In a recent interview with W. Chan Kim, notable co-author of Blue Ocean Strategy and just released Blue Ocean Shift, I was struck by this comment: “What we found fairly early on in our research is that companies focused on beating the competition were not the ones seizing new growth. They were the ones stuck in the trap of competing, making incremental improvements over one another and duking it out, while the ones who were opening up new market spaces and seizing new growth paid little heed to what the competition was doing. Their focus instead was on offering buyers a quantum leap in value that would make the competition irrelevant.” I believe that this statement could not be more applicable to the situation facing today’s law firms.
Meanwhile, from contacts at Deloitte I recently learned, “we have this target that 30% of revenue must come from stuff that we were NOT doing two years earlier.” And from contacts at McKinsey & Company, I hear that they have a very similar revenue goal – focusing on entirely new areas of practice. So how are you doing at growing your firm’s revenues and . . . do you even know where to start?
One of the fundamental challenges of being a firm leader lies in owning the responsibility of developing a strategic plan for your firm, whether you get personally involved or have a specially constituted Strategic Planning Committee doing the work.
One of the little ironies I’ve observed over the years is firm-wide strategic plans that get drafted and finalized without any allowance for input from the various business units that comprise your firm. In other words, what I’m proposing here is that what you, as firm leader, are managing is NOT one homogeneous firm but rather a portfolio of very different business units – such that what may be required to develop, market and grow a very successful and profitable Health Care Group will be very different from that required for a highly successful Labor and Employment practice. Like many clichés, this one turns out to be true – a successful firm strategy is largely built around having strong practice groups, positioned in growing market (micro) niches, developing a distinctive presence, doing higher value work.
That said, before you can even begin, there are a few hurdles you need to overcome.
Hurdle #1: Believing that the typical template distributed by your Marketing Department will produce a strategy.
All too often, when I observe how firms tackle developing a plan for their business units or practice groups, the common process is for the marketing department to develop some form of planning template and deliver it to every practice group leader with instructions and a specific deadline for completion. These all-too-common templates usually require that each practice group provide some assessment of it’s strengths, weaknesses, threats and opportunities (the old but largely ineffective SWOT’s analysis); determine and list the likely prospects that it will be focusing on for the coming year (aspirational at best); identify which of the group’s clients it will seek to cross-sell, determine what promotional activities the group will be initiating; and so forth. This template produces a hopeful inventory of possible activities, with little detail as to how any actions will actually get implemented. I’ve come to call this “wet dream marketing.”
Nevertheless, the practice leader, attempting to be responsive, takes home the template and fills in the blanks, confident in knowing that there is little possibility that he or she will ever be held responsible for comparing their results with the plan. Meanwhile, the partners in the group have not participated in the process. In the end they have no collective knowledge of the group’s plan, no buy-in to the group’s future direction, and the end result is both a futile exercise and anything but strategic.
And if that is the state of your strategic initiative, good luck, God bless, some competitor is likely eating your lunch as you are consoling yourself reading some book entitled Growth Is Dead.
Hurdle #2: Subscribing to the theory that only “bet the company” work is high value.
For some time now, various pundits and consultants have been telling firm leaders (and all of us) that the model that best exemplifies the legal market is a triangle – with only about 15% of the client‘s legal work sitting at the apex which is of highest value and labelled “Bet-The-Company” while the remainder falls into the categories of being rather routine and highly price sensitive. So unless you have been fortunate enough to get a taste of some of this rare Bet-The-Company work, the ONLY effective strategy for your various practice groups is to concentrate your efforts on cutting costs, learning how to do your legal work far more efficiently, incorporating principles of project management and process improvement in a profession-wide race to better price and deliver commodity work. The theory is that you will be rewarded by pricing yourself in ways that your competitors can’t readily match. And that theory is, in my view a theory, and will likely help you only . . . “create a better buggy whip!”
What I’m going to argue is that this triangle is NOT the only model that exemplifies work of high value and that there is a different model that can help each of your various practice groups identify areas of lucrative opportunity.
Hurdle #3: Accepting that the “demand” for legal services is essentially flat and that your future need not be in just doing commodity work.
Most all of the recent studies that have been published attest to our having to cope with a flattened demand for legal services. In the last three consecutive Reports on the State of The Legal Market, the observation has been made that “in the main U.S. law firms continue to experience sluggish growth in demand, coupled with negative growth in productivity and continuing downward pressure on rates and realization. Demand for law firm services as tracked by Thomson Reuters Peer Monitor was essentially flat.”
What that suggests, according to these studies, is that the only way for firms or practices to grow is to basically steal the work from competitors. If that is true, and the statistics seem to support this notion, then one needs to really understand the economics of demand and what it suggests with respect to crafting a successful strategy.
Therefore my intent here is to share my perspectives and experience in working with numerous firms on what I believe is most important when crafting a practice or industry group growth strategy.
McKenna’s EVOLUTIONARY S-CURVE
Let’s begin by thinking about legal services from a client’s perspective.
If you think about the overall client demand for legal services, demand can actually be graphed across a very broad spectrum of what I have come to call my S-Curve of Legal Demand. That curve looks something like this:
At one end of this curve, on the far left-hand side, are those things that lawyers do that are highly specialized in nature. This is the frontier work, extremely complex, intellectually demanding, highly valued, and often evidence of new market situations or developments (e.g. a brand new regulation).
As a client, when you are confronting this kind of legal situation, while you will always want to know that you are getting value for your fees, fees become far less relevant. If one were to use the analogy of brain surgery, then it follows that when in need, you would not be looking for bargain pricing; you would be seeking out the very best, skilled surgeon you can find.
At the other end of this spectrum, on the far right, is that legal work that we have begrudgingly come to accept as so routine as to be a commodity. As a client, there is absolutely no mystique and so we see clients aggressively telling their vendors (and they may use that term pejoratively) what specifically they want to see done; who in the law firm they will accept doing it (“no first or second years on my files”) and how much they are prepared to pay. This is legal work that is well-defined, routine and often highly compliance-oriented. In this space, you are competing with every other professional, in every other firm, in every jurisdiction, everywhere, that professes to have some expertise in this particular area of practice and so fees become an increasingly important determinant to who gets the work.
When you look across this spectrum of market demand you could actually position each of your different business units or practice groups along my S-Curve in terms of whether the unit was more specialized or commoditized in nature. But sadly, that would be of little realistic use.
However, what I have found to be of pragmatic benefit is to think of any one of your practices, be it Health Care or Labor and Employment (as mentioned earlier) as being comprised of numerous different services and clients, many of which could logically be positioned at either end and at various points along this demand curve. In other words, there are some services you provide as a Heath Care lawyer that are more cutting edge and some things that are far more routine. Meanwhile, at the same time, there are some clients that you serve that hail from newly developing sub-industries and some that are in well-established sectors. All of this is evolving over time and presents any practice or industry group with many different market opportunities. In fact, it allows us to make some specific choices about what kind of a practice we want to have and how we want to chart the future direction of our practice or industry team. Our choices along this same S-Curve will determine what competitors we are going to face; what clients we are most likely to attract; what fees we will be allowed to charge; and what kind of profitability we might enjoy.
To advance this model, we need to divide my curve into four discrete phases which represent the natural evolution of market demand, from left to right, over time.
Can be used to analyze: PRACTICE AREAS / SERVICE OFFERING, INDUSTRIES / SUB-SECTOR / CLIENT TYPE, GEOGRAPHICAL LOCATIONS
In other words, all legal services begin being highly specialized in nature and eventually gravitate to being commoditized, and in order for us to to be truly strategic, we need to understand what that means at each of these four evolutionary phases.
1. The Emerging Phase
Way over on the far left-hand side are those legal services that are very much in their emerging phase. When some legal service (or type of client) is in its emerging phase we tend to hear or read about some lawyer doing something that has us wondering, “What is that all about?” “What are they really doing?” and “How are they making any money at that?”
With legal services that are truly in their emerging stage, most often we are not even quite sure what this is and how it may develop. On the upside, you are hoping that you have identified a lucrative opportunity with some long-tem growth potential. Consider today, are there any law firms in your jurisdiction that have established a practice group engaged in “Augmented Reality.” If there are, what they are hoping is that this is going to be the next major area where they may have an opportunity to become a dominant player – to be the go-to provider; the go-to firm.
The critical success factor in this emerging phase is two-fold. The first is finding within your firm, what Peter Drucker (the late father of modern management) often called “a mono-maniac with a mission.” Your mono-maniac is some lawyer who gets really excited, obsessed with, and passionate about creating a practice in some area like . . . helping companies deal with the potentially devastating effects of a cybersecurity attack. The proper role of firm management in this instance is to try to encourage, nurture and say, “Go for it, let’s see where this takes us; what can we do to support your efforts?” And this is not to be trivialized.
In my three decades of working with the profession, I rarely see a promising development, source of lucrative new revenue or new practice emerge as the result of an Executive Committee directive. These important initiatives almost always result from some attorney with foresight, looking to do something innovative within their particular practice.
The second critical success factor is something that had its origins in the tech industry of Silicon Valley and known as exploiting a “first mover advantage.” Cognitive psychologists tell us that as consumers we have limited brain width – which is to suggest that we compartamentalize information; and have very limited shelf space! If you happen to be among the first law firms to enter the consumer’s conscience with respect to some area like Personalized DNA-based Medicine, then when the consumer hears about a legal issue in that space, they naturally think of you and your firm. In the consumer’s mind there is no competition, you are the go-to player. You are first to occupy the market-space and first to occupy the mind-space.
First mover advantage offers numerous competitive advantages. Where a firm successfully offers a new service or enters into serving a specific industry, it is thereafter perceived by the client as having specialized knowledge in their unique business and legal matters. It can then develop a name recognition that becomes difficult for others to match.
Second, in any market with a steep learning curve, being first can confer the advantage of having a head start. That head start allows your firm to position itself as a primary source for media commentary, for seminar presentations, for having articles published and other such positioning tactics. First movers, who also act as “smart movers” in that they exploit their early positioning, thereby have the chance to gain a dominant market standing and to define the standard for other firms that follow.
Third, in some situations, key resources are scarce. So for example, the first law firm to become active in a new industry association (say the Photonics Industry) could lock out others. There is also the ability to develop primary relationships with key members of some industry cluster. Clusters are a magnet for attracting world-class talent that often then move between companies within that particular industry cluster. Thus, when a key player moves from one company to another or to even start a new venture, that attorney who has the personal relationship has the inside track.
A first mover also has the opportunity to draw clients into their web, creating “switching costs” that curtail those clients from any notion of later moving their work to other fast follower firms.
Finally, Tom Kinnear, a professor at Michigan Business School reports that first movers gain 2.5 times as much market share as later entrants into new markets.
Now, as with any new entrepreneurial venture, and make no mistake that is what this is, there is a downside. Anyone remember Y2K? We can all remember a few major law firms that had established Y2K practices with dozens of lawyers actively engaged full time in serving their clients . . . right up until December 31, 1999. But that said, I never met any lawyer involved in that practice that resented the time and effort spent pursing something that ended up having limited shelf-life. It just means that you need to be a bit cautious in limiting your risk exposure should this niche be nothing more than a passing fad.
2. The Growth Phase
The legal profession often appears to operate in a manner similar to the television industry. Because it is difficult to know in advance which shows will be hits, as soon as one idea looks promising, everyone rushes to pile in (witness the number of reality-type shows hosted by every network over the past decade). In a similar fashion as soon as demand takes off, we enter what is known as the growth phase.
You always know when a particular legal need, industry, or even market location or discrete service is in its growth stage because every major law firm in your local is scrambling to develop a practice around that same area. Note the number of firms trying to develop Drone Law, or attempting to understand just how Blockchain may affect the clients that they have been serving.
The growth stage is characterized by more and sophisticated clients discovering that they have a need for legal services in a particular area. Attracted by market growth and lucrative fees, competitive firms invest in doing the necessary research, developing internal skills and competencies, increasing their marketing efforts and searching for potential laterals.
Your critical success factor in this growth phase is critical mass. In other words, your ability to position a group with say a handful of lawyers all practicing pretty much full time in serving the multi-billion dollar Genomics market – when most other competitors might have a couple of attorneys with their toes in the water, can send out a clear and definite signal that you are “a player” in this area. This is also a time when those firms who may not be fully committed to investing in this new practice could lose key talent to firms who are serious about making their mark.
Building upon the specific action you take in the emerging phase, this is where the power of the practice (or industry) group really comes to bear. These are not evolutionary phases where one sole practitioner can do it by themselves, no matter how good a rainmaker. This is also a phase where a committed smaller firm (say under 200 attorneys) with a few dedicated lawyers, collaborating together to build a practice niche can outperform a firm five times their size. This largely comes about because we are now practicing in an age of micro-niches.
In an earlier article (Unlocking The Mystique of Understanding Industry Clients), I rudely claimed that there was no such thing as a Health Care Lawyer. I was making the point that as all industries grow and at some point in their late growth phase, they fracture into multiple sub-industries. Health Care has fractured into (over 40) numerous distinct sub-industries, each of which is comprised of companies who believe they are unique. As sellers, we appear to be quite content with telling the marketplace that we are Health Care lawyers with little regard for what our clients are looking to buy. Therefore those lawyers who develop a specific expertise in mico-niches like personalized DNA-based medicine, mobile health appliances, or e-health information systems and then effectively market that specific expertise will become the go-to providers and achieve a significant strategic advantage over those attorneys who simply claim to be . . . “health care attorneys.”
In fact, to take this a step further, one of the many sub-segments that comprise the Health Care industry today is BioSciences. One could hold themselves out as a specialist in BioSciences . . . except that it too is comprised of numerous micro-niches: genomic editing, stem-cell therapies, molecular biology, bioethics, and so forth. And to really belabor this point, Artificial Intelligence (AI) is the topic of the day, which is more of a Hybrid – in that it could be seen as a service that is infiltrating every industry and also as an industry in itself. AI can be divided into 13 different categories from Machine Learning (applications) and Natural Language Processing (speech recognition) to Virtual Personal Assistants and Smart Robotics. The U.S. ranks as the top country with over 500 major AI companies. In just the Machine Learning niche there are over 260 companies, with an average age of 13 years, each receiving about $17 million in funding last year, all likely needing legal services as of this writing. So which law firm are you familiar with, that has an active practice in serving AI companies?
My strategic counsel is to make no mistake in that with most industries you need to be very specific about the sub-industry or micro-niche, that you are targeting to serve. And for those who play the game smartly, there are riches in the niches.
3. The Mature Phase
When that growth curve and the demand for the particular legal service finally does begin to flatten, we are now entering the mature phase. You always know when a practice is in its mature phase because in any of your given markets, with any given legal service, you can count on one hand, usually three fingers, those firms that are doing all of the biggest transactions, the most profitable client work.
There is another grouping of a handful of “second-tier” firms that are doing the conflict work or the slightly more price sensitive deals. And below that you can find dozens upon dozens of firms fighting for the scraps. To make this ranking even more visible we now have Chambers, American Lawyer and other published sources all grading different firms on their performance in different categories. And those categories are usually only recognizable after the service or industry has reached it’s mature phase.
Now, demand in the growth phase eventually (over years, perhaps over a few decades) flattens into maturity with the confluence of two factors. Because this is all from the client’s perspective, the first factor is client driven. Sophisticated clients and in particular, in-house counsel, soon realize that an increasing portion of their legal spend is going to outside law firms who do a particular kind of work. And in-house counsel are always looking at where they are spending their budgets on outside law firms. They also notice that there are now more lawyers in the marketplace who have a decent level of expertise in a particular area and so they decide to bring some of this work in-house by hiring the required expertise. Thus your greatest competition eventually comes from your largest clients.
The second contributing factor is a rather strategically perverse activity that only exists in the legal industry. No other competitive industry that I am aware of does this and it goes by three initials . . . CLE!
Ironically and unique to the legal profession, as soon as some lawyer develops some expertise in some new area of practice, they cannot contain themselves from presenting at CLE Seminars and sharing everything they know with other lawyers – soon managing to create their own competition. (In fact if you sit down with any group of lawyers who are eager to develop a new practice in some area, what is the very first thing they do? They begin to explore what’s available, what courses they can take through the Practicing Law Institute or some other CLE provider to develop their knowledge.)
Now, if your firm follows averages, then a large portion (likely as much as 85%) of your revenues, of the things that most lawyers do (your various services) and who they do them for (your clients and the industries those clients are in) are all in this mature phase.
That is not meant to be pejorative. This is the work that generate the income that feeds the baby. The only strategic issue is that this mature work represents the world of Today. And so what are you (and each practice group) doing to plan for your world of Tomorrow?
4. The Saturated Phase
From the mature phase we eventually transition into the final of our four phases. The saturated phase is when you are not only competing with every other law firm in town, but you are now competing with self help publications, online resources, non-legal providers and even consulting firms (look at what is going on in environmental practices) – any means that the client may have for getting their deal done or mitigating their problem, often without even needing to consult a lawyer. Many firms adopt a rationalizing approach at this stage, either withdrawing completely from providing a certain type of legal service (debt collections) to a specific type of client (personal practice) or find alternate ways (a different business model) of providing the service that retains some degree of profitability. Some large, respected UK law firms have been known to offer these (commodity) services under a different brand name and in a low-cost location outside of their London base. Obviously, stable, long-term relationships with client companies that provide some degree of adequate volume are important at this stage. That said, if you have partner-level people doing this kind of work, then you are likely loosing money.
The Profitability Implications
If we think about it, every professional services firm has a fairly simple business model. Our profitability or profit per partner (PPP) is a function of four manageable factors:
PPP=Margin x Rates x Utilization x Leverage
Two of these (margin and utilization) have certain thresholds. So if our firm revenue suddenly declines, in order to protect our margin we need to cut costs. But you can only cut costs so far because many of those costs are fixed and cutting too deep may adversely impact our ability to deliver quality service. Meanwhile, utilization is a function of how hard our professionals are prepared to work (sometimes a life style issues within certain firms) and there is an upper threshold known by the sophisticated term of – human endurance. So as long as we don’t have partner-level people delivering performance that might indicate that they’ve retired but haven’t yet informed us, we would maintain that we are running a healthy practice.
Given that both margin and untilization are properly managed and we aren’t spending money like crazy and our people are meaningfully productive, that then leaves only two ways to improve profit, and allow us to put more money in our jeans at the end of the year. We need to find some way to get our clients to willingly pay us more for what we do (Increase Rates) or find the means of doing our kind of client work far more efficiently (Improve Leverage).
If you were now to draw a line down the middle of my S-Curve, dividing the phases of Emerging and Growth from those of Mature and Saturated, I believe you would agree that the left-hand side is a “Rates” game in that you need to provide something unique and of special value in order to justify charging more (scarcity is a powerful strategy) and that the right side is a “Leverage” game and so you need to find ways to increase your efficiency to be more profitable.
I firmly believe that the firms that will outperform the others will be those that successfully pursue dual strategies of growth (in emerging and growth phases) and operational efficiency (in mature and saturated phases) while at all times staying attuned to the trends and changing needs of their clients. I would further assert that the over abundance of articles, advice and materials advocating operational efficiencies (project management and process improvement) while necessary, has come at the expense of firms developing a balanced investment in both sides of my S-Curve. In other words, if you are NOT investing seriously in the services and industries of tomorrow, playing catch up will eventually prove to be very painful.Talking about this concept to an audience of firm leaders recently I was informed of how this model has a similarity to the Blue Ocean Strategy work authored by W. Chan Kim and Renee Mauborgne, a text that I confessed I had not yet read. This individual explained how my emerging and growth phases were the Blue Ocean versus Red; market creation versus market competition; and what “could be” versus “what is” – relating how professional service firms and corporations are both needing to strategize around how to create uncontested market spaces and make head-to-head competition irrelevant.
Remember: All legal services and markets gravitate from left (emerging) to right (saturated) over some period of time and it’s called “eventually become obsolete!”
So Where to Start
When working with a group of lawyers, I often ask: “So where do you think these emerging and growth opportunities come from?”
I will usually hear about the need to be attunded to developing trends, new changes in laws and subsequent regulations, and being proactive in talking and listening to your clients. All good responses. But there is even better news. In each of your firms and in each of your practice groups, as you are reading this, there are numerous unexploited opportunities where you already have some degree of experience and are not required to construct some emerging opportunity out of thin air.
Imagine this scenario. You have a client whom you have served for many years, who trusts you and calls one day with an unusual situation that they are confronting. You have absolutely no experience whatsoever with this situation. But you do have a few brain nodules to rub together and you tell your client, “Let me look into this for you, I think we can help.”
You dig in, you invest a pile of time, you collaborate with others (inside your firm and across your personal network) and you figure out a viable course of action for your client. A good portion of your time you don’t even bother to record and much of the time you do record is then written off, because after all, you justifiably rationalize that you were in a learning mode and that this work was done for a loyal firm client. AND, isn’t that how most of us learn something new in our particular practice? Only one small problem. As one managing partner explained it, “we all operate like busy little race-horses with blinders on, going from one client file to the next, but never bothering to take off our technical hat and put on our commercial hat.” In other words, we don’t take the time to seriously ask ourselves whether what we just learned on this new engagement might be leveragable with other clients. Might there be other companies out there dealing with this very same situation and not knowing where to turn?
The good news is that you already have experience throughout your various practice and industry groups in handling various emerging and growth issues, you just haven’t invested the time to identify them. Here are a few preliminary steps to take:
1. Identify and leverage your hidden strategic assets.
In many firms there already exists “hidden diamonds” within some of the “out-of-the-ordinary” client matters that have been successfully handled by professionals in the past. To exploit the potential that lies hidden requires a bit of analysis. You need to purposefully “deconstruct past client experiences.”
For example, within one firm, I began the strategy process by having the practice leader interview each partner, to construct a written profile of their recent, out-of-the-ordinary client transactions. We asked each partner to please tell us about those particular matters that they had handled over the past eighteen to twenty-four months that presented a new and inspiring challenge. We asked who the particular client was and what might have made the client’s situation rather unique. We then explored with the practice group whether the lessons learned from any of these transactions might suggest new client, new market and new revenue opportunities.
2. Select 3 of your best emerging / growth opportunities and begin to develop your action plan for becoming a dominant player.
Deconstructing past client experiences can provide a means of escaping the myopia and put you in touch with the deeper capabilities that can be brought to bear in other commercial ways. The practice group must examine every out-of-the-ordinary transaction with the questions:
It is precisely because these hidden diamonds jolt us out of our preconceived notions, our assumptions, our certainties, that they provide such a fertile source for strategic innovation. From my personal experience in working with almost any kind of practice or industry group you might imagine, having the partners get together and identify potential emerging / growth opportunities in their particular group, has resulted in our focusing on no less than three good areas to exploit – to a list of more than 13 to select from.
In many firms now, managing partners are instructing their practice and/or industry leaders to identify three (3) areas of opportunity within the emerging / growth areas of your practice and develop your action plan for how you intend to market those in the next three years with the goal of becoming the dominant, go-to player in at least ONE.
Remember where I started this paper – both Deloitte, McKinsey (and others) are working to have 30% of their revenues, every few years, coming from entirely new areas.
So can you!
About Patrick J. McKenna
Patrick is an internationally recognized author, lecturer, strategist and seasoned advisor to the leaders of premier law firms; having had the honor of working with at least one of the largest firms in over a dozen different countries. He is the author of eight books most notably his international business best seller, First Among Equals, currently in its sixth printing and translated into nine languages. His most recent work, The Changing of the Guard, Second Edition (Ark Group, 2017), provides in-depth guidance on the leadership selection process in professional firms. Patrick’s three decades of experience led to his being the subject of a Harvard Law School Case Study entitled: Innovations In Legal Consulting and he is the recipient of an honorary fellowship from Leaders Excellence of Harvard Square. Patrick may be reached at: email@example.com.