“With all respect, I think that’s the wrong question. There’s always new stuff out there, and most of it’s not very good. Rather than looking for the next musing, it’s probably better to be thorough about what we know is true and make sure we do that well.”
The question was “What’s the next new thing in business strategy?” and the answer was given by a professor at the International Institute for Management Development in Switzerland. It’s much like Mark Twain’s, or Will Rogers’ observation (various attributions) that it’s not what we don’t know that gets us in trouble, it’s what we know that just ain’t so.
In this era of unprecedented-and no-end-in-sight-change to the law land landscape, it’s not a bad time to recur to first principles. Hence we revisit that timeless topic: Strategy.
McKinsey, in the article that features the quote above, talks about ten tests that every solid strategy must be able to pass. Interestingly, they entirely bypass the strategy development process, noting that it’s idiosyncratic to many firms and that some strategies are “emergent” in the sense that there never ever was a formal strategy-development process or exercise, but the firm discovered over time, and trial and error, what worked and what didn’t.
So what about those ten tests? Here they are.
Let’s go.
Test 1: Will your strategy beat the market?
Test 2: Does your strategy tap a true source of advantage?
Test 3: Is your strategy granular about where to compete?
Test 4: Does your strategy put you ahead of trends?
Test 5: Does your strategy rest on privileged insights?
Test 6: Does your strategy embrace uncertainty?
Test 7: Does your strategy balance commitment and flexibility?
Test 8: Is your strategy contaminated by bias?
Test 9: Is there conviction to act on your strategy?
Test 10: Have you translated your strategy into an action plan?
Already daunted? Fear not. According to McKinsey, 65% of strategies they’ve examined pass 3 or fewer tests, 25% pass 4-6, and only the privileged 10% pass 7 or more. (But you were always in the top 10% of anything, right?!)
Not all these tests should have equal value and some are more germane at different times of your firm’s life-cycle than others. For example, and jumping off with Test #1, if your strategy “passes” that test, I would venture to say you’re done: Stop there. But that’s tantamount to the acid test of these tests: You might as well say that a strategy is successful if it puts you ahead of your peer group. I’m not sure there’s too much more to say about it (although I would never characterize such eminently sourced learning as “tautological”).
Actually, all markets are subject to reversion to the mean, so a “strategy that beats the market,” if propelled by something unique to your firm, is a pearl of great price. Just be prepared: Mid-performing firms will perform copy-cat operations and the sadly lagging firms will either exit the competitive space or undergo wholesale reform. And this will all happen faster than you were expecting or hoping for.
The next nine questions are actually more probing.
The second asks about unusual advantages your firm has-advantages no other firm has, at least not in the same degree. McKinsey categorizes them as “positional” or “special capabilities.” Positional essentially has to do with incumbency: Brand names like Wachtell, Cravath, Slaughters–but let’s not forget their positions are not impregnable and not of divine right. Where was Skadden 40 years ago? This is climbing Everest, you may think, but it has been done.
As for “special capabilities,” this really means unusual resources your firm has privileged access to. In Law Land, the key resource is talent: Laterals and superstar law school grads. The key to accessing these categories of talent can be summed up in one word: Prestige.
If this is starting to sound a bit circular (Wachtell? Cravath? Slaughters?), point well taken. Let’s face it: Our industry doesn’t have the equivalent of patents or oil strikes or strokes of software genius (Facebook). We’re fighting something more akin to a ground war.
#3: Granular about where to compete.
80 percent of the variance in revenue growth is explained by choices about where to compete, according to research summarized in The Granularity of Growth, leaving only 20 percent explained by choices about how to compete.
Yes, folks, my old and timeless, trustworthy friend, the 80/20 rule.
But it begs the question: How granular is granular?
The answer may surprise you, but it makes tremendous intuitive sense the moment you reflect on it: Very granular.
“Push within reason for the finest possible objective segmentation of the market: think 30 to 50 segments rather than the more typical 5 or so. Too often, by contrast, the business unit as defined by the organizational chart becomes the default for defining markets, reducing from the start the potential scope of strategic thinking.”
What does this mean for you?
If you decide you have to be in, say, Sao Paulo, the immediate next question has to be what and why exactly. In other words, it’s not just office locations and practice areas, but office areas times practice areas, and then times clients. Very granular.
(PS: If you’re wondering about Sao Paulo, let’s talk. I was there a few months ago.)
#4: Ahead of trends?
Sounds great, right? But we confront two obstacles: (1) Being ahead of trends risks dissing many of your established practice areas, and (2) Sussing out what’s really new can be extremely challenging. Here’s the problem:
(1) Most trends emerge fairly slowly–so slowly that companies generally fail to respond until a trend hits profits. At this point, it is too late to mount a strategically effective response, let alone shape the change to your advantage. Managers typically delay action, held back by sunk costs, an unwillingness to cannibalize a legacy business, or an attachment to yesterday’s formula for success. The cost of delay is steep
(2) Always look to the edges. How are early adopters and that small cadre of consumers who seem to be ahead of the curve acting? What are small, innovative entrants doing?
These are hard problems, and the history of incumbents when confronted by upstart outsiders is littered with dead men walking. So what else can you do? You can clearly discern some trends (even if they’re slowly emergent); you have to move from recognizing they exist to thinking hard about their precise financial and economic implications for your firm.
For example?
Suppose the “trend” of client push-back on fee increases is something that you think is here to stay. Rather than think in the abstract that we can roll over and play dead or push back as hard as we can, think about the concrete and specific financial implications of what (say) a 36-month firmwide across the board freeze in rates would mean. If the implications are dire enough, you’ll be motivated to do something about it. And if they’re not so dire? In that case, you have either been enjoying actionably impressive gross margins or else I need to rejigger my business to mirror yours.
#5: Privileged insights
Data has never been more accessible. Indeed, the standing joke in the search community is that the problem has gone from finding information to filtering it. And of course it’s far from a joke.
The relevant point is not that more data is accessible, but that it’s accessible to everyone. What do I mean?
I recently spoke at a global firm’s knowledge management leadership retreat, and one of the questions I got was how could they make better use of LexisNexis or WestLaw. I said: “You can’t.” What I really meant was the LexisNexis and WestLaw are, by definition, elaborate displays of publicly available information and available to all comers for a fee. There is no competitive advantage in having access to them. Only the firm’s internal KM resources could be the basis for competitive advantage: The trial tactics of, say, its marquee IP litigator, or the corporate partner who has spent a decade refining the poison pill.
Here’s one more insight from McKinsey, one highly germane to us, preternaturally afraid of asking our clients what we could do better:
Finally, many strategic breakthroughs have their root in a simple but profound customer insight (usually solving an old problem for the customer in a new way). In our experience, companies that go out of their way to experience the world from the customer’s perspective routinely develop better strategies.
Just a thought.
#6: Embracing uncertainty?
General George S. Patton famously said he’d always take a good plan executed today over a perfect plan executed tomorrow. But we always want the perfect plan. If only the world would stand still while we debated the niceties.
Another famous figure in US military history, former Defense Secretary Donald Rumsfeld (whose legacy history has yet to write), appeared to veer towards the Zen when he remarked in a press conference about Iraq that “there are the known unknowns, and the unknown unknowns.” Before stepping into that quicksand, here’s one way of dimensionalizing levels of uncertainty:
A critical step in embracing uncertainty is to try to characterize exactly what variety of it you face–a surprisingly rare activity at many companies. Our work over the years has emphasized four levels of uncertainty. Level one offers a reasonably clear view of the future: a range of outcomes tight enough to support a firm decision. At level two, there are a number of identifiable outcomes for which a company should prepare. At level three, the possible outcomes are represented not by a set of points but by a range that can be understood as a probability distribution. Level four features total ambiguity, where even the distribution of outcomes is unknown.
In our experience, companies oscillate between assuming, simplistically, that they are operating at level one (and making bold but unjustified point forecasts) and succumbing to an unnecessarily pessimistic level-four paralysis. In each case, careful analysis of the situation usually redistributes the variables into the middle ground of levels two and three.
In my experience, we’re especially prone to “level four” paralysis: We are extraordinarily gifted at trotting out the parade of improbables when, in reality, many of them are so outlandish as to be preposterous bases for strategy. So can we all just agree to stay out of the quagmire of level four?
But let’s also agree that here in the midst of the New Normal we are not at level one.
After all, levels two and three are where it gets fun.
#7: Balancing commitment and flexibility
I actually think this is an ineluctable core problem in developing strategy.
Why?
Betting big–which is required if you’re going to outperform your competitive set–requires you to be far out on the “commitment” end of this spectrum, while being responsive to the market, clients, and your competitors requires you to be far out on the “flexibility” end. Good luck with that.
How to crack this code?
Break it into parts. Opening a new office with 2 partners is a different order of magnitude commitment from acquiring a firm in that market with 50 partners. On the other hand, if there are no reasons not to do something, why wait?
And as for the rest?
I’ve long subscribed to “options theory,” meaning don’t shove all your chips onto red. Put a few chips on each of a number of bets and see which pans out; then add more chips to that and take them away from the losers.
#8: Contaminated by bias?
We all think we’re the most objective, clear-eyed, unbiased, coldly analytic people in the room, but we’re just human being subject to the same cognitive biases as anyone without a JD after their names. Specifically, behavioral economists and their brethren have identified many ways in which we systematically exhibit bias. For the record, here they are:
- Overoptimism: Depressingly well-documented. 90+% of us believe we’re above-average drivers, spouses, students, you-name-it’s. Probably….not.
- Anchoring: Good negotiators know this in their hearts even if they haven’t articulated it, but providing an “anchor” in a bargaining session can be a critical advantage. An “anchor” is the opening bid, or asking price, which is, after all, unilaterally set by one side without necessarily any regard to the real market.
- Loss aversion: We hate to lose so much that in order to avoid downsides we avoid risks that are well worth taking.
- Confirmation bias: We listen to facts and opinions that tend to confirm what we already believe and discount or not-hear things that would unseat our settled convictions.
- Herding: Talk about people who excel at herding! Thy name is Lawyer. This means more than fealty to precedent, it means the famous, notorious, soul-killing question: “Who else is doing that?” The best answer, to lawyers, is “firms I admire.” The best answer, to businesspeople, is “Nobody else.” There’s a reason firms you admire are already doing it and if the best you can do is to follow them, you’ll stay right where you are: As a follower.
So what’s to be done?
Rather than focus on one potential hypothesis, try developing multiple hypotheses, with teams of advocates and devil’s advocates for each. Stress-test everything.
Also: Imagine what might happen if you bet on X or Y or Z scenario and it did not happen. How much worse off would you be? This could comfort everyone who’s wearing their risk averse hats.
#9: Conviction to act on it?
Obviously this isn’t a criterion related to “strategy” itself but to the culture surround it. But don’t underestimate its importance. Here’s the key problem:
Many good strategies fall short in implementation because of an absence of conviction in the organization, particularly among the top team, where just one or two nonbelievers can strangle strategic change at birth.
We are learning more and more all the time about what makes human beings willing to change their minds or adopt new approaches to landscapes they felt completely comfortable in beforehand and in which they are emotionally invested and see no compelling reason to upset.
What the new learning about changing people’s approach to things has everything to do with emotional buy-in and almost nothing to do with intellectual persuasion. This makes your job harder but also more interesting. What you need to do is to make the key stakeholders (your management team, at a very minimum) experience what the change in strategy would mean.
In other words, get past the nice presentation in the boardroom where everyone politely claps at the end. If your strategy involves moving into a new country, take people there-preferably, with clients. If it involves closing a practice area, have your people meet partners in that practice to gauge their level of emotional enthusiasm and commitment to the firm.
#10: Translated into action?
You can define the greatest strategy in the world, line up all the troops in support, show them the objective, fire the cannon, and then…what? Do they know what to do differently on Monday morning?
McKinsey calls this defining the “from-to” shift. Make sure there’s momentum behind making it happen.
And, by the way, if you don’t put your budgetary and compensation systems behind the change, then, to borrow John McEnroe’s famous phrase of outrage to the line judges in tennis grand-slams when they made calls he didn’t agree with, and which were delivered in full throat: “You cannot be serious!“
This is the first in a series of pieces on strategic plans in the world of the New Normal.
Stay tuned for the next.
