The 2006 AmLaw 100 is coming out May 1, and in anticipation of that I’d like to discuss how hard it is to achieve, and sustain, superior performance.
Fortunately, I have the crutch of McKinsey studying precisely this question, at least as it relates to the particular sample they used in Living with the Limitations of Success:
"To learn what we could about the world’s most successful companies (as measured by market capitalization), we examined the performance of the top 25 largest nonfinancial companies in the United States over each of the past four decades—a total of 100 companies. Ninety-seven of them survived a full decade in the top 25. To make their performance comparable across time as underlying general market conditions fluctuated, we adjusted their total returns to shareholders (TRS) for market returns. We also looked at both the average and trends in operating margins, growth, and returns on capital over each decade to understand what drives TRS performance."
They start from the premise that executives at large and successful companies often promise such things as doubling the share price within five years or growing earnings at double-digit rates as far as the eye can see. Doubtless they mean well. The problem is simply that what they’re promising is often not really within their, or their companies’, control.
First, the data:
- Segregating the 100 companies into quartiles, by 10-year rolling averages:
- the 25th percentile underperformed by the market by -2.9%
- the median firm outperformed by 2.0%
- the 75th percentile was at +4.2%, and
- 23% of companies outperformed the market by more than 5%, albeit heavily weighted towards the lower end of that range (5-7%: 15 firms, 7-9%: 3, 9-11%, 2, >11%, 2)
Second, the interesting question: How did they do it?
Lesson #1: Every top-performing firm succeeded by sticking with or refining their basic business model rather than reinventing themselves. And most that out-performed benefited from environmental and economic factors outside their control.
McKinsey describes four scenarios that enable continued out-performance, and also says, since firms outside these scenarios were merely mediocre, in words of no uncertain cautionary tone: "The message for executives: be careful about letting pronouncements on performance goals exceed your company’s ability to meet them." Here are the four scenarios.
Perfect your model
Primarily consisting of high-tech and pharmaceutical companies who found themselves in a high-growth sector of the economy, all these companies had to do was adhere to the "if it ain’t broke" advice. Dell Computer used to be a good example.
The problem with this—assuming you’re lucky enough to have this problem—is that the ground can (and will) shift beneath you at some point. For example, after the 1984 breakup of AT&T, the regional Bells were on a roll until the mid-1990’s when the rapid emergence of cellphone demand and the Internet required substantial investments at the same time their legacy revenue sources were eroding.
In law-firm land, a model might be investing in technology to make your already strong employment or patent prosecution practice very low-cost, so you can quote attractive fixed fees for large portfolios of business.
Extend your model
Firms that can capitalize on this generally have strong brands or intangible assets such as patents. Think P&G with its multiplication of varieties of Crest, or adding Downy to Tide.
For us, it might be taking a classic 1940 Act mutual fund advisory practice and extending it to private equity fund formation, or taking a robust environmental practice and extending it greenhouse gas/CO2 issues. (You heard it here first.)
Capitalize on commodity prices
Frankly, this has zero applicability to us—at least until first year associates are a dime a dozen—but I mention it for inclusiveness, and the general level of insight it provides. This cohort of "winners" simply happened to be in the right place at the right time.
But it’s not where you want to be: The suppliers of commodities (oil, steel, basic chemicals) essentially cover their cost of capital and grow linearly with inflation-adjusted GDP.
Turn around underperformers
This one’s actually interesting, although its relevance to the AmLaw 100 may be increasingly in the past. McKinsey’s observation is simply that poorly-performing firms can make great strides by radical improvements to their sclerotic operations.
In our world, I think this kind of low-hanging fruit has largely been exploited out of the system. I would like to think that virtually every AmLaw 100 firm has come to terms with the need to run its business side operations with the same degree of professionalism that they apply to their legal work.
No, of course we’re not all there yet, but permit me to point out that we’re not competing with the superstars in this area like GE; we’re only competing with each other. As the battle-scarred joke of the two hunters encountering a bear in the woods has it, "I don’t have to run faster than the bear; I only have to run faster than you."
Are these findings really germane to law-firm land?
Yes, and I’ll recur to the pending release of the AmLaw 100. The import is this:
- If you’re promising, or anticipating, supra-normal performance for your firm, be realistic about how difficult that is to sustain over a period of years.
- The move from, say, AmLaw #50 to AmLaw #30 is daunting, and a long, hard, challenging slog. It’s not strategy (who wouldn’t endorse such a strategy?!), it’s execution. Be prepared to start early, stay late, and make more mid-course corrections than you would have imagined possible.
- The move from AmLaw #30 to AmLaw #20 is more intense by a factor of __ (fill in the blank as you please).
- And above #20, the air gets really thin.
That said, there is no entitlement to incumbency, and the disease of complacency at the top is in the Physicians’ Desk Reference. The most cursory glance at the changing complexion of the S&P 500 or the Fortune 500 over the past decade or two is proof of that.
Sustained excellence should be within the grasp of all of us; sustained outperformance of our excellent peers is another order of business.
