This is a joint post by David Barnard & Mark Shapiro of Blaqwell and Jack Bostelman of KM/JD Consulting Blaqwell is a pre-eminent consultancy that advises top law firms on high-level issues, such as strategy, mergers & acquisitions, compensation systems, performance measurement and lateral hiring strategies. KM/JD Consulting advises leaders of Am Law 200 firms how to improve practice group productivity and achieve real follow-through from lawyers on internal initiatives.

This post is Part 3 of a 3-part series on strategy. Part 1 – What is a strategy? And why you need one – explained the elements of a strategy, which is a roadmap to future success: A definition of how the firm will look in 3 years, the metrics used to measure progress toward that goal, and 3-6 key actions to achieve the goal. Part 2 – How to choose a strategy – and why it must include growth – explained the available directional choices dictated by the current market for legal services: grow broadly or grow deep. This Part 3 will explain how to flesh out a directional decision to grow deep into a detailed strategy.

The Executive Committee resumes its debate

The Executive Committee of an AmLaw 100 firm has been debating the firm's future direction. Having grown from its Midwestern roots, the firm has 500 lawyers, 10 domestic offices, including New York City, Washington, D.C. and Los Angeles, and an office in London. It offers 30 practice areas.

In the last post, the Executive Committee was wrestling with the following challenges:

• If the firm continues on a no-growth approach as a 500-lawyer national full service firm, it will lose market share, face increasing price pressures and most likely go into decline.

• The firm can compete based on being distinctive, which could mean offering a specialized service in a handful of practice areas regionally or nationally or offering a broad service regionally, nationally or globally.
• Either going deep or going broad on a national/international basis implies growth for the firm.
• If the firm does not choose one of those options, it will be not be distinctive and will be forced to compete on price, which would necessitate a new service delivery structure relying heavily on standard forms, technology and low-cost human talent.
• Each of these three approaches involves a very different-looking law firm from the one we have today.

First, perspective on strategy planning

The Executive Committee reconvenes

Against this backdrop, the Executive Committee decided in the last post to grow and compete nationally but was deadlocked whether to grow deep in a handful of practice areas, or whether to grow as a full-service firm or be acquired by one.

The Committee recalls the consultant to explain the recommended process for making this decision.

“I hope we can streamline this process,” says Sandra, the Litigation Department head, who is a midlevel partner and the newest member of the Executive Committee. “We've spent too much time away from client work already on this decision.” Sandra had advocated that the firm grow deep in a handful of practice areas.

“I suggest we first take a step back,” begins the consultant. “It will make your decision easier if you consider two preliminary points. First, the strategy process should be enjoyable, not a burden. Second, we should bear in mind the goal of the strategy process; how to grow is simply a means to achieve that goal.”

The Committee asks the consultant to elaborate.

Executing the strategy requires decisiveness but can be highly rewarding

Making the tough choices required to shape the firm from what it is today into the more competitive firm it can be in 3 years can be hugely rewarding. A modestly successful firm can become not only financially more successful but also one to which partners feel a stronger bond.

The strategy planning process is the luxury of imagining a great new way for the firm's best people to be effective, to get to do what they want and to be rewarded for it. There are lots of choices, and lawyers are fortunate in that many choices are available, unlike in so many industries where one or none are available to middling firms. What can make this process a challenge for some partners is that most law firms have come from the even more luxurious situation of not having to make choices, so that even making a few can seem difficult. Those partners can often be brought along through an education process that explains the new market reality for law firms and how the firm currently fits into that reality.

Strategy means being distinctive to compete better

The purpose of a strategy is to be distinctive so the firm can compete more successfully on that basis rather than purely on price. So the focus of the discussion should be on how to stand out and become more competitive. In other words, to be attractive to clients for reasons other than price.

In today's market, as discussed in Part 2, firms can be distinctive by scaling broadly as a full-service firm or by specializing in a handful of practices, with great bench strength, including granular experience in relevant sub-specialties. Growth itself is not the goal. It is a means to being distinctive, which should remain the focus of the planning discussion. The geography where the firm will compete must also be decided – regionally, nationally or globally. Over time, though, regional firms may find they face increasing competition from national firms pursuing the same strategy. Ultimately, national firms may face competition from similarly positioned global firms.

The planning process involves mostly qualitative, not financial, analysis

The planning process is not a dry financial analysis. It involves much internal assessment – identifying the personal and professional aspirations of the partners, discovering their views on what the firm should be in 3 years that's true to those aspirations, and learning how much change they can support.

The process is also not linear. First, the goal is decided – what the firm should be like in 3 years. Then, the steps to get there are figured out. If those steps feel too difficult, revision of the goal may be needed. Ultimately a plan is devised that in 3 years will turn the firm into a distinctive and highly competitive enterprise. That plan also needs to be enthusiastically supported by the partners.

How to decide whether to grow broadly or grow deep

The Executive Committee now better understands it is undertaking a process, not a simple decision, and commits to budget time accordingly. They have become excited about reinventing the firm.

“Now you're ready to roll up your sleeves,” the consultant continues. As a next step the Committee should

• compare what the firm would look like 3 years from now in each of these very different scenarios, and consider how much change that requires from the firm's current platform,
• consider for each scenario the competitive advantages for the firm, as well as the challenges of transforming the firm in 3 years as contemplated by those scenarios, and
• consult a representative group of partners to obtain a sense of which direction is most consistent with the personal and professional goals of the partnership.

The review should be both inward- and outward-looking, including the firm's current practice mix, financial picture of each practice area, client base, geographic reach, talent pool, leadership, and competitor firms.

Growing broadly

What it means to grow broadly

At the last Executive Committee meeting, the consultant explained that a decision to grow broadly on a national basis likely requires a large increase in scale if the firm is to be competitive. This might imply growing to 1,000 or more lawyers and opening more offices nationwide.

A 500-lawyer firm could achieve this growth in 3 years only through several smaller acquisitions or one or two large M&A transactions. In order to determine the feasibility of either smaller or larger M&A transactions, the firm needs to survey which firms may be compatible financially (such as similar profits per equity partner, revenue per lawyer, average hours per lawyer, associate leverage, and ratio of equity and non-equity partners), geographically and from a practice perspective. Ultimately the firm would need to reach out to other firms to gauge interest and analyze compatibility, including cultural fit. At this stage, though, the firm can merely consider whether the list appears to include a sufficient number of acceptable candidates to make reliance on growth by transactions a reasonable path to pursue.

Some firms will find this strategy easier to pursue than others, such as firms that already are full-service but simply not large enough. Joining with an equal or larger full-service platform may be just what the firm needs, with the combined firm being stronger than the parts because of its scale. Finding a counterparty that is the right fit will be critical to the success of this strategy. Fit includes not only financial metrics, but also work ethic and culture.

The Executive Committee concludes growing broadly is not a good fit

“I've changed my mind after hearing what we'll need to do. I'm uneasy about a combination with a large firm to pursue a full-service growth strategy,” declares Mike, the senior partner on the Executive Committee and the long-time head of the Corporate Department. He had originally pushed for growing broadly. “I don't want our culture to be diluted or to lose control over our destiny. Part of our glue is our culture of hard work, pride in client service and genuine like and mutual respect among our partners.”

Others nod in agreement. “We have several solid and financially successful practices that could become leading practices if given proper support,” says Sandra. “Couldn't they be the basis for a grow deep strategy?”

The Committee decides to set aside for now further discussion of the strategy to grow broadly. They will return to it only after they have more fully considered the viability of the grow deep approach, which has greater gut appeal for them.

Growing deep

Growing deep will also require substantial change. First, the firm would need to select 3‑4 practice areas or business sectors in which to focus. Second, it would need to consider the geographic implications of that focus for its platform – which offices to close and where possibly to open. Both the practice focus and geographic decisions will involve changes in the make-up of the partnership. There will no longer be a place for some partners. The firm will need to bring in laterals and undertake small mergers to fill gaps, and will need to take these actions quickly.

“I can live with those kinds of decisions,” declares Mike, the Corporate Dept. head who was concerned about losing control and culture if the firm grew broadly through a merger. “It involves less change for us than growing broadly. And we keep more control of our destiny.” The Committee reaches a consensus. For these benefits, they are willing to forego the greater stability a broad-based national platform can provide.

The consultant walks them through the remaining steps in defining the changes required to grow deep.

Select firm peers and set growth targets

Being competitive means tapping into demand. An indirect way to gauge what's required is to size up firms that are succeeding at a similar strategy. For this, the firm needs to identify a group of actual or potential peer firms and analyze what they are doing. What practice areas or industries do they target? How many lawyers do they have? What is their geographic platform? How have their key financial metrics performed? Selecting the right peer group is a subjective, but very important, undertaking.

The firm should seek to become comparable to these peer firms and grow as they do. For example, it should seek to match their growth rates of net income, revenues, numbers of equity partners and profits per equity partner, setting numerical targets for itself in 3 years. The firm, of course, must do so while remaining distinctive, so it will have its own practice area or industry focus.

Identify focus practice areas or business sectors

How many? The Executive Committee also needs to identify 3-4 practice areas that can be leading practices, be financially successful and achieve the desired growth.

The prescription to select 3-4 areas derives from the fact that fewer than that may produce too much concentration risk. The

firm size implied by 3-4 practice areas with a deep bench on a national scale is probably 600-800. At that size, managing more than 3‑4 areas at high growth and with discipline would become progressively more difficult.

How decide? In order to decide on the 3-4 practice areas on which to focus, the firm must analyze each of its existing practice areas on their value and growth potential. One factor in the value analysis is productivity – generating the greatest income with the fewest resources. Other elements of value are attractiveness to clients and to the firm, using indicators like demand, profitability, growth, rankings and demographics, all adjusted for sustainability.

Typically this practice area analysis produces some results that surprise firm leaders. Some practice areas considered important are not very valuable. Some smaller practice areas with low visibility are or can become extremely valuable.

Who will lead the 3-4 practice areas is an important consideration as well. If a practice area is considered to have the potential for requisite growth, but a leader within the firm is not apparent, the Executive Committee should consider the likelihood of being able quickly to recruit a lateral partner to perform that role before nominating it to become one of the 3-4 focus practice areas.

Establish roles for partners and practice areas in the new order

Having tentatively decided on the focus practice areas, which will be the pillars of the firm going forward, the Executive Committee should assess the role of each partner and practice area in supporting the new direction.

“Are we going to have to ask some partners to leave?” asks Sandra. The significance of their new direction is starting to sink in. The consultant reassures them that the situation is entirely manageable.

There may be some practices that are valuable, though not rising to the value of a focus area or not likely to grow as fast. There can still be a place for those practice areas, and the partners who support them, though it should be recognized that the preponderance of the firm's resources and growth will be devoted to the focus areas. There will also be some practice areas that are needed to support the focus practices, such as tax and ERISA. These, of course, should remain.

“You need to stay true to the new direction and the focus practices that will be the engines of the firm's growth,” advises the consultant, “while still being inclusive and constructing a firm that the majority of partners are enthusiastic to support. This requires balancing.”

“There will, however, be partners for whom the required change is too much or who otherwise don't have a place in you new firm,” cautions the consultant. “But there are many ways to handle that collegially. If you follow this process rigorously, your new firm will be truly different than it is now – not merely the same firm dressed up with new labels.”

Conversely, the Executive Committee needs to assess the gaps that must be filled to achieve the targeted growth and depth in the 3-4 focus areas. What is the required timing to fill those gaps? Is there sufficient will to engage in aggressive lateral hiring? Are there targeted merger candidates to supplement lateral hiring? Mergers cannot be counted on to occur. Can all this be accomplished in the time required?

Next steps

Implementation

Over several rounds of meetings, the Executive Committee decides on 3-4 practice areas, geographic changes to the platform, areas to be wound down and lateral hiring and M&A strategies. It now has a strategic goal – what the firm should look like in 3 years.

The final phase of the planning process is to decide on the handful of practical actions the firm will pursue in order to achieve the new direction in 3 years.

Some of those actions should be internally focused, such as revising the compensation system to incentivize the desired behaviors, reorganizing management of the firm around the 3-4 focus practice areas, or creating a formal partner development program. The others should be externally focused, such as creating a firmwide business development strategy around the 3-4 focus areas, establishing a centralized lateral recruiting unit, or creating a group to focus on M&A opportunities.

The new direction and the implementation steps constitute the strategic plan.

Building support of the partnership

The Executive Committee must next seek and obtain a consensus from the partners and develop a communications plan for various firm constituencies. These are essential steps that require thoughtful planning and careful execution.

Execution

“Now you're ready to undertake the hardest part,” declares the consultant. “You've got to implement your plan with intensity, determination and accountability.” The Executive Committee members look around the room. A few look uncertain. But most look excited to get started.

Conclusion

The Executive Committee learned the following in this phase of its efforts:

• Choosing a direction means making judgments about how to be more competitive, ideally how to be distinctive in the eyes of target clients and prospects – this requires outward-focused facts not just our own impressions of what we're good at and what we like doing;
• Several kinds of direction are available, each with its own rewards and challenges, and likely there is one that is available for each firm with its unique culture, partnership goals, and mix of skills and shortcomings;
• Growing deep in a few practice areas or business sectors at a national scale requires
• benchmarking what clients require by identifying peer firms and establishing growth rate targets 3 years out that will keep pace with those peers;
• assessing value, growth prospects and leadership of existing practice areas to identify a handful that can achieve leading status and grow in the required time frame;
• being disciplined but not rigid about finding roles for partners under the new direction so that a majority can be enthusiastic about their new firm; and
• having a plan for lateral hiring and opportunistic M&A transactions to achieve desired growth in scale.
• An integral part of the selected strategy is the implementation plan. This includes internal initiatives, such as revising the partner compensation system and reorganizing practice management, and externally facing initiatives, such as business development planning and a lateral hiring strategy.

Some of the implementation steps mentioned above will be the subject of future blog posts.

[Photo credits: © Can Stock Photo Inc. / Elenathewise, mcarrel, rudall30 & kentoh]