the new playing field is analogous to college teams now playing against professional teams.  The decision to remain independent is also a decision to continue to grow and compete at a whole new level, requiring an intentional strategic growth plan.  Additionally, just like a college team competing against a professional team, understanding the other’s playbook and game plan is extremely important, especially knowing how the PE backed companies would grow their market share.  Independent companies will need to determine how they will combat against these areas:

• New capital infusion – Independent companies will need to create a more effective operating structure to compete with their Private Equity infused competitors.  This includes new technology enhancements, use of cost effective resources and a margin-enhanced product line up.
• Increasing marketing budgets – With the ability for the newly infused companies to spend on increased marketing and advertising, independent companies will need to have a cohesive and effective plan to take rifle-shots for marketing instead of shot-gun or “carpet bombing” techniques.
• Expanded product lines – As most of the Private Equity companies are creating a holistic portfolio of companies (legal, estate, tax, wealth management) a more full-service offering is created decreasing the market share for nuanced businesses.  Independent companies’ differentiators in the market will need to be amplified to protect their turf and current customers.

The Competition for Finding Talent in Decreasing Pools

The law firm landscape is changing regarding the makeup of total staffing.  The largest shift has taken place in the position of Associate Attorney, where the Associate Attorney position has been shrinking by 5% each year.  This requires a new level of thinking of how work will be completed and potential profit margin pressures as higher-paid individuals are now required to complete work that was originally completed at the Associate Attorney level.

While this seems like a large disruptor, the importance of qualified and experienced Associate Attorneys and Paralegals never been more important. 

Continuing to evolve the Associate Attorney level at your practice will require three extremely important considerations:

• Understanding the resources within the business that are the “baby-boomers” and their career trajectory to understand short and long-term needs of retiring partners and professionals.  This may include creating a retirement plan which is scaled vs. a specific date full retirement.  The more a company can delay retirement of a valued employee allows a better long-term succession plan.
• Incentivizing current employees to advocate as hiring resources for the company, including attending career fairs, becoming involved in summer and winter break internships, and actively recruiting talent from other competitors.   Most companies will benefit financially and culturally by asking their employees to become pseudo-recruiters for the company as they are the best representation of the brand and the company.
• Enhancing work culture and clearly articulated company values helps both current employees with retention and the ability to attract new employees that will stay with the company.  Post-COVID work arrangement flexibility is now the expectations of most employees.  Offering multiple options will maintain a level of cultural consistency while giving employees a selection of choices for work-life balance.  And while most companies should not be held “hostage” to their employees work practices, giving multiple options allow for semi-custom work experiences.

New Ways of Getting Work Completed (Not All AI)

So many yearly outlooks have focused on the advent and usage of AI and machine learning that it feels like a requirement to address this topic.  While it is an obvious advantage to utilize AI within the work product of the company, this premise is wrought with danger.  While AI may be able to pull past cases and create some repetitive contract language, the real value of employing a Law Firm is now and always has been the same – the people and their critical thinking abilities are the true differentiator.

Secondary to AI and machine learning, companies should now, as always look at new ways of transitioning repetitive work to alternative work substitutes.  Many new quality options are available, including off-shoring, contract and seasonal employees. To know which of the alternative resources are best, companies considering these options need to follow 3 complex steps:

• Create a step-by-step operational map (flowchart) showing where work is coming from, the inputs needed to complete the current step, and the next step in the process that is dependent on the evaluated step.  Taking into consideration the knowledge to complete the step, technological skills, and overall service levels (timing) to complete the step will be necessary. 
• Determine if the current step is part of a larger process or if it is a singular, all-inclusive process.  Clearly articulate who and why the current step is being completed and how close the step is to meeting the core values of the company to the ultimate client.
• Create a final list of all work steps that are being completed by someone over or underqualified and categorize correctly.  Many times responsibilities are handled by the wrong person because the process step is in the middle of another responsible party’s work process.  With new technology (discussed in next session) and the ability to migrate work from one individual to another much simpler, role clarity and proper skill pairing is more important than getting the work from the start to the finish of the workflow.

Knowing and Being Considerate of Fixed vs. Variable Costs

Before any company begins creating an aggressive strategic plan to grow revenues through new products and service offers and marketing, there should be a clear understanding of how operating costs will change with growth of the company.  This is a simple exercise that requires the company to determine “what costs will I have regardless of how many sales (revenue generating) efforts I am focused on?”  To emphasize the importance of this task and the result on profitability, costs should clearly be identified within financial reporting as “Fixed Costs” or “Variable Costs”.

All costs that are identified as variable from the assessment may be evaluated to determine if they are able to be omitted, completed by a lower cost resource, or automated through technology resources.  To determine how the variable costs may be handled, a simple evaluation requires:

• Determining how closely the work product aligns to meeting the company objectives and strategic goals.  If the outcome of the task results in directly meeting a strategic goal, the work should remain with a full-time, fixed cost resource.  This ensures that the work product is of the highest and most consistent quality.
• Looking at the amount of work each area is consuming.  If a specific role is spending 60% of their time on client facing work (very important) and 40% of their time on administrative work (less important), the lesser tasks may be completed by a lower cost resource or outsourced.
• Looking at tasks that are consistent across each time they are completed.  For tasks that are the same month over month or quarter over quarter (think of regulatory reporting or inputting data), these tasks may be automated through technological solutions.  While this may seem like a large, arduous upfront task, the long-term benefits of automating tasks will help with a parallel path increasing revenue and increasing margins.

As we bring in 2026 on February 17, we are reminded that it is the Year of the Fire Horse.  The year is characterized by enthusiasm, creativity and freedom.  More importantly, it is a time for bold moves, exploration and forward momentum.

Starting 2026 with an intentional view of the possible areas of opportunity will be imperative in gaining market share and putting profit margin growth on a positive upward projection.

enlighten fractional has been helping companies with these challenges and increasing profit margins for over 30 years.  With C-Suite experience in professional services firms in the areas of sales, operations, technology and marketing, enlighten fractional will be an important part of your companies growth.