At the end of our last piece, I asked aloud whether we as lawyers are intellectually and emotionally capable of adapting to the new market landscape, suggested that adapting would require experimentation and—yes—failure, and noted that countries and industries that did not reflexively punish failure enjoyed stronger long-term growth.
Let’s talk about that some more.
A key set of players facing us on the new landscape are lower-cost providers. They come in a variety of guises but all essentially embrace (you can say “exploit” if you prefer, not that it will help you in the least) clients’ newly exercised power to demand more for less.
The founder and head of one of these firms, which is in the business of applying Six Sigma processes to document review, and which has demonstrated consistently and convincingly that their quality is immensely superior to that produced by BigLaw associates working on the same document sets, remarked fairly casually to me not long ago that “for every dollar of revenue we gain, BigLaw loses three.” If you want to reduce what “disruption” means down to a size suitable for a T-shirt, this will do nicely.
But we’re hardly the first industry to encounter lower-cost providers. How have other incumbents responded when such a threat arises? I’m sorry to report the track record is not all that reassuring.
In June 2010 McKinsey published When companies underestimate low-cost rivals which opens thus:
When low-cost competitors appear, one of the toughest decisions facing executives in companies with premium products and brands is whether to respond. Should the company or business unit adjust its strategy to meet the low-cost threat or should it continue business as usual, with no change in strategy or tactics?
As these established companies attempt to define the nature and magnitude of the challenge, they often underestimate it. Sometimes executives are so focused on their traditional competitors, they don’t even recognize the threat developing from low-cost rivals.
Often, the incumbents’ slow response stems from the most rational, admirable, and correct of motives: They’re focused on their core customers and clients, who are not patronizing the low-cost new entrants. But markets, competitors, and technology—not to mention clients’ tastes and preferences—are never static. The newcomers want to move up the value chain as badly as anyone, and often they find they can do so:
As these established companies attempt to define the nature and magnitude of the challenge, they often underestimate it. Sometimes executives are so focused on their traditional competitors, they don’t even recognize the threat developing from low-cost rivals. What executive isn’t familiar with the case of the low-cost airline Ryanair and its hugely successful entry into the European market at the expense of the region’s traditional carriers? Likewise, were the world’s leading telecommunications companies too busy competing with one another to recognize the threat from the Chinese low-cost competitor Huawei, now a leader in fixed-line networks, mobile-telecommunications networks, and Internet switches? Then there was Vizio, a little-known LCD TV supplier that overtook the premium brands in five years to become the North American market leader in large-format TVs. Complacency and arrogance produce blind spots that delay a response and leave incumbents vulnerable.
It can be a mistake to think one has a reliable pricing umbrella over one’s head. Even though Xerox first commercialized and introduced copiers into the US market, to the point where “xerox” became a verb like “google” is today, they never saw the threat coming from Canon, which introduced low-cost, low-feature-set machines into the US and in short order owned all but the very top end of the market. By contrast, when duPont introduced nylon, it priced it not at what a patent-owning monopolist could persuade the market to bear, but at what duPont anticipated its costs of production would be, together with a modest profit margin, five years hence after going through the learning curve. This alternative approach accomplished two things: Not only did it make it all but impossible for new entrants to match duPont’s economies of scale when the technology became generic, but it induced duPont customers to discover completely unforeseen uses for nylon (such as, to use a wild example, in women’s stockings during the WWII silk shortage), which greatly increased duPont’s nylon revenues and accelerated their advances in optimizing production efficiencies.
Low-cost entrants have upset apple carts in everything from California premium wines to IT services, software development, pharmaceuticals, flavors and fragrances, and retailing.
Even if the incumbents react adroitly and nimbly, as viewed with the benefit of hindsight, they are almost invariably plunged into a highly stressful period of experimentation, hastily arranging an array of responses, which require those who lived through the experience to try first this and then that: Experimenting, in other words.
Earlier in this series I discussed what A. O. Lafley achieved at Procter & Gamble, with innovation in a seemingly mature market, but I didn’t tell you what he said about failure. Essentially, it was: (a) fail fast; and (b) don’t fail the same way twice. Doing this gracefully and effectively requires a personality characteristic that the psychological and organizational dynamics literature usually refers to as “resilience.”
Indeed, resilience is so important to particular companies that assessment tools have been developed specifically to measure for it in individuals. One of the originals, the so-called “Caliper” tool, was developed by the Encyclopedia Britannica to help the company select effective door to door salesmen of its big, heavy shelf of books. Now, few lines of work are ever going to involve as much rejection (call it “failure”) as door to door sales of expensive and complex products, so you can see why Encyclopedia Britannica found this assessment tool critical to its success. But the Caliper tool also scores people on 17 other personality traits, and by this point has been administered to over 2-million college graduates in the US, as well as to some 3,000 lawyers. (What follows is courtesy of work Dr. Larry Richards, one of the leading authorities on lawyer personality types, has done.)
On six of the 18 traits, lawyers in general score one or more standard deviations above or below the population norm. No other professional group produces a profile that is systematically such an outlier from the norm.
Here are the six traits in question:
|Trait||US Population Average||Lawyers Average|
|Skepticism||50th %-ile (by definition)||90th %-ile|
|Sociability||50%||7% (12% if you include rainmakers)|
Let’s clarify something right away: If you’re in the market for a lawyer, these are probably just the traits you’re looking for. Let’s say a powerful government agency has opened a high-profile investigation into your company, and you need a law firm. Here’s how these traits can work to your advantage:
- Skepticism: Do you want an advocate who is tempted to take what the agency says at face value, or someone who will challenge them at every turn?
- Autonomy: Do you want an advocate who can figure out what to do on their own, without micro guidance?
- Abstract reasoning and urgency: Need I say more?
- Urgency: This means our overwhelming need to get things done now. Great, for clients.
- Sociability: First, understand that “sociability” refers to ordinary human relations in the everyday sense, such as a facility with small talk, readiness to introduce oneself to strangers in a checkout line or at a cocktail party, etc.; it has nothing to do with proper manners and courtesy. Think of it as introversion vs. extraversion. Do you care about it on this engagement? Is someone low on it any kind of problem? Didn’t think so.
- Resilience: Ah, the critical factor in rebounding from being rejected. Think of it as an indicator of sturdiness in the face of setbacks or criticism, as well as the ability to bounce back speedily. You might think that’s not an issue since your chosen lawyers haven’t been rejected; they’ve been selected. So low resilience isn’t germane, is it? Not so fast. Low resilience also makes one more likely to respond poorly to stresses caused by change, uncertainty, and challenges. So you actually want an advocate with high resilience (good luck finding one) because when an adversary, a judge, or you-the-client criticize their thinking, challenge the bill, or even reject them for other unrelated work, the more defensive, even unhinged, they may become.
Now switch hats. You’re the managing partner of a firm staring down the throat of the need for fundamental change. How do these lawyerly traits work in this context?
- Skepticism: Ready to be challenged at every turn, over matters great and small? Then this is the team you want to lead. True story: The managing partner of an AmLaw 50 mentioned at a partners’ lunch that they were going to change the font size of the firm’s letterhead by 2 points. 90 minutes later they were still debating the font size change. I actually don’t know whether the change went through or not. Now expand that to a decision that actually has consequences, and have fun.
- Autonomy: These are people who really do not want to be led.
- Abstract reasoning: You can find holes in anything. Lawyers will.
- Urgency: When you’re talking about the changes that have to be made, lawyers will focus on everything that’s wrong with it. When they go back to work, they’ll forget about it entirely because they’ll be preoccupied with the issues of the moment. Not the best way to build long-term consensus. Or, if partners will talk about the firm’s long-run strategy, they’ll tell you they have an hour; then you can come back in five years when we see how it turned out.
- Sociability: Probably not a big deal either way in this context.
- Resilience: Did we mention experimentation entails failure? And failure requires resilience?
All in all, it seems one could substitute “lawyer” for “pessimist” in Winston Churchill’s famous dictum, and it would make equal if not greater sense:
An optimist sees the opportunity in every difficulty, a pessimist the difficulty in every opportunity.
Before you think we are presenting a counsel of despair, I submit that Churchill’s apothegm may hold the key to our salvation.
Understand that we are scarcely defenseless in the face of new entrants; they may have resources, so do we; they may have talented people, so do we; they may have enthusiastic clients, so do we.
The problem is that for the first time in a long time (a century?), change is not something to be suspicious and skeptical of; it has become something we must welcome and indeed embrace.
Twenty years ago, Peter Drucker wrote of “the five deadly sins” of management, and what he had to say is timeless:
Recent years have seen the downfall of one once-dominant business after another – General Motors, Sears Roebuck and IBM, to name just a few. In every case the main cause has been at least one of the five deadly business sins – avoidable mistakes that harm the mightiest business.
Here are those sins (mostly a paraphrase or verbatim quote of Drucker, emphasis mine):
- The first and easily the most common is the worship of high profit margins and of ‘premium pricing’. This was Xerox’s downfall in the face of Canon’s entry into the copier business, and GM, Ford, and Chrysler’s in the face of first the VW Beetle and later the Japanese. Drucker’s lesson: the worship of premium pricing always creates a market for the competitor. And high profit margins do not equal maximum profits. Rather, maximum profit is obtained by the profit margin that yields the largest total profit flow, and that is usually the one that produces optimum market standing.
- Closely related to this first sin is mispricing a new product by charging ‘what the market will bear’. This, too, creates risk-free opportunity for the competition.
- The third deadly sin is cost-driven pricing. Most American and practically all European companies arrive at their prices by adding up costs and putting a profit margin on top. And then, as soon as they have introduced the product, they have to cut the price, redesign it at enormous expense, take losses and often drop a perfectly good product because it is priced incorrectly. Their argument? ‘We have to recover our costs and make a profit.’This is true, but irrelevant. Customers do not see it as their job to ensure a profit for manufacturers. The only sound way to price is to start out with what the market is willing to pay – and thus, it must be assumed, what the competition will charge – and design to that price specification.
- The fourth of the deadly business sins is slaughtering tomorrow’s opportunity on the allure of yesterday. It is what derailed IBM.IBM’s downfall was paradoxically caused by unique success – catching up, almost overnight, when Apple brought out the first personal computer in the mid- 1970s. But then, when IBM had gained leadership in the PC market, it subordinated this new and growing business to the old cash cow, the mainframe computer.
- The last of the deadly sins is feeding problems and starving opportunities. All one can get by ‘problem-solving’ is damage containment. Only opportunities produce results and growth.I suspect that Sears Roebuck has been starving the opportunities and feeding the problems in the retail business these past few years.The right thing to do has been demonstrated by GE, with its policy of getting rid of all businesses – even profitable ones – that do not offer long-range growth and the opportunity for the company to be number one or number two worldwide.Then it places its best-performing people in the opportunity business, and pushes and pushes.
Did you note what I noted about what all but one of these five have in common? Four of the five have to do with price.
And isn’t “price” what has been driving us to distraction ever since the Great Reset? “Clients are demanding value.” “Realization hits all-time lows.” “Annual rate increases don’t work the way they used to.” “No junior associates on our matters.” “Purchasing managers on review panels.”
It’s all about price.
The market is trying to tell us something. My counsel would be to listen.
My thoughts on how exactly to go about that will be in the next installment.