When you see—or when I see, at any rate—sustained outperformance
by a firm over a five-year span, I cannot help but ask myself: "How
did they do that?"
What follows has a dusting of speculation at the end, but I think it’s
a path worth walking down, with more than enough hard truth along the
way to give us firm footing.
The firm I have in mind this morning is Reed
Smith, which announced its total 2005 revenue was up 12% over 2004
to $563-million, revenue per lawyer up 10% to $609,000 from $553,000,
and its profits per partner up 21% to $800,000 from $662,000.
And
the five-year record?: Revenue per lawyer up 62% and profits
per partner up 154%. Aside from one senior recruiter at
BCG Attorney Search who sounds as though she took the reporter’s phone
call unaware of the Reed Smith results, and who expostulated "That’s
very good, very, very good," the real story is reflected in this range
of comments:
“We basically doubled in size over five years,” [Managing Partner
Greg] Jordan said. “I
suspect we’ll continue to grow at about that pace.”"[Philadelphia-based legal recruiter Michael] Coleman said it is difficult to think of a firm that has transformed
itself as dramatically as Reed Smith has over the past few years.
“If one looks at Reed Smith over the last five years and each year had
very significant growth in its numbers, one can’t help but be extremely
impressed with the management and direction the firm has gone in converting
itself from a regional shop to a national powerhouse with some global offices,” Coleman
said."Chuck Fanning, global practice leader for the partner placement group
at Major Lindsey & Africa said Reed Smith is clearly one of the firms that
is moving up in the ranks.
“It’s a national — and becoming a global — player that is, I think, on
the rise,” he said."
Reed Smith has grown geographically, most notably with its 2003 acquisition
of California’s Crosby Heafey, and its UK practice, launched in 2001
with the acquistion of Warner Cranston, is growing at a rate outpacing
that of the firm as a whole.
For historical perspective, in 1999,
just before Jordan took over, Reed Smith was #79 in the AmLaw 100,
with total revenue of $126-million and profits per partner of $335,000;
the 2005 numbers would put them at #27.
So what’s going on? Jordan uses one critical phrase more than
once: "It’s just the result of following through our strategy,"
and, "while the firm has achieved a lot of its strategic plan,…I don’t
think we’re anywhere near becoming a finished product." What
are the elements of that "strategy?":
- to expand geographically, domestically at first and now internationally
(they just opened in Paris late last year); - to move the mix of work towards more complex, high-end work (which
also enables cross-marketing); - to focus on areas such as financial services and life sciences; and
- to command rates higher than were typically available in their home
town of Pittsburgh.
A consistent and sustained campaign of moves like this, in my experience,
is not an accident. How, then, does a firm create and
follow through on such a strategic campaign? In the case of Reed
Smith, by appointing a "Director
of Strategic Planning." In other words, if you’re
serious about strategy, make someone responsible for it.
Now we move into slightly more speculative territory. In the 2nd
quarter of 2001, McKinsey published a study, "Lawyers Get Down to Business,"
subtitled "New pressures are hitting the legal industry. Now
is the time to think through your strategy." (The report is
now behind a pay-wall, but I have a hard copy; anyone interested in learning
more, please contact
me.)
McKinsey’s premise then?:
"The legal industry is losing its immunity to the macroeconomic
forces that have propelled consolidation and stratification in other
industries. Of the world’s largest law firms (measured by revenue),
all but the most profitable are in some peril. […]"The more far-seeing firms will build national, and in some instances,
global practices of distinctive depth and breadth of expertise—practices
that can support high profits per partner and significant growth. These
strengths will set in motion a virtuous cycle in which such firms
cherry-pick top talent from other, less profitable competitors and
invest in geographic expansion and technology. New talent and
investments will help the leading firms put even more distance between
themselves and the stragglers, which will be swept into an almost
irreversible downward spiral, thus losing talent and stature at an
accelerating pace until they unravel, get acquired, or reconstitute
themselves as ‘commodity’ players."
McKinsey also discussed the "bifurcation" between routine legal needs
and high-value practice areas, and proceeded to create a four-quadrant
"profitability map" of the Global 50 law firms, showing their positions
in 1993 and 1999, with number of equity partners on the horizontal/X
axis and profits per partner on the vertical/Y axis.
Saying
that "a firm’s position on the profitability map provides insights
into that firm’s strategic choices," they posited the following
groupings:
- Upper left "specialists," with few partners but high profits, focused
on a few related, highly lucrative practices: Wachtel, Slaughter
& May - Upper right "shapers," with high profits and a large number of
partners, combining a distinctive strategy with top-flight execution: Skadden - Lower left "incumbents," with small partner bases and low profits,
lacking both world-class skills and scale: Hogan & Hartson - Lower right "full-service integrators," with substantial geographic
scope but not stratospheric profits: Jones Day, Latham, Baker
& McKenzie.
So what? McKinsey identified a key "winning strategy" going forward
as that of becoming a dominant "megafirm," with a broad but coherent
set of practices and a compelling geographic presence, "skilled
at negotiating and struturing deals and at integrating and governing
a large, diverse, and highly dispersed group of attorneys."
My speculation is that McKinsey did not prepare this report on a lark: That
it was an offshoot of a paid engagement by an AmLaw 50 firm facing
an identity crisis in 2000. And my nominee is O’Melveny & Myers. Tea
leaves:
- In 1999, O’Melveny was #18 on the AmLaw 100, with total revenue
of $372-million, but no clear path to growth or even sustainability. - In 2004, they were #16, holding their own against incredibly
strong incumbents; this was not an accident either. - Finally, as Aric Press puts
it,"O’Melveny jumped into
the first quintile [in Value Per Partner] in fiscal 2001 and
has stayed there, finishing this year at number 20. The
change started with a power shift too, this one after a contested
election for chair that was won by Washington partner Arthur “A.B.” Culvahouse…
As Culvahouse saw it, the firm was already working hard, but
the work varied in price. Quickly and aggressively, Culvahouse
recalls, the firm sought “to
move to higher-value engagements at the top of the market.”
Sounds like the McKinsey strategy, and what a coincidence of timing.
I leave you with these questions:
- What is your firm’s strategy? Time’s up if
it takes you more than 5 seconds to reply. - What specifically are you doing to be clear, consistent, and
firm in its implementation? Do you have a Chief Strategy
Officer? - If not, #1: Then who’s the champion of your so-called strategy? And
don’t reply that it’s the managing partner; they have too many
other irons in the fire to do this full-time. - If not, #2: Name a high-end professional services firm
outside the law that has no such person or no
such function—and
if you can come up with one, let me know because I want to short
their stock. - If yes: Is your CSO on the management/executive committee? Are
they, in other words, for real?
