By Hariolf Wenzler.
In March 2020, law firms and especially their managing partners had every reason to be sceptic about their businesses’ economic outlook. With a pandemic ahead and virtually no experience on how to handle it, the risks of an economic downturn with melting demand for and rates of legal advice was at least an option firms started to prepare for. Now, 20 months later, most business law firms thrived through this era: Work from home has played out much better than expected. Clients kept merging with and acquiring businesses with mandating their lawyers. Thus not only revenues have increased, the elimination of travel, events, and other costs have even led to higher profits. And on top of it all: no strategy meetings, retreats, business development initiatives and such stuff – lawyers could simply work in peace. Looking ahead, however, this tranquility might prove deceptive.
All untackled issues from pre-Covid are back: How do we attract, promote and retain young colleagues? How do we further expand our client base? How do we professionalize and digitize our processes? How do we keep up with the increasingly digital processes and requirements of our clients? How do we create a collaborative workspace in our teams, offline and online? What does true diversity and inclusion look like? And what was our purpose again? Summing it up, the question of law firm strategy is back on the agenda.
Ashish Nanda, professor at Harvard Business School, former director of the Harvard Center on the Legal Profession, and valued advisor in building its counterpart at Bucerius Law School in Germany some ten years ago, recently published an article with his colleague Das Narayandas on strategy development in professional services firms, and law firms in particular, in the Harvard Business Review (https://hbr.org/amp/2021/03/what-professional-service-firms-must-do-to-thrive). They focus on two important pillars in developing a firm strategy:
1. "People": Building a strategy around one's own strengths, i.e. people’s skills. Whom to hire or promote, how to grow in timekeeper headcount and specialization, how to hone the skills of the lawyers and how best to group them around practices and industries.
2. "Clients": How to assess the actual mix of clients and mandates, how to shape topic- or industry-specific products and service lines, how to operate a data driven business development up to the setup of a dedicated key client program.
These are doubtlessly the first two pillars of a coherent strategy. What the authors seem to have overlooked, however, is that there is a third pillar of strategy development, which is linked to the emergence of digital tools and devices on the one hand and customer expectations of the Amazon/ Uber/ Apple/ Google/ etc. economy on the other hand. It’s the third pillar: 3. "Delivery": How are the services delivered? How do clients consume and digest legal advice? Paper or PDF memos? Or shared documents or even dashboards, seamlessly integrating legal and compliance products into the software systems of clients?
Whoever decides upon a law firm’s strategy, the digital age requires to focus on all three pillars: Firstly, the production and design of the legal product, which is essentially conceived and developed by professionals; secondly, clients and their business needs, for whom the (legal) advice is created; and finally, thirdly, the "form of presentation", or delivery, which must be as "seamless" as possible for clients to integrate into their business processes. Let us look at the three pillars and their meaning in detail:
1. People: The What
Specialization, practice and industry groups, and investment in bright minds.
Continental law firms have – other than their large UK or US competitors - only begun to seriously develop consistent strategies when their service became less and less "free profession" and more and more "managed service". The process began with the liberalization of the financial markets and their regulation in the 1990s, with globalization, the development of new technologies and the associated growth in all industrialized nations in the early 2000s. The need for strategy development and its implementation (i.e., management) has increased steadily since then, but since markets and revenues usually grew faster, it was still possible to generate high revenues with decent returns for a very long time without having a clear strategy in place and a professionalized management in charge.
Hence strategy mainly was the development of new service lines (i.e. new offers for clients, often driven by the regulator) or the expansion of the existing business by adding further professionals. In many cases, more of the same was the right thing to do, according to the hourly-rate-driven growth. In law firms, this repeatedly rewarded the simple hiring of more timekeepers. Strategy meetings, then, were focused on the market for talent, revolving around questions like how (i.e., with whom / what profiles) to expand the corporate practice, for example, or whether to grow a separate IT practice, whether to become full-service or remain boutique, and whether it could become a national or even international business.
In Jack Gabarro's Professional Services Spectrum (Thomas J. De Long, John J. Gabarro, Robert L. Lees: “When Professionals Have to Lead”, Harvard Business School Press 2007, pp. 87 ff.), this is the decision on your own profile: Do you deliver commodity, rocket science or something in between? The strategic thinking of the managing partner here is - more or less - a supply-side phenomenon, focused on the expansion of the workforce, putting the product and the quality of its manufacture at the center. This first pillar still is and remains important because of the ongoing specialization within the legal profession, the differentiation of consulting services and the still dominant billing-by-the-hour. All this requires to strategically select and build up one's consulting staff according to the development goals of the firm.
2. Clients: The Who
Who to work for? ABC analyses, cross-selling and long-tails.Once specialization and team setup are done, the analysis and the alignment of the clientele come next. The tool strategists use was described by Benson P. Shapiro et.al. as the Client-Portfolio Matrix (Shapiro, Benson P. "Bridge the Gap Between Strategy and Tactics with the Magic Matrix." Harvard Business School Publishing Case, 2003). Using methods developed by U.S. business schools in the 1980s and 1990s, and applied for many years by BCG and McKinsey upon strategy processes in other industries, law firms' clients are analyzed and segmented into specific portfolio quadrants, and the client portfolio is aligned - culminating in targeted business development activities tailored to that portfolio. Metrics such as costs, revenues per timekeeper and, above all, profits per partner emerge, ABC analyses with the question of what percentage of revenues are generated with the top 20 clients and – on the long tail – from what annual revenue on small, uneconomical mandates should be declined. In addition, it’s a given that one can't offer everything to everyone to the same extent which is why it is no option not to have a client strategy. The increasingly important species “managing partner” hence is faced with the challenge of providing a consistent service to clients with an already specialized but still comparatively heterogeneous group of lawyers.
Strategy meetings then become focused on sales and business development, clients and profits. Questions are, e.g., what the target markets of the corporate practice might look like, how to set up a client relationship program designed to match their needs, how the IP/IT practice can tap into additional client groups, how to manage cross-selling and up-selling, how to develop a pricing strategy geared to the target markets and how to set up a key client program in general. 3. Delivery: The How
How would clients actually like services rendered? From user experience, legal design and co-creation.
In addition to qualified employees (people) and clearly structured market and client portfolios (clients), law firms now have a third dimension that is closely related to the development of digitization as a whole. It is service delivery, creating a seamless client experience which is internally created with operational excellence. So it is no longer just the legal deliverable (i.e., legal advice in the narrower sense), but also the way in which this core service is delivered (service delivery), as Jack Newton explains (Jack Newton: “The Client-Centered Law Firm”, Blue Check Publishing 2020). The digital era is primarily changing the expectations and experiences of all clients towards an experience-driven economy. For lawyers: Even very good legal advice must be consistently aligned with the needs of the client, when, how, where, and in what format it wants to be consumed. Dashboards instead of memos? Charts instead of text? Computable data instead of written characters? APIs instead of E-Mails? Stratifying this third pillar requires an understanding that all services that are created with the help of a piece of software become or must become "transformational products" in Matthias Schrader’s sense (Matthias Schrader: “Transformational Products: The code behind digital products that are shaping our lives and revolutionizing our economies”, Edition NFO, 2017).
But how does a law firm create transformational products? It’s a three-step-process that focuses on delivery. Three interrelated steps are necessary: Firstly, permanent, relentless and candid client feedback, gathered by collecting data (e.g., the Net Promoter Score NPS, the modern form of the recommendation rate) and asking clients systematically and unbiased (e.g. by BD professionals or outside consultants, not by the partner handling a respective cleint), secondly, the establishment of delivery as an independent but integrated component of the service provision process (e.g., with the help of legal operations experts), and thirdly, the "softwareification" of the consulting products (e.g., with the help of legal tech experts). The greatest challenge, however, is not the technology, but the establishment of structures within the law firm based on the division of labor, in which different trades and faculties (lawyers, business economists, techies) work together to create a client-centric product. Mindset, not Tech is the Main Challenge, as David Carter points out (David Carter: The Evolution of Legal Delivery; https://www.artificiallawyer.com/2021/09/20/the-evolution-of-legal-delivery/). In addition: This third pillar differs from the first two in one important detail: The deliberations do no longer stay within a firm’s internal walls. It by its nature requires interaction and conversations with clients. Clients help to shape the products and develop the services, they become an integral part of a firm’s strategy-building along the entire value chain.
Strategy meetings become co-creation sessions involving clients, outside expertise and using methods such as design thinking or legal design. This form of developing strategies and solutions, nota bene state of the art in many industries, will increasingly be adapted by law firms. And as in the past, those who start early, overcome the uncomfortable and master the mindset shift faster than others will have a competitive advantage.
Focussing the next partner retreat on strategy development along all three pillars can change your firm’s trajectory: It helps keeping partners away from remuneration quarrels whilst providing perspectives on how to attract the next generation of lawyers, how to master the digital challenges ahead and how to win the future instead of watching others do it.
About the Author
Hariolf Wenzler is director of the Bucerius Center on the Legal Profession and serves as CEO of YPOG, a fast growing law firm focussing on tech industries. Before, he was with Baker McKenzie as director of business
development, marketing and communications in EMEA and on the global innovation committee.
He is grateful for reviews and comments from Markus Hartung, Emma Ziercke, Iris Wahl, Nora Teuwsen and Stephanie Hoerstel.