It’s become a commonplace to observe that Law Land has entered a period of negligible overall real growth in demand. (Five years ago I published Growth Is Dead: Now What?, which at the time prompted a fair amount of skepticism, a perspective on the book which seems to have died out.) You can lay the no-growth reality at the feet of clients’ becoming choosier, attractive alternatives and substitutes having been introduced to the market, or simple exhaustion at paying ever-increasing rates, but that’s a topic for another day.
An unintended, but hardly unexpected, consequence of our growth hitting a wall is that a number of firms have exposed themselves as having no other strategic ideas: Growth worked so well for so long that perhaps if only we redoubled our efforts to find it somewhere (under this rock? under that one? with this lateral? with that one?), then perhaps happy days would be here again. Because in the meantime, it seems to be the only game in town. I’m sympathetic because they’re asking the right question—if not growth, then what?—they’re just coming up with the wrong answer. Being more precise, they’re assuming that if it’s growth they want, the old approach to growth, bolting on revenue, will do just nicely. It won’t.
Today we’d like to take the seemingly obvious next step and point out that stagnant demand is reality for vast swaths of the economy and ask what we might learn from sectors that live our new reality every day. (By “stagnant” growth we take the editorial license of including growth at a rate essentially equivalent to {[growth in GDP] + [inflation]}.)
Are there companies in those sectors that have adapted to slow/no growth more successfully than their peers and if so, how? As in Law Land, a static pie does not remotely imply static shares for every firm; some are outperforming and others losing ground.
Conveniently, The Harvard Business Review has a cover story this month on “Curing the Addiction to Growth,” which treats as its subject the retail industry. They start from the anodyne observation that at some point even the fastest-growing retail chain achieves market saturation where new stores cannibalize existing ones. (If Walmart, a gigantic retailing growth/success story if ever there were one, had continued to grow at the same rate it did between 1968 and 1988, today its revenue would be $246 trillion, or three times global GDP.)
Being of an analytic turn, our authors examined US retailers with annual sales over $1-billion whose sales growth over the past five years was only in the single digits. There turned out to be 37 such companies, 20 of whom had delivered total shareholder returns over the period below the S&P 500 and 17 of whom had beaten the S&P. While some of their metrics turn out to be indigenous, shall we say, to retailing—like “return on invested capital” for each new store opened or projected—many others have immediate analogs in Law Land including, importantly, estimated revenue added per new store: Revenue Per Lawyer, anyone?
But there’s no denying the potency of the growth drug:
This is fascinating and timely.
Will you be writing anything on KWM, what it means for the other vereins and the implications generally? Been a shortage of good analysis…
The reason there are fewer discussions about law firm growth is because their is no interest in consuming those ideas. Traditional law firms are hamstrung by non-business leadership who see old solutions only. This will ultimately lead to more of what is already occurring – the gradual erosion of legal work going to traditional law firms. Alternative services providers will take more in the future. Revenue vs profitability? You can’t have a profitable organization that doesn’t exist. And an organization can’t exist without revenue. So you must have revenue. Discussions of what will produce revenue are confined in law to what doesn’t produce revenue but conventional wisdom says it does (mergers, laterals) and solutions which require compromise with non-business leadership of law firms. Growth solutions for law firms exist. There’s just isn’t any interest in them within law firms.
Would you not say that the problem of commercial law firms is less addiction to growth and more the obsession with maintaining profitability even at the risk of long-term damage to the institution? You can make a pretty good case that law firms are losing too much work because of the determination to pay their shareholder class above what the market is comfortable with (largely to in-house legal teams). You rarely if ever see a reasoned discussion of the trade-offs between organic revenue growth, investment and medium-term strategic expansion on one hand and the limitations of only pursuing 40-60%-margin service lines on the other. The focus of law firms on distributing capital to partners rather than retaining earnings only serves to heighten that short-termism.
Alex:
Thanks for this contribution; you have touched upon a wealth of issues far “beyond the scope,” as they say, of this column. But in a nutshell:
In any event, thanks again. To be continued.
Bruce