We often ask law firms, “Who’s your competition?”  The single most frequent response we get is, “Well, no one, really.”

This is delusion on stilts.

Every business, I would venture to extend that to any human organization, has competition, and it has nothing to do with how rarefied are the precincts in which you (yes) compete: Even Sotheby’s has Christies.  Extending it a bit, Harvard has Princeton and Yale, the Louvre has the Met, and even the Episcopalian Church has the Presbyterians (and that perennial choice, nothing at all).

With that hopefully settled, what does your “competitive set” mean exactly?  In plain English and everyday experience, it would be those firms that you repeatedly find yourself up against and win from or lose to.  In stricter economic terms, it’s firms who are a credible and viable “substitute” for yours in the eyes of clients.  Not in your eyes, mind you; it’s the clients’ viewpoint that matters because they have the wallets.

As I wrote in a column from about six months ago (“Is BigLaw One Business, or Two?“), the test is along these lines:

The defining characteristic of two products or services being widely recognized substitutes for one another is not whether you are indifferent between them or whether you view them as alternatives on a single spectrum of possibilities; that’s a matter of personal taste.  Rather, the test is posed to the market overall:  The test is whether some meaningful cohort of the buyers of that product/service will switch from one to the other in response to price and quality changes and will be, all in all, equally satisfied with either one “depending.”

Also in that column, I introduced the trope of “Skins” and “Shirts” firms.

Consider the market for clients selecting a firm to represent them in a major M&A or private equity transaction, or a high-profile corporate or securities investigation.  The consideration set of law firms (“Shirts Firms”) for such engagements is limited and is anything but coterminous with the consideration set of firms for, say, cost-of-doing business litigation, ordinary-course asset acquisitions and divestitures, roadmaps for complying with new corporate housekeeping regulations, and so forth (“Skins Firms”).

I always hesitate to name names—and I anticipate plenty of “Hey, what about us?” emails—but a suggestive and non-exhaustive list of Shirts firms almost surely includes London’s Magic Circle, the New York white shoe elite, focused powerhouses such as Latham, Gibson Dunn, and Kirkland, and some first or second-generation litigation super boutiques.

Pretty much everyone else?  Skins Firms.

What that column did not discuss, but this one intends to, are more specific definitions for each of those two sets of firms of their respective competitive sets.

For the Shirts Firms, your competitive set is the Shirts Firms.  I don’t mean to be cute or tautological.  A Major Corporate facing a material transaction or litigation will be considering a Wall Street or London elite law firm and an AmLaw 50+ is by no stretch of the imagination a plausible substitute.

The good news for the Shirts is that you know who your competitors are, and can map them out in two or three-dimensional capability and reputation space with financial and economic research you commission a capable grad student to do, together with brand perception scoring from Acritas (full disclosure: Adam Smith, Esq. has a close working relationship with them and we like their work) or BTI.

The bad news for the Shirts is two-fold:

  • Your core competence  has to be recruiting and retaining the top 1/2 of 1% of lawyers in both legal expertise and business savvy. It’s a small pool to draw from, competition for those people is intense, and they know their market value.
  • Being superb at this altitude means being choosy; you cannot do everything exceptionally well.  Be focused, courageous, and consistent in saying “no.”
  • The most trenchant observation about lockstep is “There is no such thing as a tolerant lockstep” (thank you, Tony Angel). Whether your firm is strictly, somewhat, or not-at-all lockstep, you need to take the wisdom embedded in that to heart and live it every day.

The Skins are operating in a completely different competitive space.  Their competition is:

  • Other Skins firms;
  • Their own corporate clients and their increasingly sophisticated in-house legal capabilities; and
  • NewLaw.

Another option for many corporates facing legal issues with minor ramifications is to do nothing; some corporate work and more and more of litigation is viewed as frankly discretionary. A nasty letter may suffice.  But it tortures and dis-serves English to label this alternative a “competitor.”

It is a business truism that when you have a different competitive set, you have to adjust your business model to be able to effectively compete. The business model for the Shirts (elite) firms is not sustainable for the Skins (everybody else) firms. But the great majority of Skins firms are not adjusting their business model in any material way. Perhaps they are unwilling or unready to acknowledge they’re not in the same game as the Shirt firms.

The implication for the Skins crowd is clear: Not only do you have to be perceived by clients as a superior alternative to Skins Firm B or C or D (presumably you know how to do that at least passably well or you wouldn’t still be here), now you also need to demonstrate why you’re superior to what the client could do for itself or what the latest constellation of NewLaw providers could accomplish.  It’s unlikely you can seriously undercut your own client or NewLaw on price, and even if you could once or twice that’s not a battlefield you want to wage an extended campaign on. So what else have you got?

Performing the function of “super-coordinator” may seem like a viable card for you to play.  Other industries are routinely organized around networks of specialized firms with varying but complementary core competencies that come together to execute a specific project and dissolve as soon as it’s complete.  Think the General Contractor in construction, or the Producer in movies, TV, and entertainment.  Other companies put together rather more long-lasting networks of suppliers (Apple, Boeing, any global car manufacturer) but only the duration of the constellation of suppliers is different; the principle is the same.

The manifest problem with this option is that law firms are dreadful at coordination; they’re notoriously poor at pulling it off internally even when, an objective observer might assume, everyone’s interests are aligned.  That innocent outsider would quickly learn that their assumption (collaboration works best) won’t survive an encounter with an amazing proportion of law firm partners.

Alternatively, maybe you could tell your clients that you’ll take care of all the routine due diligence, e-discovery, etc. (“don’t worry about a thing”), by outsourcing it to a capable NewLaw provider but that your firm will stake its reputation on the results and stand behind the quality overall.  This sounds more promising, but if you’re going to do it routinely and well you have to hire highly accomplished business professionals who can actually evaluate various NewLaw offerings, diagnosis their strengths and weaknesses, and install a layer of fit-for-purpose  Q.C. (quality control) on top of their work product.  And you’re going to have to pay these business professionals very very well and defer utterly to their judgment: No second-guessing by partners.

Does that sound like an equilibrium steady state for a law firm?


Let me end by venturing to put this in a larger context.  A slow-rolling but accelerating revolution has been taking place under our noses since the global economy emerged from the Great Meltdown of 2008, with clients increasingly calling the shots on the terms of buying legal services.  That’s so commonplace as to border on trite.  But I’m suggesting something a bit more subtle and quite a bit more powerful.

No one in NewLaw, or the Big Four, talks about the “practice” of law, and it’s not because they’re dancing around so-called “ethical” walls. What they talk about is “legal service delivery,” of which the actual hard-core component of activities narrowly confined to licensed attorneys is all but a vanishing fraction.  In the Skins marketplace, clients don’t want and aren’t buying legal expertise (another phrase you never hear NewLaw or the Big Four  utter); they’re buying legal services, which is the output that results when several functions intimately familiar to MBAs but far less so to JDs come together: Scale, financial and human capital, process optimization excellence, and a sprinkling of domain  knowledge, all of it resting on an integrated technology platform and all of it designed to learn from defects and continuously improve the process.

Except for the elite firms–The Shirts–lawyers have lost control over what “the practice of law” means and clients have lost interest in buying it.  Clients want efficiently delivered “legal services” at scale, on demand, with price certainty and consummate quality.  That’s the competitive field the Skins firms are increasingly playing on.

 

 

 

 

 

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