The Fading Power of Niches

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By Nick Jarrett-Kerr

It has often been stated that only two broad strategic directions are available to law firms, summed up in the often quoted platitude “Get Big or Go Niche”. Over the last few decades, many boutique firms have successfully followed a niche direction by doubling down on particular areas of focus and creating depth in sectors or in specialist practice areas. For three main reasons, however, it is dangerous for any niche or portfolio firm to assume a do-nothing default strategy in which assumptions for the future are predicated on the basis of performance in the past.

Niches become mainstream. The first problem is that as the market for legal services becomes yet more competitive – and sophisticated – a number of previously precious and profitable niche areas have become mainstream areas for larger law firms. In the UK, for instance, over 150 London firms are highly rated by the directories for commercial real estate law. Over the years, areas such as intellectual property, tax and employment/labour law have become part of the standard offering of the majority of mid-size and larger firms.

Niches are transient. The second issue is that niche areas tend over time to be transient in nature. Problems that kept the CEO awake at night a few years back, and upon which he or she needed expert or “guru” advice have now become – at worst – a minor irritant. Changes of law and market obsolescence can also lead to the extinction of a niche area. Whole sectors can be eradicated or fade over time, affecting law firms specializing in various areas of manufacturing, technology, and retail. Threats that worry our clients also recede – we all remember the hype and death of the so-called Y2K threat and the law firm niche that went with it!

Niche areas commoditize. The third issue is the often highlighted danger of increasing commoditization. The problem here for boutique firms is that the previously high barriers to entry inevitably decrease over time, allowing more competitors and empowering more corporations to provide a wider range of services in-house. Commoditization also affects the profit-making business model. Premium pricing strategies run out of steam and staffing needs change from a small number of high-charging gurus to greater systemization.

In the case of the fading power of niche areas, firms can take action in at least three ways – Dominate, Diversify or Ditch.

First, they can continue to exploit the laws of dominance that enable the top few firms in any market to continue to thrive by sheer numerical power, the creation of sub-niches and infrastructure investment. Brand prominence and risk avoidance by the larger clients helps such firms attract and retain the best talent and clients.

The second possibility is for the niche firm to diversify into different areas of law or sectors, thus avoiding the risks of all the eggs remaining in one basket. This is generally easier to do by diversifying into related areas of law or into similar sectors.

The final possibility is to get out. Larger firms with a broad portfolio of niches can get rid of practice groups that are diminishing in profitability and importance. Smaller law firms where the partners are close to retirement can let the firm run its course and then close it down. Making your money and then running is easier said than done in legal services. However, due in part to the high cost of run-off insurance and the cost of staff redundancies; backing into a larger firm by merger can be an alternative, if the larger firm can see a return on investment from a long tail of clients and work coming out of the acquired firm.

Nothing stands still in legal services and no law firm can afford to assume that its competitive position will last forever. The point is that a niche strategy can only give temporary competitive advantage which diminishes over time. It is therefore important to spot trends early and spread the firm’s risk.