Category Spanning, Evaluation, and Performance: Revised Theory and Test on the Corporate Law Market

“Category spanning” – the provision of a range of distinct services – has long been frowned upon by organizational experts, because it’s seen to drain a producer firm’s appeal to audiences. Compared to “purer” competitors, category spanners are traditionally less feted and more poorly rewarded, and it’s become conventional wisdom that clients prefer focused producers – those who “stick to their knitting” in the colloquial British expression. Yet when it comes to corporate legal services, we found in a study of hundreds of law firms in New York, London and Paris over a decade that this generalised theory just doesn’t hold up. As clients expect more sophisticated services – particular in relation to acquisitions – they tend to value category spanners more positively and are willing to pay higher prices for them. That’s because clients assess a producer as a broader entity, rather than looking at expertise in isolation, when issues are complex. So we concluded that – at least as far as legal services are concerned – clients have no general preference for a single category of expertise. Instead, what matters is the “theory of value” – clients’ perception of issues and solutions, and how these can best be provided from a goal-based perspective. Our study – just published in the Academy of Management Journal – looked at eight practice areas that span most of corporate legal practice: competition; litigation; intellectual property; property; tax; mergers & acquisition; bankruptcy and employment over the period 2000 to 2010. We examined rankings given the law firms by three top guides for the legal profession – The Chambers and Partners, The Legal 500 and PLC Which lawyer – which rank according to practice area and location, and we also collected complementary information (on numbers of partners, gross revenue and other data) from a journal focusing on each city: American Lawyer for New York, The Lawyer for London and Juristes et Associés for Paris. What we found is that what matters more to clients is not whether firms straddle practice categories, but rather the clients’ own ability to identify, understand and appreciate the combinations of categories offered by law firms. The ability to convince clients that such a combination is beneficial also helps boost law firms’ bottom lines. As the Paris-based partner of a U.S. law firm law firm told us, the way to develop the more profitable areas of practice such as litigation and M&A is to demonstrate skill in tax, property, employment and other less glamorous areas of the law – because demonstrating diversity can be the best way to close the high-profitability deal. Some might suggest that clients often stick with their diversified law firms not out of appreciation of their many skills, but simply due to inertia: to minimize the cost of searching for another provider and haggling over a new contract. Yet we found no evidence for this, and in fact one study found that 56% of big companies from 60 countries use up to 10 multi-practice law firms. While we found insignificant evidence of a direct effect of category spanning on law firm performance – i.e., higher revenue per lawyer, our statistical results suggest that category spanning has an indirect positive impact on performance through the positive evaluation of clients (i.e., higher ranking positions). Plenty of “new economy” companies have shown they can thrive by spanning categories: Amazon, after all, quickly broadened its offerings from books to diapers and cloud computing storage. We hope our look at “old economy” law firms will help shed some further light on this evolving and fascinating area of organizational economics and sociology.