Imagine an industry finding itself characterized as follows:
- “The good old days of the industry are gone forever.”
- “Even an improved global economic climate is unlikely to halt efforts to contain spending.”
- “These factors suggest that the industry is heading toward a world where its profit margins will be substantially lower than they are today.”
- “Over the years real price increases have been among the most significant drivers of the industry’s growth. Less attention has been paid to managing the cost base. The industry may have recently begun to focus on that, but its heart doesn’t seem to be in the effort, and it has little to show for these efforts.”
Three guesses as to what industry is under scrutiny here, and no it’s not BigLaw: It’s McKinsey in A Wake-Up Call for Big Pharma.
And wait, there’s more: Just as with BigLaw, so with Big Pharma:
Big Pharma must compete for parts of the value chain with focused players–for example, generics companies that excel at manufacturing; life-science service providers that offer flexible, specialized services (such as managing clinical trials) at scale; and biotechnology companies that generate innovative ideas and products.
If you doubt BigLaw is subject to the same vicissitudes, I beg to differ. Revenue we once captured is now going to Legal Process Outsourcers, focused boutiques, and perhaps soon (in the UK) brand-new legal service and quasi-legal service providers operating on brand-new business models entirely–some of which will fail or struggle along, to be sure: But not all of them.
For another analogy, McKinsey suggests the automotive industry, farther down this path than either Pharma or us.
For many years, it was vertically integrated and dominated by large, primarily Western corporations. But the value chain has been disaggregated into companies specializing in narrow parts of the process. Today, component manufacturers, design houses, and basic-materials companies share much of the industry’s revenues: the automakers are responsible primarily for the design of major components (such as engines), assembly, sales, and marketing.
What do comfortable incumbents do to respond to such tectonic changes?
First, let it be said: It ain’t easy, because it necessarily entails blowing up some of what you have–assets which have been very profitable in the past but which have outlived their usefulness.
And no one wants to rock the boat and risk spoiling the party for everyone. But that see–no-evil approach, reliant on inertial momentum slowly being scrubbed away by the friction of the marketplace, is a wasting asset. Almost inevitably, someone who is either less burdened by legacy investments and assets or else just plain more desperate will act pre-emptively to strip out fixed costs and rely on contracting for all but the truly core services. As McKinsey drily notes, “The residual organization would be much lighter–perhaps less than half of the starting point.”
“Lighter:” I have to start using that.
The question is how real the risk is.
To judge from the just-released ALM Client Survey, no one has exactly taken away the punch-bowl yet. For example, 75% of those responding said that alternative fees accounted for less than 15% of their total legal spending–and nearly half said AFAs were zero to 5% of their spend. Then there’s this: Only 3% of law firm leaders said they planned to keep rates flat in 2012 (and zero, just for the record, said they planned to drop them). And although firms appear to be outsourcing work in different contexts, only 13% said they “currently” are doing so.
Judging from what people are actually doing, then, the revolution is far from imminent.
The sneaky thing about systemic change is that it almost always appears avoidable, if not impossible or improbable, until it’s too late. And when that happens, avoidance and denial, as demonstrated from time immemorial in contexts ranging from business to the military to empire itself, are not coping strategies.
“Rather than debate what seems inevitable,” the counsel is, incumbents must “develop responses that focus on how quickly the change will take place…. Strategy is firmly back on the agenda. Companies that don’t have one or stumble into something by accident will be picked apart, broken up, or taken out.”
Happy holidays.
