Nicks new book Strategy for Law Firms - After the Legal Services Act is now available.  Click here to buy it.  A number of Nick's recent articles on Strategy and Strategic Planning are also available under Articles and Resources.

The following briefly summarises a selection of Nick's thoughts on Strategic Planning

 The strategic choices any firm makes are critically important.  This is because strategy is essentially all about choices - how a firm decides to be different from competitors in some meaningful way

• To compete in one set of markets but not in others,
• To select and reject services, activities and specialisations, and
• To occupy a specific strategic position relative to competitor firms in terms of quality, or cost, or client focus.

Strategic thinking should be externally focused on markets and clients and not internally focused on internal questions of technology, compensation, morale, training and similar issues.  Strategic planning should also avoid

• Relying on some sense of already achieved impetus to guide the firm roughly in the right direction
• Following an Industry Recipe or a Business Book formula
• Copying a competitor
• Continuing to do what was always done.

In summary, strategy is not the following (although they may be part of the execution of strategy)

• Implementing best practice
• Organisational restructuring
• Changing remuneration schemes
• Creating an agile, flexible organization
• Encouraging innovation
• Doing mergers/alliances

Strategy is by nature Divergent – it leads us in a different direction from competitors.

Execution is by nature Convergent – most firms are trying to do roughly the same things in terms of improving and achieving high quality, working on client service and client satisfaction, managing people well and striving for hygienic finances and good profitability.

Most law firms do nothing like enough to review their strategy on a regular, frequent and consistent basis.  In many cases, many firms seem to have no real idea of where they are heading next. Indeed, if you ask the average Partner of even quite a large firm what he thinks the Firm’s strategic plan is, the answers you will get are often muddled, differ between partners of the same firm, and at times are limited to the individual partner’s sense of where his own career is heading.  What is more, there is typically confusion between strategy and various other elements – such as marketing, systems, and structure - which may form part of the strategy, but are not in fact strategy themselves.    Some firms also show a marked aversion even to think about and discuss their strategic plans.  One partner I spoke to said “Please not another Strategic Review; I thought we had banned the ‘S’ word in our organisation.”  I have some sympathy with his view; especially as the old style of ponderous Strategic Review (particularly those which attempt a five year plan) have an awful habit of repeating the obvious and of failing to address anything new.  What’s worrying is that things are moving so fast that firms ought to be reviewing their strategy more often than in the past, not less often.  And that statement presupposes that the Firms in question know roughly their purpose and destiny. This is a bigger assumption than may be thought; most firms answer quite strongly that they know exactly where they are going and how they are going to get there, but the evidence often points to the contrary.

I have been constantly surprised by the number of even quite large law firms where the leading partners (or in some cases departments) are each following their own quite separate strategies in relation to their own practice areas without a unified plan holding the whole enterprise together.  It may be that a sort of working accommodation has emerged over the years with historically few problems.  But like a yacht with no single guiding hand on the tiller, it is, in those cases, entirely a matter of luck and tradition as to whether the firm’s overall direction and purpose is both consistent and competitive.   Indeed many such firms have severe fault lines which are either ignored or suppressed.  The fact is that most merged firms remain, at least in part, a product of their own separate histories.  Partners have to become used to working together, sometimes in situations which, given an entirely clean sheet of paper, they would never contemplate.     There are, for example, still some law firms around who have traditionally acted for both Claimants and Defendant Insurers in Personal Injury cases.  In other firms, such a possibility would not for a moment be contemplated, either because the insurance clients would oppose such a practice, or for internal reasons such as the clash in culture and working practices.  For the same reason, it is rare to find in Employment Practices in law firms which are focused on advising both employers and employees.  It is usually one or the other.  But some firms persist in trying to be all things to all men.   “We have always done it that way” is the justification.  The problem is that fault lines can exist, sometimes for many years, without too much apparent problem.  But underneath, fault-line firms have two strategic disabilities.  First, and invariably, the existence of the fault-line commands internal attention and energy on an ongoing basis; energy and time which will accordingly not be available for moving the firm forwards.  Second, and more difficult to prove, the firm will fail to achieve its long-term potential even in its strongest areas. In short, I believe the firm will underperform in all its chosen markets.  This may sound like a strong claim, but I challenge you to name me a law firm with an underlying fault-line which has done better than it would have done with a focused and consistent strategy.   Like a yacht with more than one hand on the tiller, which can never be sailed tightly and efficiently, such a firm is hampered by its tradition and history.

Sadly, many firms choose to ignore such fault-lines and limp on through the problems.  The more honest and ultimately more sensible route is to address such fault-lines sooner rather than later even if this means dumping a practice area or demerging part or all of the firm.

Combating the Enemies at the Gate

At least five competitive forces are currently facing the legal profession.  First and foremost, is the internal competition in the form of other law firms in each locality or performing similar services.  However, there are other forces to play in the shape of new entrants to the legal services market, the threat of substitute services (technology, the internet, transfer of risk via insurance) and the bargaining power of both suppliers (mainly the cost of hiring and retaining talented lawyers) and clients and users of legal services.

At present, we are seeing both segmentation taking place and also a certain amount of consolidation.    Consolidation describes how any market over time becomes less fragmented and increasingly dominated by smaller numbers of larger organizations.

I often use the analogy of a cake to describe the distinction between segmentation and consolidation.  The cake is the legal market.   Segmentation describes the layers of the cake from the thin layer of excellent work (the icing) at the top of the cake down to the cake base and crumbs at the bottom of the cake.  Consolidation describes the vertical slices of the cake –  the way in which the various shares of the market are divided.

The legal profession has often been described as the last of the cottage industries.  In England and Wales alone, there are over 10,000 law firms, over 85% of which are small firms with four partners or less.  Yet more than 40% of all solicitors are now working in the small percentage of firms with more than 26 partners and this percentage increases every year. 

 Using England and Wales as an example, lawyer numbers have also gone up from around 66,000 in private practice in 2000 to some 83,000 last year, but most of this growth has been concentrated in the larger firms.    What we are seeing is a profession which is becoming increasingly dominated by larger firms, and the medium and smaller firms facing increasing pressures.  In other words, the larger firms are increasingly taking bigger and bigger slices of the available cake and the slice of the cake available to the smaller firms is decreasing. I would expect to see over the next five to ten years a growing consolidation in the medium and smaller ranges of law firms, leading to a smaller number of somewhat larger medium size firms.  This is likely to be brought about by many firms under 26 partners in size seeking to grow by acquisition of firms and teams and through merger.  This trend will also accelerate as sole practitioners reach retirement age – the average age of sole practitioners (51 years) is far higher than the average age within the profession (41 years). 

 Segmentation is used to describe how the legal profession is splitting into different tiers offering different types of services to widely differing types of client.  The segmentation phenomenon is seen at the two ends of the legal market – the big commercial work end and the bulk commoditised end.  The market for commercial work divides into four main segments

•  Work that goes automatically to the major financial centres like London and New York – complex transactions, financings, major insolvencies, huge pieces of litigation etc. – The Icing Layer
• Work that could be directed to mid market city or leading regional/national firms – big but standard transactions and matters for big and medium clients  – The Marzipan Layer
• Purely regional work - where clients want a competitive supplier – this work could equally find its way to leading regional/national or to regional firms operating largely in the mid market range of work – The Cake
• Local work, lower in value/price terms (including deals up to several millions) and covers private client as well as SME and OMB, medium/small, local businesses.  This work includes lower level (bread and butter) work for large companies – The Cake Base

 In the arena of commercial work, the success of the bigger firms has been in recognising the competitive market place and that commercial clients like to see critical mass in key practice areas.  The result has been that to be a full range commercial law firm, with depth on these major practice areas, requires firms with around 400 fee-earners or more.  One strategy of course is to proactive in only one or a very few practice areas and to remain small; hence the advent of small niche firms specialising in areas such as IP, employment and construction law.   At the commoditised end, there is also a concentration of work into larger ‘factory’ style law firms who are rapidly sewing up panel appointments whether those are with chains of estate agents, insurance companies, mortgage providers or unions.

Positioning, Differentiation and Pricing

A set of key questions faced by every firm therefore are

• How do we stand out from the crowd?
• Why would clients choose us?
• What do we do which is different, cheaper or better than our competitors?
• How can we demonstrate added value to our existing and future clients?

 As can be seen from this set of questions, the firm’s positioning is largely client-oriented and externally focused.   If the clients can see no added benefit or advantage from the firm, then the firm is not likely to progress and prosper.

 As the firm reviews its competitive position, it should be careful to recognise that we are not living in a world of constancy where the competition stands still.   A stunning year, a key new hire or a merger may well have given the firm a temporary advantage in that it may have leap-frogged other similar firms in the eyes of clients, but other firms will be progressing their strategies as well.

 What is more, it is extremely difficult for a law firm to achieve true differentiation.  The new legal landscape faced by any firm will undoubtedly display a surplus of similar firms, employing similar people, with similar educational backgrounds, coming up with similar ideas, producing similar services, with similar prices and similar quality. 

 Most firms may think they are different from other competitors but this does not mean that they are differentiated in the eyes of potential clients who are perhaps choosing between a number of alternative firms to solve their particular legal problems. 

 The point I am trying to make is that the particular make-up of the firm may well be entirely unique but it does not necessarily enable the firm to obtain a particular distinguishing feature from its competition in any of its main practice areas and any distinguishing features which it does have, may very well differ depending upon the type of target client and its industry sector. 

 What is clear is that the firm must decide how it wants to be seen in its marketplace, what position in this market it wishes to occupy and what type of client will provide its core as it goes forward.  It needs to consider its service range in order to service the clients for who it aspires to act, and the required depth in each practice area.

 In short, the firm needs to decide and define how it is going to compete and how it wishes clients to perceive  its competitive edge.

In a number of client surveys which we conducted for clients last year, we asked the clients how they perceived their law firm’s competitive advantage, value and edge.  The most common answer was that the differentiating factor was the power of the relationships between the law firm partners and its clients – the power of relationships remains a huge source of competitive advantage for any firm.

 As mentioned earlier, competitive differentiation can be summed up in the all important questions “Why should clients choose my firm or me?”  “What can I offer which is different/better than my competitors?”  “What can I offer which is not obtainable from anyone else?” These factors tend to be

•  Frequently intangible rather than by direct comparison with competitors
• Dependant on the ability fully to meet the specific business and individual needs of clients
• Focused on value propositions in terms of service, process and value for price
• Highly reliant on Quality of People + Quality of Client Relationships

Differentiation also depends on the sort of law firm you are or are trying to be.  Bulk Providers rely on high volumes, good leverage, but the work is price sensitive and the margins are low.  Differentiation for the Bulk Provider concentrates on systems, processes and efficiency to produce fast and streamlined services.  These qualities are emphasised in marketing, and the building of relationships with those who want commoditised services.  There is also a particular emphasis on the development of referrer networks.

Niche or Boutique Firms rely on distinctive offerings – for example, extreme and focussed specialisms or industry sector expertise – for their competitive edge.  What they are emphasising is their skill, knowledge and experience in their chosen niches. 

The dangerous position is in between these two extremes – it is not differentiated to be offering all things to all men as your offering is probably similar to that of many other similar firms.  Only the large and dominant firms can really pursue this option with any success.  Dominance, however, can be a good strategy for differentiating full service or ‘portfolio’ practices – national/regional dominance or even local dominance.

A firm’s strategy in relation to the pricing of its services both should reflect the firm’s positioning in its market place and should also influence it.  If the firm is choosing to practice at the lower or commoditised end of the market, then its pricing will reflect that choice.  Rates and prices for such firms will always be sensitive and under downwards pressure but the profit is to be made by increasing volumes of work at the same time as decreasing the cost (to the firm) of doing the work via leverage and systems.  If the firm is choosing to practice at the higher end of the market (High Net Worth Individuals and commercial organizations) then the price ought to reflect the partner intensive nature of the work and the rarity factor associated with extreme expertise. 

The Strategic Planning Process

I do not see strategic planning as some magical exercise that must include things like mission statements and SWOT analyses. Law firms should avoid any “shrink-wrapped” ” or “one size fits all” strategic planning process.  The needs and expectations of each firm are different and I attempt to accommodate those differences in working with individual clients. 

There are some consistent themes, however.  The basic process is first to gather and analyse as much information about our client firm, their marketplaces, their clients and potential clients and every other factor that could affect their ability to provide the legal services their clients demand now and in the near future.

The insights achieved from the collection and analysis of information helps to inform the range of challenges and opportunities available to the firm and to identify where the firm should best position itself to focus its attention and resources in order to develop new clients, new markets, new offerings and new revenue streams. 

Using this data, the firm can create a vision for the future.  This vision is really a statement of objectives to describe the end result the firm is trying to achieve.  Typically, the vision describes the firm’s practice mix, areas of focus and any constraining features.  This brief statement - the more simple and short the better - is used to develop a shared commitment by the partners to a desired goal.