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 2 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. This post (Part 2) explains the available directional choices dictated by the current market for legal services:  grow broadly or grow deep. Part 3 will explain how to flesh out a directional decision into a detailed strategy.

The Executive Committee is in turmoil

Change is too risky

“We've been holding profits per equity partner steady for the past 5 years,” asserts Mike, a senior partner on the Executive Committee and the long-time head of the Corporate Department. “We should stay on our path and keep working on profitability of some offices, weeding out the small clients, keeping our bigger clients happy with great service, quality work and broad practice offerings, continuing with selective lateral hiring and offering early retirement to some of our weaker partners. Why risk the formula that's worked for us?”

Growth in all directions is required

“We're in a new world now,” argues Sandra, the Litigation Department head, a midlevel partner who is the newest member of the Executive Committee. “The pie is not growing, and by staying static we're allowing other firms to get ahead of us. We need to double in size and open 10 more offices.”

Professional advice is needed

The Executive Committee of an AmLaw 100 firm has been debating the firm's future direction. 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. They've been at it all afternoon, and appear deadlocked around the two positions described by Mike and Sandra.

“I suggest we get the benefit of some outside advice,” proposes Art Imperatore, the firm's chairman.

When they reconvene a few weeks later, the consultant explains why both Mike's and Sandra's proposals are wrong. “You have two choices if you want to thrive,” he explains. “Grow broadly or grow deep. No-growth is not an option. I agree with Sandra that showing flat profits per partner means falling behind. But growth for its own sake won't succeed either.”

Why a small group of winning firms is pulling ahead

The make-up of the participants in the market for legal services is following the same progression as for other B2B service businesses, but with a lag that's probably due to the intensely local nature of law, conflict rules that mandate that more than one firm be involved in most contracts or disputes and lawyers' tendency to resist change.

The market's five stages

Most professional services markets start with many small firms providing services, not really competing much with each other – each a cottage industry – typically serving small clients. As clients grow, the competition to serve them increases, winners start to emerge – the rich get richer. The next stage is differentiation, where winners start to dominate. Some firms blow up.

Next comes an oligopoly, where a limited number of large players do exceptionally well (remember the Big Eight accounting firms in the 1970s and 80s, and by 2002 the Big Four?) and others perform modestly. Finally the successful firms start to differentiate themselves from each other, which stratifies the successful end of the market, while smaller firms continue, with widely disparate levels of financial success.

Evolution of the market for the delivery of legal services has been jolted forward by the 2008 financial crisis, the technology revolution and most importantly, the increased sophistication of General Counsel as purchasers of legal services. One telling indicator of this change is the fact that in the 7 years since 2008, 42% of the growth in total AmLaw 100 profits has been generated by the top 10 firms and the top 25 firms now account for more than 50% of AmLaw 100 total profits.

What stage are we in now?

Today's stage – the squeeze

The market for legal services is today, to all intents and purposes, dominated by an oligopoly of large law firms, though the identity of the oligopolists will remain fluid for some time to come. The market is now entering the fifth and final stage as participants start to stratify, with successful oligopolists staking out distinct market positions for themselves.

This stage of market development will be characterized by further concentration of profits in a small number of firms, while competition from non traditional substitutes (legal process outsourcers, law departments and smaller firms selling services at fire sale prices), will force wider gaps between winners and losers, and even stronger pressures to consolidate.

The bottom line: No-growth firms are losing market share. In the absence of differentiating strategies, they are forced to compete on price but typically don't have the distinctiveness or structure to win at that game. They will continue to feel price pressure until forced to merge with a larger firm or dissolve.

The two choices for winning law firms of the future

So how to differentiate? A firm can no longer be all things to all clients in all places. Quality lawyering and excellent client service are table stakes, not distinguishing features.

There are two basic approaches to winning in the stratification stage: Scale broadly or specialize in a handful of practices, with great bench strength, including granular experience in relevant sub-specialties.

Both directions involve growth – grow broadly or grow deep.

Scale implications of the two growth choices

Growing deep in a few practice areas

Growing a deep bench in a practice area requires not only a lot of people with overlapping experience and skills, but also experience in the sub-areas

of that practice. Related practice areas, such as ERISA and tax for transactional practices, will need to grow along with those practices. Growing a deep bench to service a region or a particular state can make sense, but as technology advances and virtual meetings and other collaborative software proliferate, the advantages of in-person, local access diminish, and the advantages of dominating a small geographic area will erode.

For example, if a firm wants to distinguish itself as a capital markets expert, it has to recognize that within “capital markets” there are many specialized sub-disciplines, including investment grade debt shelf registration financing by large public companies, initial public offerings, equity offerings by established public companies, private placements of debt, first round venture capital financing, subsequent round venture capital financing, high yield debt 144A offerings, non-US Regulation S offerings, and US debt offerings by foreign sovereigns. Differing expertise is also needed to represent the providers vs. the users of the capital raised.

To gain a competitively strong deep bench, the basic math suggests an AmLaw 100 firm, competing nationally, could easily need 200 lawyers to specialize in one area, including required related areas. Because focusing only in a single practice area may be an imprudent concentration, firms are likely to select several practice areas. That implies a minimum scale of 600-800 lawyers.

Growing broadly

To grow a broad-based practice that's competitive, a firm needs enough lawyers to cover many, many practice areas and an office footprint that covers the chosen geographic area. The size of that area – regional, national or global – drives the required size of the firm. A regional broad-based firm may require several hundred lawyers. That figure may jump to 1,000 or more for a national full-service practice. In order to offer both local law and cross-border services globally, the number of lawyers can be in the thousands.

Achieving global – or even national – scale, and managing it effectively, is perhaps a greater challenge than building a deep bench in a few practice areas. Today we see only a couple dozen firms seeking to compete nationally across a broad group of practices, and only a handful of firms choosing to grow globally.

Remaining a small “full-service” firm

Firms of 500 lawyers that continue to offer “full service” – a broad range of practice areas to a broad range of client types and industries – on a national basis are too small to differentiate themselves. As a result, they will be forced to compete on price. Yet their structure and service delivery model is not well suited to compete on that basis. Perhaps a few will adapt by relying heavily on contract attorneys, making few partners and investing heavily in knowledge tools and technology, but the prospects for the majority are not bright without significant growth.

Opportunity abounds for the two growth choices

In contrast to the 500-lawyer full service firms, there is real opportunity for the firms that choose one of the growth paths. But they must execute with discipline. For example, firms choosing to grow a deep bench in a few practice areas will need to make some difficult decisions to wind down or spin off their other practice areas. They will need to persuade their partners to spend valuable capital to search out and make acquisitions of smaller firms and lateral hires of practice sub-groups, and develop an effective integration program for those new lawyers.

Successful firms will also improve their efficiency and become more sophisticated about pricing and managing their matters.

Practical limitations

Theory meets reality when a firm actually thinks about the hard choices it must make to pursue either of the growth paths. The most difficult decisions relate to the parts of the firm that are not part of the new strategy – the partners and other lawyers in practice areas not slated to grow or offices that should shrink or close as part of a deep bench strategy, or who are in practice areas that are overrepresented in an office of a firm pursuing a national full-service strategy.

The reality is that the firm needs to play the hand that it's been dealt. Radical restructuring, as may be possible in the corporate world, is not feasible in a law firm. Too radical a change, especially letting too many people go, could tear the firm apart.

As a result, the pace of implementing the strategy will be slower and the time required to see results will be longer. This needs to be taken into account as the firm decides on a particular strategy. If the firm is under pressure to move expeditiously, it may feel compelled to choose a strategy that requires fewer difficult decisions even though it may not be the optimal strategy.

The Executive Committee tries to make a decision

After considering the consultant's presentation, the Executive Committee meets again to decide how to proceed.

“If we follow our consultant's advice, I see only one alternative – growing nationally in specialized areas,” declares Sandra, the Litigation Department head.

“I also see only one alternative,” replies Mike, the Corporate Department head. “We need to grow as a national full service firm, or be acquired by one!”

Even after considerable debate, the others on the Committee are also split.

“We can't decide this in the abstract,” interjects Art, the firm's chairman. “We need to explore how we would actually accomplish each alternative: where we would grow, what we would de-emphasize, who our competition would be, who our possible merger counterparties are for each of the strategies, and how long achieving each strategy would take.”

The consultant had indicated there is a logical process to be followed in considering all these matters. The Committee decides to call the consultant back for further advice.

To be continued . . .

Conclusion

The Executive Committee is 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 means offering a deep bench in a handful of practice areas regionally or nationally or offering a broad but less deep service regionally, nationally or globally.
• Going deep or going broad on a national basis each implies a growth in scale for the firm.
• If the firm does not choose one of those, it will be forced to compete on price, which implies a new service delivery structure relying heavily on standard forms, technology and low-cost human talent.
• Each of these three approaches involves a different-looking law firm.

Against this backdrop the Executive Committee has decided to grow and compete nationally but is 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.

Our next post will discuss the steps to unlock this problem.

[Photo credits: © Can Stock Photo Inc. / iqoncept, Paha_L & maxxyustas]