Backing off from that existential foray into your indifference curves, let’s ask a simpler question: Is it working for the business of law? Is it helping us deal with the changed landscape since the Great Meltdown? Thomson-Reuters thinks not, and I invite you to find the flaw in their view (emphasis mine):
Firms have responded to this increase in competition in a variety of ways – by enhancing PPEP by reducing the number of equity partners, by increasing spreads in partner compensation, by raising associate compensation to retain promising young lawyers, and (as noted) by pursuing mergers to make their market footprints more competitive. Ironically, these steps have sometimes led to more instability rather than less.
I won’t recapitulate our views on the lateral partner recruiting arms’ race here, but doesn’t this all constitute a massive game of zero-sum revenue musical-chairs pursued at tremendous transactional cost in real $$ and senior-level management distraction?
Something subtler is going on: The traditional levers of financial management and revenue/profit growth don’t work they way they used to. This can make it hazardous to your law firm’s health to assume they still work and continue to rely on them; the mental image springs to mind of a comic pratfall scene where the steering wheel and gearshift come off into the hands of the hapless driver.
Consider: What is the “right answer” to each of the following management decisions:
- Raise rates and price aggressively? Or respond to clients’ voiced preference for economies?
- Invest more than the other guys in work flow process optimization and technology to steal a march in efficiency, or wait to see what works before making a serious commitment?
- Expand geographically to offer clients more services in more places or focus on your core markets?
- Participate gleefully in the lateral arms’ race or save your powder?
- Increase associate compensation to retain the “best and brightest” or face the music of career butterflies?
- Is leverage friend or foe?
We’ll stop now.
The report rightly opened with a narrative about how to respond when faced with increasing evidence that one’s traditional way of looking at a problem no longer suffices. In that spirit, then, let us–hand-in-hand with the report’s authors–suggest a new mental construct for understanding the dynamic forces at play among law firms.
Our hypothesis is that the days of one unitary market for “law firm services” has disappeared. Some firms–a small minority–are in one type of business, but everyone else is in an entirely different business. Note I did not say different business “model,” but different “business.” Firms in each business compete with one another, but not with firms in the other business. Call them the Maroons and the Greys.
Clients needing the services of a Maroon wouldn’t even glance at a Grey, and vice versa. Maroons compete with Maroons, and Greys are no “substitute” (economic sense) for what Maroons can do. (Simple analogy: Uber, Lyft, and yellow cabs are substitutes for one another; Uber and walking probably aren’t.)
We will have much more to say about the Maroons and the Greys here at Adam Smith, Esq. in future (and our friends at T-R generously gave me credit by name for this construct–see fn. 28 on pg. 17), but in the meantime let’s give Thomson-Reuters the last word: Surviving as a going firm, much less thriving and prospering, all begin with a frank and unblinking analysis of which business your firm is in. This is anything but an “academic” exercise:
The strategic decision-making process described above may make perfect sense in the abstract. But the question remains whether a majority of firms will be able to make the honest assessments and strategic judgments necessary to compete effectively in the new market for legal services. Sadly, that remains an open question and an especially important one for the vast majority of U.S. law firms whose practices fall primarily in the [vast majority of firms business] category described in our suggested market model. The problem is not so much that law firm leaders fail to understand the challenges their firms face or the steps they need to take to remain competitive, but rather the resistance that is often mounted by firm partners to the changes that are required.
Will we follow the doctors who resisted the new learning about ulcers for a quarter of a century and more? And if we take that path, how well will we be serving our clients?
And it all starts with knowing which business you’re actually in.