Strategic Thinking for Mid-Size Law Firms

Posted on October 3, 2013 by Sterling

Last month we talked about mid-size law firms: how best to define “mid-sized;” whether aggressive growth was the most logical strategy for mid-size firms; and alternatives to adopting an aggressive growth strategy. We got quite a bit of feedback – including some asking whether we had any alternatives to rapid, merger fueled growth. Part of the answer to that question was addressed in the second half of that article (a section entitled “winning strategies for mid-size law firms”). This article advances that discussion further.

Last month we identified some important commonalities among successful mid-size law firms, including the following.

Successful mid-size firms tend to be general service, business law firms (though not “full service” – that is unattainable even at 2,500+ lawyers).

A large number (perhaps a majority) of their clients are middle market companies – and that means that legal costs are essentially paid out of the owner/CEO’s pocket.

Successful mid-size firms have people and/or practices that are the absolute best in the local/regional market in their areas of expertise.

They have at some point (perhaps frequently) been approached by another law firm (probably a larger law firm) interested in merging.

There are important strategic implications associated with each of these traits, each suggesting potential sources of competitive advantage and vulnerabilities to competitive disadvantages. Some generic strategic thinking can be applied to these common attributes – a few examples follow.

General Service, Business Firm

As a diversified law firm, a “general business firm” has an opportunity to build deep, multi-practice, multi-partner client relationships.

Potential Advantage – Partners at mid-size firms have a strong personal familiarity with (most of) their partners. That should provide an advantage relative to introducing one another to clients as new needs arise (assuming partners have confidence in one another).

Potential Disadvantage – Every firm has practice capability gaps and those gaps can be pretty large at mid-sized firms (even in the strongest). When competing against biglaw, mid-size firms need to avoid competing on the basis of scale or breadth.

Middle Market Clientele

Serving middle market companies has preconditioned many partners at mid-size firms to be value conscious. The legal market has been moving decisively toward reduced costs and value, particularly since the great recession. Many mid-size firms have been benefiting from that trend.

Potential Advantage – Generally speaking rates are lower in mid-size firms. In addition, many mid-size firms are predisposed (temperamentally and practically) to staff matters with lean teams.

Potential Disadvantage – Biglaw firms are making substantial investments in knowledge management, project management, and financial management and that has the potential to close rate and efficiency advantages currently enjoyed by mid-size firms. In addition, as Bruce MacEwen has noted here, some large firms are engaged in “suicide pricing” – it isn’t sustainable for a biglaw firm, but it is a real threat to competing mid-size firms.

Market Leadership

Strong mid-sized firms are often the best choice in their local or regional market for a number of legal issues. Yet, they are rarely the largest or most visible firm in their own market.

Potential Advantage – Marketing and business development that supports market leading practices generally has the best return on investment. That includes both investments intended to attract new clients and those intended to expand existing relationships across practice areas. The key is being willing to make those investments.

Potential Disadvantage – Essentially, two can play that game (i.e., biglaw competitors will be pushing their own strengths forward in the marketplace) – and larger law firms have larger marketing and business development budgets. In addition, that biglaw competitor may have a great option for the client sitting in an office 2,000 miles away (geography often isn’t a barrier for work these days).

Merger Inquiries

Critically, you need to know what your firm’s general disposition is vis-à-vis merger. Even if it is quickly dismissed by the partners, it is important to have that conversation from time to time at the Executive Committee or Board levels, as well as with the broader partnership.

Beyond that, as a general rule of thumb, mid-size firm managing partners should accept invitations to lunch from an out-of-town (merger seeking) peer. At worst, you will learn a bit about a firm that is obviously interested in competing for clients and people in your market. And, you will gain insights into what other people value in your market and in your firm.

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As always, we welcome your comments and insights below, via email at info@sterlingstrat.com, and via phone at (312) 543-6616.

What Are the Prospects for Mid-Size Firms – and What Does Mid-Size Mean Anyway?

Posted on September 17, 2013 by Sterling

The Executive Committee of an AmLaw 200 firm (aspiring to become an AmLaw 100 firm) raised the following question. “(We’re at) an awkward size (roughly 500+ lawyers)…what should a mid-size firm like ours do (strategically)?” Given their aspirations, the answer was to keep growing and become a ‘big’ law firm. They certainly would not be the first to follow that road and some have realized their aspirations. For instance:

At the time of their merger in 1999, Piper Marbury was a 400 lawyer “Baltimore law firm” with most of its lawyers located outside money centers and Rudnick & Wolfe was a 350 lawyer “Chicago real estate powerhouse” with no New York presence at all. According to the American Lawyer DLA Piper is now the world’s largest law firm, with over 4,200 lawyers in 30 cities worldwide.

Similarly, at the time Elliot Portnoy became chairman of the Firm in 2007, Sonnenschein, Nath & Rosenthal was a 600 lawyer “Chicago-based law firm,” with less than 20% of its people in New York. Since declaring its intention to become leading global law firm, Sonnenschein scooped up over 100 lawyers from the disintegrating Thatcher Proffitt & Wood in New York, merged with UK law firm Denton Wilde Sapte, and simultaneously merged in international firm Salans and Canadian firm Fraiser Milner Casgrain. Dentons now has over 2,600 lawyers in 80 offices across 50 countries.

“Moving up market” (as some like to term the strategy) is certainly not impossible. But, the conversation with that aspiring AmLaw 200 firm raises a couple of pointed questions. Is a 500-600 lawyer firm actually “mid-sized?” And, is growth the only winning strategy for mid-size firms that intend to survive and prosper into future generations?

What is a Mid-Sized Firm Anyway?

Let’s deal with that first question – is a 500+ attorney firm mid-size? Sure, if your frame of reference is the AmLaw 50 or 100, then an AmLaw 200 firm is mid-size. That is especially true if your firm aspires to being part of ‘BigLaw.’ To generalize the point, defining what mid-size is depends largely on what you are comparing it to (e.g., an elephant is mid-size next to a brontosaurus).

That said, for many, many firms ‘mid-size’ is better defined in the context of nearby (i.e., local and regional competitors). In other words, mid-size is a function of your size relative to other firms/offices in your primary (or only) city. Firms that are mid-sized by that definition tend to share some common traits.

They tend to be general service firms (since “full service” is unattainable at any size) focused mainly on the legal needs of business clients and their owners.
They have a number (perhaps a majority) of clients who are classic middle market companies – and that means that legal costs are paid out of the owner/CEO’s pocket (if it isn’t insured risk).
They have people and/or practices that are the absolute best in the local/regional market in their areas of expertise.
They have at some point (perhaps frequently) been approached by another law firm (probably a larger law firm) interested in merging.

Is the only (or even the most logical) strategy to say ‘yes’ to merger overtures and/or launch a search for suitable merger partners with whom to grow aggressively?

Winning Strategies for Mid-Size Law Firms

So, is aggressive, merger fueled growth the best/most logical/only strategy for mid-size firms? After all the demise of the mid-size firm has been predicted for at least 25 years. Our answer: it is certainly not the only strategy, but it really depends on what your firm aspires to become. We addressed that broader question in a recent article regarding strategic direction.

Mid-size firms can adopt a compelling strategic direction that does not include substantial growth. Assuming there is widespread agreement among the partners regarding that direction (whatever it might be), there are a few things that you can (in fact should) do to turn that into a winning strategy.

Focus on a Few Things that Can Create a Competitive Advantage

Focusing a a few things that create competitive advantages requires a firm to do at least two things. First, honestly assess what the firm is (or can become) truly great at doing – strengths that can become the epicenter of genuine excellence that cuts across the firm. Second, get external validation that being great at those things is meaningful in the marketplace. Focus on a handful of things you are great at (or can become great at) that also have meaning in the market.

A basic SWOT assessment (strengths, weaknesses, opportunities and threats) can highlight your areas of strength (actual and latent). If you are not good at looking objectively at yourself, a good consultant can help.

External validation can and should come from your clients. Your best clients want you to succeed into the future – they almost certainly consider your partners to be among their most trusted advisers. So, ask your clients what you are good at and what you can do better. It will inform your strategy and improve your relationships to boot. It is amazing how few firms do this in any systematic way.

Think Strategically

What does that mean, to think strategically? Well at a minimum, think about competitive advantage (those areas you might focus your energies on) through three lenses.

Consider whether you enjoy size or scale advantages over competitors – or more likely face larger competitors who have size advantages with which you must cope. Large firms do have deeper pockets (or at least more equity partner pockets) over which to spread marketing, technology and other shared costs.
Identify factors that may help you to defend your firm’s market position against competitors (even much larger, better financed competitors). It may be your knowledge of the local courts and judges, your reputation and brand may have deep roots in the community, you may have very deep and broad relationships with clients. Consider how you can capitalize on and solidify those defensive advantages.
Finally and most importantly, take an indirect approach – occupy the unoccupied market positions and be willing to do things differently from competitors. Precedent is a horrible source of strategy – don’t do what others are doing, do things no one else is doing.

Implement – Do What You Say You Are Going to Do

We have written extensively on implementation – through the balanced scorecard and through other means as well. Successful implementation involves:

Cascading strategy implementation throughout the organization – from firm level initiatives to practice and departmental level activities to a vital and meaningful roles in implementation for all of the firm’s people (partners, associates and staff);
Measuring and monitoring implementation and the results it is producing – reinvesting in and celebrating the things that are working;
Adjusting as implementation unfolds – abandoning or recalibrating initiatives that are clearly not producing expected results and responding to new market challenges and opportunities as they arise.

In sum, if you think you are mid-size, you probably are – it is entirely a function of your perspective on the competitive marketplace. Being mid-size is not equivalent to being diagnosed with a fatal disease. You are free to reject the label and seek to grow – others have done so with remarkable success. But, you can also adopt other winning strategies by focusing on few sources of competitive advantage, thinking strategically, and implementing with discipline.

As always, we welcome your comments and insights below, via email at info@sterlingstrat.com, and via phone at (312) 543-6616.

Strategic Direction – The Key to Sustained Success

Posted on July 31, 2013 by Sterling

We have written quite a bit about strategy implementation both on this blog and elsewhere. Those articles and books make the assumption that a good strategy is already in place. The topic of effective strategy development can (and has) benefit from book length treatment. However, it only takes a few minutes to get a solid grasp of the most important aspect of good strategy – namely, having a well understood and agreed upon strategic direction.

“Strategic direction” sounds like fluent consultant-speak and it probably is (guilty as charged). That said, research underscores the point that having a clear direction is critical to sustained business success. In fact, if you have a well understood direction, coupled with strong implementation, the odds are overwhelming that your organization will survive and prosper. All the other details surrounding strategy development are secondary to strategic direction and good implementation.

So, what does strategic direction mean? There are three fundamental components – vision; shared values; and primary goals.

Vision

A great deal has been written about vision (and vision statements), often dismissing it as superficial or confusing it with a marketing tagline. Without a doubt, it is difficult to craft a short, compelling vision for an organization’s future – particularly if you intend to have it stand alone as the only reference point for the organization’s direction.

Ideally, your vision should be short and inspirational. It should not, however, be expected to stand alone as the sole definition of your organization’s strategic direction. Rather, treat it like a destination on the map – the end state you aspire to reach. Then, discuss the vision in the context of enduring values and the primary goals of the organization.

Shared Values

The most enduring element in a strong organization is its culture – a reflection of the shared values held by stakeholders within the firm. At most firms, shared values can be articulated though a half dozen or fewer words – sometimes with a phrase or sentence expanding on what each means at the firm.

Collins and Porras discussed the enduring nature of purpose and values in the context of what they termed “corporate ideology” (Built to Last). The key point to take away from their research: a set of shared values is like an organizational North Star – a constant in a sea of constant change. We discussed ways for maintaining a positive culture here.

Visions change as markets change and goals are achieved. But values endure through changes in leadership, markets, product/service offerings, et cetera. The only reasonable exception to this basic rule of thumb is in cases where the organization’s culture is so dysfunctional that everything – and especially the current values – needs to change.

Primary Goals

The final element in a well-articulated strategic direction is identifying and articulating a limited number of primary goals. Those goals serve as the focal point for the prioritization of investment and implementation efforts. Fewer goals are better than more generally speaking. Three is better than five – and more than five goals is resource dissipating and will erode most organizations’ ability to maintain focus and professional discipline.

The best primary goals reflect an intersection of market/client needs with the firm’s ability to deliver excellence in that realm. That intersection of market need and organizational excellence usually manifests itself in one of the following ways.

First, it can lead to the development of core capabilities that enable the firm to perform at a level required to remain competitive. Achieving these goals does not differentiate the firm, but it does enable the organization to stay in the game. Examples include having low cost operations in the aluminum industry, solid product quality in the automotive industry, and talented people in professional services. You simply cannot compete without these core capabilities.

Second, it can lead to the development of core competencies – a competitive strength that transcends products, services, and markets and one that genuinely distinguishes the firm from others in the market. Examples include Apple’s excellence in product design, 3M’s ability to continuously innovate and develop new adhesives and coatings, and Axiom’s ability to deliver highly experienced legal talent at a low cost.

Taken together – vision, shared values and primary goals – define strategic direction. It highlights where the organization is going, provides a “north star” for navigation, and identifies a limited number of goals to focus the allocation of resources to guide the strategic choices the organization will need to make to achieve its vision.

As always, we welcome your input and feedback in comments, via email (jsterling@sterlingstrat.com), and over the phone (312) 543-6616.

CO-CREATION OF UNIQUE VALUE WITH CLIENTS: A Strategy Tool for Winning the ACC Value Challenge (Part Two)

Posted on June 20, 2013 by Sterling

Our last post introduced the principles underpinning a valuable strategy tool – co-creation. We noted that co-creation is a tool particularly well suited to sophisticated legal practices for two reasons. First, in many respects co-creation principles align well with attorneys’ instinctive approach to managing client relationships. And second, co-creation is proverbially “just what the doctor ordered” relative to having an effective tool to respond to the Association of Corporate Counsel’s (ACC) Value Challenge.

As we noted in that last post, co-creation is built on four principles: open dialog; access to information; shared risk assessment; and transparency (especially on costs and pricing practices). We promised to share a few real world examples of how those principles were put into play by forward-thinking law firms and partners – working collaboratively with clients. We share three real world cases below (disguised sufficiently to protect both the identity of the law firms and their respective clients).

Managing A Large, Growing Patent Portfolio

A global technology company, spending well into the seven figures to manage and expand their patent portfolio in the U.S. (exclusive of litigation costs), approached their leading intellectual property law firm looking for an approach that would save money, while effectively supporting a core business strategy that highly valued a strong and growing portfolio. The existing relationship was long-standing and strong. The law firm currently supported more than 60% of the company’s patent portfolio. Further, the primary relationship manager was predisposed toward open dialog, access to information, and shared risk assessment.

Supported by solid financial analysis on the law firm side and progressive thinking in the general counsel’s office (including the associate GC for intellectual property), the following solution was crafted

An open dialog regarding the full scope and nature of the company’s patent portfolio – and the law firm’s technical capabilities – led to a realization that efficiencies could be gained by having one firm support the entire portfolio in the U.S. (as well as much of the rest of the world). Essentially, consolidating the work with a single firm would free-up resources in the GC’s office and the law firm and would streamline docket management.

The law firm already provided real time visibility to the client’s patent docket. By consolidating all the work in a single firm, it also became feasible to have secure access to the underlying documents (e.g., applications, USPTO responses, etc.) across the law firm’s and the client’s networks.

Real savings emerged from shared risk assessment. The company had a highly sophisticated strategy for its patent portfolio. They had a very clear sense for which patent families were most valuable and/or integral to that overall strategy – and the law firm became a valuable partner in helping to assess both value and risk. That in turn enabled the firm and the company to deploy the right level of resources to each element of the patent portfolio – especially in areas driving the greatest costs (e.g., the application docket and management of the pipeline of new technologies and patents).

Entrusting the entire portfolio to a single firm enabled the company and the law firm to create a rational budget for managing the entire portfolio (i.e., via transparency on costs and pricing). That budget included meaningful insights into what work should be done in the GC’s office and what should be done at the law firm – in the process optimizing total costs to the company. And, because the right work was being done in the right place by the right people (including administrative support), the law firm was able to maintain profit margins even as the company’s total spending on outside counsel declined.

Controlling Costs on Recurring Litigation

A large petro-chemical company with recurring litigation in the toxic tort arena was looking for a way to gain greater control over the costs associated with that litigation. Costs ranged from the mid-seven figures to the low eight-figures (excluding judgments and settlements) in any given year.

The company’s general counsel started a dialog with the lead partner of a range of litigation matters for the company (across multiple sub-specialties – including some toxic tort work). He was open about his objectives: to save money overall; and to introduce some predictability in his budget for this recurring work.

The relationship benefited from an established set of tools that provided access to documents (via a secure document management system) and to regular status reports on all open cases.

The partner was well respected for his ability to understand the risks associated with complex litigation – and his ability to cut through complexity to put a value on cases. That included an ability to assign solid ranges to the potential outcomes for any given case, as well as an ability to develop litigation strategies to manage cases toward controllable outcomes. This provided a dual ability to better manage ongoing litigation costs and achieve agreed upon outcomes vis-à-vis judgments and settlements. Settlement decisions could be made more strategically as a result – better managing risk and reducing the company’s total cost of litigation (not just the cost of outside legal counsel).

The relationship was characterized by a high level of trust (and transparency). Thus, when the company approached the partner looking for savings and predictability, he suggested putting all of the recurring work on a single fixed annual budget. Time would be tracked against the budget and the budget would be reset annually – some years up and some years down (a real reflection of mutual trust). As a means of saving the company significant legal fees, the partner suggested staffing routine, but labor intensive aspects of the ligation with low cost contract attorneys (rather than his firm’s higher priced associates). That took money out of the law firm’s hands, but created additional credibility and trust – as well as substantial cost savings.

Innovative Financial Services Products

One of the largest banking and financial services companies in the U.S. was searching for innovative product ideas to respond to the post-financial crisis banking environment (e.g., low interest rates, higher reserve requirements, more stringent regulatory oversight, etc.).

General Counsel at the bank began a dialog with partners at one of its most forward thinking law firms. The bank and its competitors were responding to the low interest rate environment by adding a substantial quantity of government bonds (in particular municipal and other tax advantaged government bonds) to their balance sheets. However, the process through which those assets were traditionally created (e.g., underwriting and disclosure by investment bankers, public offerings and market making, etc.) was both cumbersome and costly. The bank was looking for a creative solution to simplify and streamline that process.

That initial dialog led both the bank and the law firm to open access to the key stakeholders at the bank (e.g., investment bankers, commercial bankers, law department, etc.) and to subject matter experts at the law firm (e.g., securities, public finance, banking/bank regulatory, etc.). The combination of dialog and access led to the development of what amounted to a new product in both the banking and public finance world – direct purchase by the bank of newly created government bonds.

The success of the product was strongly influenced by the ability of the bank and the law firm to effectively manage risk. That included strong risk assessment of the municipalities and other entities originating the bonds (i.e., no distressed municipal debt in this product mix). It required effective documentation of underlying disclosures by the issuing entities, as well as other regulatory compliance (another form of risk mitigation). And, to manage the longer run balance sheet risks, it required the creation of products with appropriate durations to protect both the borrower’s and the bank’s balance sheets.

Creating what amounted to an entirely new product (both for borrowers and lenders) raised critical transparency questions. Should this product be considered highly proprietary (which in the world of financial services meant it would take a few quarters before other banks figured out their own way of offering the product) or should it be trumpeted as a new industry standard (enabling faster followers)? In addition, having created a product that was essentially a winner for all stakeholders (borrowers, the bank and the law firm), how repeatable and predictable could the process become? Direct purchase of municipal (and other public) debt has been moving rapidly toward industry standardization (answering the first question). There are tremendous efficiencies in the product/process, however the unique qualities of each asset (i.e., municipality/project/etc.) limit how entirely repeatable the process can be (partially answering the second).

Hopefully these three examples – across markedly different legal specialties and markets – help to provide some insight into how you might adopt and apply a co-creation strategy in your own firm and/or practice. At a minimum, co-creation ought to be in the “strategy toolbox” of every law firm of reasonable size and capability.

As always, we welcome your comments below and via telephone (312) 543-6616 and email (jsterling@sterlingstrat.com).

CO-CREATING UNIQUE VALUE WITH CLIENTS: A Strategy Tool for Winning the ACC Value Challenge (Part One)

Posted on June 13, 2013 by Sterling

This is the first in a two-part discussion of a valuable innovation tool for law firm leaders – “co-creation.” Co-creation has its greatest value at the individual client level, but can be applied at practice level as well. Co-creation dovetails directly with the kind of call to action at the heart of the Association of Corporate Counsel’s (ACC) “value challenge.” Namely, that increasing the value law firms deliver to clients requires “that solutions must come from dialog and willingness to change things on both sides.”

Co-creation is quite distinct from disruptive innovation (see our article from April 2013) which provides a process and roadmap for creating low end solutions that fundamentally alter established markets. On the contrary, co-creation is a process for creating solutions that have unique and enduring value for clients (often enhancing or at least preserving profitability). It is essentially a process for taking practices to higher levels of value and for strengthening client relationships in the process.

This first article provides an overview of the tool and how it applies in a law firm setting. Our follow-up article next week will provide a few examples to provide some practical, real world insights into the process.

Origins of the Tool and Principles

Co-creation emerged and was defined by C.K. Prahalad and Venkat Ramaswamy – both professors of business at the University of Michigan. They identified a number of foundational shifts in the nature of relationships between businesses and their customers – shifts that alter how and where value is created. Those shifts include:

Growing access to information on the part of clients; globalization regarding viewpoints and perspectives (i.e., not only do clients have increased access to information, that information is global in scope);

Networking among clients (for example, via the Association for Corporate Counsel, LinkedIn interest groups, and other formal and informal networks); and

A willingness to experiment – particularly with digital and/or information driven products and services.

Given that backdrop, Prahalad and Ramaswamy found that increasingly value was created at the point of interaction between businesses and their clients. Value was becoming less a function of creating a product or service to be purchased (i.e., take it or leave it). Rather, value was being created as businesses and their customers created unique solutions together.

For many in the legal industry, this insight is not particularly novel. Because legal services often require dynamic interaction and unique tailoring of solutions via direct interaction with clients, the idea of co-creating value is a standard operating practice for many lawyers. Prahalad and Ramaswamy approached this dynamic from a mass market, product oriented perspective, and as a result they were able to develop some basic principles that are potentially valuable to law firms. In short, they have codified the foundational approach that makes co-creation based innovation a repeatable process with clients.

Using the Tool in a Law Firm Setting

Co-creation tools provide a roadmap for taking client interaction to a higher level – recognizing that the world has become more interconnected and information is more readily available to clients than it had been in the past. By recognizing and embracing that change, more value can be created for clients and in the process, relationships can be strengthened.

Applying co-creation in a law firm setting involves embracing four fundamental, ongoing principles in client interactions.

Dialogue – “Dialogue means interactivity, engagement and a propensity to act – on both sides (client and law firm).” Beyond simply listening to clients, dialogue suggests shared learning on the part of two problem solvers.

Access – Access focuses primarily on providing access to information and tools. For instance, many firms have implemented extranets and/or cloud-based solutions for managing shared information with clients. Embracing the access principle takes that one step further, ensuring access to the insights, knowledge and other foundational tools the law firm uses on behalf of clients (e.g., knowledge management tools, project management tools and processes, etc.).

Risk Assessment – To fully engage in co-creation, clients need to have a deeper understanding of the risks (and trade-offs) they face when selecting and creating a particular solution. Some attorneys are extremely good at helping clients assess risk and make wise choices – others are not. Helping clients assess risk is fundamental to co-creating value.

Transparency – Historically, there has been a natural imbalance regarding some elements of the relationship (e.g., pricing, underlying costs, profit margins, etc.). Some of that imbalance has already broken down. For instance, starting salaries for associates are published openly at NALP and profit levels are openly reported in the AmLaw 100 and 200 rankings. The transparency principle calls on firms to continue and expand that openness.

While many will object to (or fear) the level of openness called for by the principles above, that fear is generally unsubstantiated in actual practice. Clients do not object to their law firms earning a healthy profit – they understand that profitability is the cost of doing business into the future. Furthermore, because they are actively part of key decisions regarding the creation of solutions and the management of risks, the value received relative to the fees charged is generally perceived to be very high. In addition, having co-created approaches that deliver high levels of value, incentives to switch firms falls dramatically – increasingly client loyalty in the process.

Co-creation works most effectively when complexity is high and resulting solutions are genuinely unique and of high value. In those high end settings, law firms are well served adopting principles of co-creation. However, the principals work in many other settings as well (e.g., improving value on high volume work, integrating legal process outsourcing vendors into ongoing relationships, etc.). In summary, co-creation is a natural extension of long standing traditions and leads to deeper, stronger and more loyal client relationships.

Next week we will follow-up with a few examples of how these principals work in practice.

Strategy Implications of Disruptive Innovation

Posted on April 10, 2013 by Sterling

The rise of Axiom, Clearspire and other disruptive innovators in the Legal Process Outsourcing (LPO) segment of the market has led to a wave of articles and blog posts – some insightful and well considered and some likely to prove embarrassing to the author(s) down the road. We have been addressing law firms’ strategy development and strategic planning needs for over 25 years and I personally have been a professional strategist for nearly 30. That contributes to my frustration with some of the writing out there – namely, this stuff isn’t particularly new (although some of the more successful disruptors in the legal industry are relatively new).

Clay Christensen published The Innovator’s Dilemma in 2000 – in the wake of documenting dozens of disruptive business models during the dot.com boom. Since that time, multiple books (including follow-ups by Christensen himself) and journal articles have been written building on that initial landmark. Further, several industries have adapted (and adopted) innovation toolkits based largely on the principle steps involved in pursuing disruptive innovations.

We covered this topic in reasonable depth in our book Strategic Planning for Law Firms: A Practical Roadmap. For the benefit of blog readers, we have excerpted an edited portion of that discussion below. We hope this helps you and your firm think about the strategic implications of disruptive innovation in the legal industry. Please keep in mind, especially in the legal industry, disruptive innovation is not the only successful approach to innovation and new service development. This a tool for pursuing one type of innovation and there are other valuable innovation tools with application to the legal industry.

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Disruptive innovation is an approach to product, service and business process development that focuses on delivering “good enough” products or services. In other words, disruptive innovations target and capture the so-called low end of a given market – usually by delivering “good enough” performance at a dramatically lower price than full service or full function incumbents.

Disruptive innovators typically attract either non-consumers of a product or service (essentially creating a new solution and a new market) and/or customers who are “overshot” or over-served by a higher cost and higher function solution than they really need (creating a low end disruption). There are dozens, if not hundreds, of examples of disruptive innovations entering and capturing the low end of their given market – Skype instead of full function video links, Quicken rather than more complex accounting software, cameras integrated into cell phones, and Metro’s free daily newspapers.

Origins of the Tool

Clayton M. Christensen is credited both with the research that identified the fundamental principles of disruptive innovation – in the first of two landmark books, The Innovator’s Dilemma – and with the subsequent work that codified how to pursue disruptive innovation in your own organization. Christensen’s second book, co-written with Michael Raynor, The Innovator’s Solution outlined the steps to pursuing disruptive innovation.

The disruptive innovation process involves three major steps:

Opportunity Identification – This step includes identifying non-users of a product or service as well as users whose needs appear to be “overshot.” With potential target clients or customers in mind, opportunity identification focuses on defining the “jobs to be done” for those customers (i.e., identifying through traditional market research the core needs those non-users and overshot users actually need fulfilled).

Idea Formulation and Shaping Ideas – The second step involves developing disruptive ideas – the authors provide a range of supporting tools to help with that process. With ideas in hand, this stage of the disruption process calls for an iterative process for refining and testing ideas. Christensen’s research found that innovators rarely understand the needs of non-users or overshot users out of the gate. Rather, they need to refine their ideas via low cost, low risk failures – leading to a refined product or service that can capture a larger and potentially growing market.

Building a Business – The third step focuses on establishing a sustainable business to market the solution and grow the business to reasonable scale. This stage requires the innovator to identify and understand critical areas of uncertainty, experiment in ways that resolve that uncertainty in the early growth stages of the business, and refine the underlying business model in response to what is learned.

Christensen and his co-authors have built upon and refined this approach over the past ten-plus years and there are now a number of industry specific innovation methodologies in circulation (though none focused directly on the legal market).

Application to the Legal Industry

The application of disruptive innovation for incumbent (i.e., traditionally structured) law firms is largely two fold. First, for well established firms, understanding disruptive innovation is important. In particular, successful low end innovators can and are dramatically altering the established market – client relationships, pricing expectations, profit potential and otherwise. Ultimately, they may actually surpass incumbent competitors – fundamentally changing the market they undercut initially.

Source: The Innovators’ Dilemma; Clayton Christensen; 2000

Second, there may be markets ripe for disruption that can be served by your own firm. In those instances, firms or practice groups can directly apply the disruptive innovation tools to targeted markets – identifying non-users/overshot users; defining the “jobs to be done” for them; creating, testing and refining solutions; and building a sustainable business that grows to scale over time.

Examples of disruptive innovation in the legal industry have emerged in a number of specialty areas, as well as in important elements of larger scale legal processes. For instance, the emergence of pre-paid legal services and “do-it-yourself” online tools have captured clients who were previously non-users of legal services – RocketLawyer.com is one of many examples of this business model (largely online, but with human talent behind it). Talented patent attorneys have created micro-boutiques that do nothing but patent prosecution on a fixed fee per application basis. Most threatening for bigger firms (and over the long run for mid-size firms), legal process outsourcing shops like Axiom are creating dramatically lower cost approaches to selected phases of large scale litigation and transactions. In virtually every one of these examples, the solutions offered are “good enough” for over-served clients and the costs are dramatically lower than using a traditional firm.

It is critically important to understand the underlying business models of emergent disruptive innovators. If their solution is scalable, if it can add new capabilities over time (gradually encroaching on your practice’s incumbent solution), and/or if it attracts clients who perceive themselves to be “overshot,” those innovators need to be taken into account in the context of developing and implementing competitive strategies.

Using the Tool in a Law Firm Setting

The three phase approach outlined above applies fairly universally. It is certainly applicable in a law firm setting without unique tailoring or embellishment. Because there is considerable depth, nuance and insight in The Innovator’s Solution, it is recommended that those planning to pursue disruptive innovation take the time to read that book and use the many supporting tools provided in that text.

There is an important consideration law firm leaders should recognize prior to engaging in an all-out pursuit of disruptive innovation. Michael Raynor continues to research disruptive innovation with a high level of energy. His most recent book, The Innovator’s Manifesto, includes an important insight for incumbent competitors. Namely, incumbents tend to be highly successful at creating incremental innovations (i.e., innovating at the high end), but are dramatically less successful in introducing disruptive innovations (see the chart below). There is a reason why the first book characterized disruptive innovation as a dilemma – it fundamentally challenges the established (usually highly profitable) business model.

Source: The Innovator’s Manifesto; Michael Raynor; Crown Business; 2011.

This would suggest that firms wanting to capture disruptive innovation in an area where they are already an incumbent competitor should consider a few alternatives to directly pursuing disruption within their firm/practice group. First, they can acquire a growing disruptor – someone who has already worked through the first two (and possibly all three) stages in the disruptive innovation process. Second, they can co-opt a disruptive innovator, using them as a sub-contractor (a recent interview by Lee Pacchia at Bloomberg Law identified some anecdotal examples of this approach). Third, they can set-up an ancillary business to develop the disruptive service offering – removing some of the principle barriers incumbents face when trying to launch disruptive innovations that will compete with their well-established services.

Further Reading

Those interested in pursuing disruptive innovation (or who have a strong interest in the topic) are encouraged to read Christensen’s and Raynor’s The Innovator’s Solution (Harvard Business School Publishing, 2003). Raynor’s new book, The Innovator’s Manifesto (Crown Business, 2011) provides valuable insights into the drivers of success and failure among innovators.

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As always, comments are open below and we welcome your calls and emails at (312) 543-6616 and jsterling@sterlingstrat.com respectively.

Five Tips for Sustaining a Great Law Firm Culture

Posted on March 5, 2013 by Sterling

Steven Harper wrote a terrific piece on law firm culture in response to the latest Citi Private Bank/Hildebrandt update on the legal market. Harper is incredulous of Citi/Hildebrandt’s warning that “Law firms discount or ignore firm culture at their peril.” He makes the point that “consultants have encouraged managing partners to focus myopically on business school-type metrics that maximize short-term profits…what has resulted from that focus: the unpleasant culture of most big firms.”

The reverse does not have to be (in fact often is not) true. Namely, firms with a strong, collegial culture are not inherently doomed to poor economic performance. They may not top $3mm a year in profits per equity partner, but everyone working in those firms earns a very good living, they have strong and enduring client relationships, and they enjoy a balanced and rewarding professional life. Having that kind of positive firm culture requires work and discipline – and, especially, a commitment not to throw away long held values in the face of short term economic challenges.

Our recent survey on best practices in law firm strategic planning confirmed this point. Namely, the firms experiencing the most successful results from strategic planning are much more likely to have articulated shared values or principles as part of that process. At the same time, those highly successful firms are much more likely to adopt and track measurable objectives as part of the strategy process. In other words, the most successful firms balance a strong commitment to long held cultural values with a pragmatic approach to setting objectives (i.e., financial, client relationship, and other measures).

Having had the pleasure and privilege of working with a number of firms over the years that have cultivated and sustained great cultures, here are five suggestions for how you can cultivate, embrace and sustain a set of shared values that define a great law firm culture.

Honor the Founder(s) – When I started my consulting career at Arthur Young (that dates me), John Smock made sure everyone in the practice got a copy of a relatively short book entitled, Arthur Young and the Firm He Founded. That little book encapsulated many of the core values of the firm – and traced them to the values of the hard working Scotsman who immigrated to America and started the firm. Whether your firm was founded 20 or 200 years ago, you are likely to find some of the roots your firm’s values and culture in the character of your founder(s). Honor those roots.
Celebrate a Milestone Year – Round number anniversaries lend themselves to celebrations (10^th, 50^th, 100^th). So do record years, though they tend to arrive with more frequency and less fanfare. Take the opportunity of a milestone year to reemphasize the shared values that brought the firm to that point. Embrace and celebrate your culture and your shared values – not just the anniversary or the record.
Document Your Stories, Your History and Your Culture – I have a number of books in my collection from clients – both law firm and corporate – in which the history of their organization (and its culture and values) is documented and described for posterity. Sometimes those books are commissioned in conjunction with an anniversary, others mark the passing of great leaders, and still others were done simply to capture the stories before they were lost to memory. Those stories may be the very best window into truly understanding the firm’s culture and the values – they are a way to connect our rational understanding of the values to our emotional understanding of values (see this brief slideshow for more). Stories can even be used when you need to drive cultural change (see Peter Bregman’s HBR article on the topic).
Ask Your People to Define the Culture – We have used a technique very successfully over the years to isolate core values and help organizations coalesce around them. Ask a very simple question, “What three words best describe the values that endure over time in our firm?” The resulting word-cloud is enlightening and it helps to define (or reinforce) the firm’s shared values. It can be used in many settings to spark a discussion of shared values and the culture – keeping that culture front and center as other decisions are being made (e.g., employee reviews, partner compensation, lateral hiring, strategic planning, etc.).
Put It In Your Plan – Finally, take a lesson from the firms having the most success with strategic planning and strategy implementation. Articulate your values as part of your overall strategy. Include a long term mission as part of your strategic plan and include a concise articulation of your core values in that mission.

While the embrace of firm culture and values may be belated for some, it is welcome nonetheless. Whether your firm is large, mid-sized or small, sustaining a positive firm culture is a critically important element in a genuinely successful law firm strategy. Who knows, it might even land your firm at the top of the Vault.com rankings for best firms to work for.

Implementing Law Firm Strategy Using a Balanced Scorecard

Posted on January 30, 2013 by Sterling

We have seen a spike of interest in the Balanced Scorecard since our December 2012 strategy question of the month focused on what kinds of measures law firms are using. As regular readers will recall, the only measures firms are using with a high degree of consistency and reliability are financial measures. Other areas – client satisfaction/client relationships; people/professional development; operational improvement – are generally not measured.

The balanced scorecard, as originally described by Kaplan and Norton, envisions a balanced set of goals, objectives and measures in four areas (as depicted in the graphic below). Those goals and metrics should ideally be focused on advancing the achievement of the firm’s vision and strategy. While these four categories are logical and work for the majority of organizations, the authors (and experienced managers) recognize that measures should be aligned with the strategy (rather than aligning strategy with the generic scorecard categories).

The concept is easy enough to understand, but how does one go about implementing some version of the balanced scorecard in a law firm environment? In our 2009 book on the topic, we highlighted the range of barriers law firm managers might encounter when trying to use this very powerful tool to facilitate strategy implementation. We will leave those challenges for another post so we can focus on how to use the balanced scorecard in a law firm setting.

The real key to the process (and this is equally true in a corporate setting and/or a non-profit organization) is to ensure the strategy is aligned from the firm level to the practice (and administrative department) level – and from the practice level to the roles individuals play in strategy implementation.

Obviously, this graphic assumes the firm has a strategic plan. For those who might have missed it, our June 2012 strategy question of the month focused on best practices in law firm strategic planning. Some examples of how this cascading works across the categories of a generic balanced scorecard follow.

A firm with clear objectives for profit improvement (could be margins, could be PPP, could be some other reasonable proxy) might ask each practice group to identify the profit driver that offers the most promise for improving performance in their area. In this example, the practice has identified realization improvements as the most promising area. They would then set a target for improved realizations and adopt initiatives to drive that improvement. Individuals in the practice would then move those initiatives forward. In this example, individuals would focus on getting invoices out on a timely basis, with higher levels of accuracy. Thus, the firm’s goal for improved profit margins cascades to a practice’s goal for improved realizations, which in turn cascades to individual’s committing to more timely billing.

Our second example focuses on the client dimension of the balanced scorecard. At the firm level a goal might be adopted to broaden client relationships where ever possible. This might be translated into an objective measure that tracks how many clients are served by multiple practice areas and/or partners from different practice areas. At the practice level, this focus might translate into a set of target clients for whom the practice wants to expand its relationships (either bringing other practices into their relationships or by beginning to serve clients originated by other practice groups). At the individual level, that could lead to specific plans to introduce colleagues to selected clients (or conversely to seek introductions to colleagues’ clients).

Our third example focuses on cascading for people oriented goals and objectives. A firm level goal focused qualitatively on having the best people in the market could be measured via the number and nature of external recognition(s) the firm’s people get (e.g., Chambers, Best Lawyers, Super Lawyers, etc.). At the practice level, that could translate into initiatives and measures focused on getting people professional (or industry) certifications. In turn, individuals can adopt specific plans to build certification into their professional development plans.

Our final example focuses on how operational improvement goals might cascade in a law firm. In this case, imagine a firm that has adopted a goal to reduce costs related to delivering client services. A litigation practice in that firm might adopt an initiative to engage project managers on some or all of their matters. At the individual level, partners/engagement leaders would commit to actively partnering with those same project managers to capture the benefits of project management discipline on matters.

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These are obviously generic examples. However, if you have clearly defined firm level goals, those can (and should) be translated into measurable objectives so progress can be tracked and the firm can make adjustments if the strategy is not working. With clear firm level goals and objectives, practice groups and administrative departments can align their plans with key goals. Note, not every department and practice needs to align with every firm level goal – but, every practice has some valuable role to play in the implementation of the firm’s overall strategy. Finally, this cascading approach enables every individual to take meaningful action that contributes to the achievement of practice and firm level goals.

SURVEY RESULTS – Goals, Measures and Balanced Scorecards – December 2012 Strategy Topic of the Month

Posted on December 26, 2012 by Sterling

Our final strategy topic for 2012 focuses on what law firm management is doing relative to setting objective measures for their strategic plans. More specifically, what do law firms measure and are those measures in any meaningful way connected to their own strategies?

What we learned – in short – is that law firms measure financial results with real consistency. Beyond financial results, measurement is relatively limited and is often unconnected to firms’ strategies. That puts law firm management roughly 15 years behind corporate management – where balanced scorecards enable companies to translate strategies into measures in four primary categories:

Balanced Scorecard Graphic

The balanced scorecard idea was novel when Robert Kaplan and David Norton introduced it in the mid-1990’s. Essentially, they recognized the peril in having a company focus only on financial performance – without consideration to its performance vis-a-vis customers, employees and underlying business processes. Since then, research has demonstrated the positive impact of adopting measures in key areas beyond financials. For instance, a 2008 study published in Advances in Accounting found that “firms that adopt the balanced scorecard significantly outperform firms that do not (including financial returns).”

No one responding to this month’s survey has formally adopted a full scale balanced scorecard approach. However, roughly 40% of the firms responding to the mini-survey have either adopted portions of the balanced scorecard (25%) or are working with an informal version of the balanced scorecard (15%). This is consistent with what we found in early 2009, when we were putting together case studies for Balanced Scorecards for Law Firms – namely, very few firms have formally embraced a balanced scorecard approach to strategy implementation and/or performance measurement.

Unsurprisingly, 100% of law firms report having and using financial measures. In fact, the overwhelming majority of them consider their financial metrics to be either “solid and reliable” (24%) or “excellent and highly informative” (72%). To the extent firms have measures linked directly to their strategic plans, those measures are predominantly financial. Asked specifically if they have measures linked to their strategy, only about half of responding firms reported make any effort to link measures (financial or otherwise) to their strategic plans.

A summary of how prevalent measures in each of the four balanced scorecard categories are within law firms underscores the overwhelming reliance on financial results as a proxy for everything else.

Survey Table

The most striking thing here is that although over 95% of all firms have solid or excellent financial measures, 80% of firms have limited (or no) measures of client satisfaction. This is consistent with our October 2012 strategy topic of the month. In that study we found that relatively few firms have structured client feedback programs focused on their top clients. Frankly, this is both a huge missed opportunity and a potentially critical mistake. Even if you never seriously evaluate or adopt a balanced scorecard – at the very least augment your financial metrics with systematic feedback from clients.

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As always, we thank you for your input and willingness to share your insights via these brief monthly surveys. We will return next week with a recap of the top ten insights gained from the 2012 strategy question of the month surveys.

Best wishes for a healthy and prosperous 2013.

Sterling Strategies

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