We have never subscribed to the belief that law firms operate in a fundamentally undifferentiated industry—that each law firm competes with every other law firm—and that given the magic alignment of expertise, cost, and personal rapport, clients’ choice of law firms is essentially unbounded. Not so. When it comes time for a client to choose a law firm to address an issue, the client knows the short-term and long-term gravity of the issue to the company, has a rough sense of what the monetary and/or reputational risk exposure is, knows the venue/locale (if that’s germane), has a good idea of which firms have handled lots of similar matters and which haven’t, and indeed has in mind a multitude of other considerations from the quantitative to the subconscious. These combine to produce a short list of “plausible” law firms for the matter.
Stated differently, law firms do not exist in their own economic walled garden, exempt from the normal economic dynamics of competition, substitutes, price/quality tradeoffs, reliance on familiarity and personal relationships, and the anchoring effects of search costs. And, to run a law firm effectively you have to be a gimlet-eyed realist about your firm’s position in the market.
Back in 2014 we published A New Taxonomy: The seven law firm business models, which introduced and discussed general categories of law firms such as “global player,” “capital markets,” “category killer,” and of course the most-discussed if least favorite category of all, “hollow middle.”
Taxonomy remains, we believe, a useful construct, but it’s hardly the only one. So, while markets continue to evolve, our dedication to analyzing them is unyielding and, if anything, ever stronger. Our goal is simply to attempt to provide insight into the landscape in ways novel and helpful to participants and observers alike—ideally producing a reaction along the lines of “that explains it!”
What follows, then, is our newest law firm segmentation model, the “maroons” and the “grays.”[1]
The Core Model
This segmentation model is not based on:
- Size ($$ revenue or headcount)
- Type of firm (litigation boutique, private equity juggernaut, high-tech/startup mothership, etc.), or
- Geographic footprint.
In this model, these factors are largely irrelevant.
The fundamental premise of the Maroons and Grays segmentation model is that law firms have divided into two different businesses—not (just) two different business models. With these two businesses come diametrically different business challenges.
Probably the easiest way to introduce to the distinction between the maroons and the grays is in terms of client selection criteria.
Client selection criteria
Maroons
- Truly distinctive “destination” capability
- Price no (real) object
- Rarer events in corporate lifecycle with boardroom visibility
Grays
- Efficient, predictable, reliable, transparent
- Price-sensitive, from mildly so to least-cost wins
- Mostly “run the company”—less “bet the company:” Legal services that are a cost of doing business
Next it makes sense to follow client selection criteria with what are the scarce resources for each type of firm and what the existential threats would be.
Scarce resource/existential threat
Maroons
- Scarce resource: Highest conceivable level of legal talent plus business savvy—in one and the same individuals
- Existential threat: A run on the talent bank; fielding teams of “B” players; complacency
Grays
- Scarce resource: Expertise in continuous improvement, driving costs out, and assembling networks of highly reliable suppliers
- Existential threat: Self-delusion; lawyers solely in charge
With those building blocks in place, we can finish off our compare/contrast exercise with perhaps the most pointed and hard-edged differentiator of all, that of the two types’ competitive sets.
Competitive set
Maroons
- Other “Maroons:”
- A known set of players
- Limited consideration set—a non-negotiable “brand” threshold
- Membership in the club must be earned over years and years (used to be decades and decades)
Grays
- Other “Grays,” but also:
- In-house capability
- NewLaw
- Combinations and fluid networks of all the above
Here’s where the strategic rubber hits the road: Different competitive sets demand that your firm make different strategic and tactical choices. It will propagate through everything you do.
Greetings Bruce,
As always a great article. I always enjoy reading your posts. There is one area in which we might play ping-pong.
You like to analyze, categorize and segment different law firms as though they compete directly with one another. I take the view that they don’t! It is only their respective business units that may compete – which makes for a whole different view of the marketplace.
By way of a corporate example, Coke and Pepsi don’t compete. Their respective beverage businesses compete, but each of those companies has numerous subsidiary operations that play in completely different industries.
We also tend to think and categorize law firms as being comprised of only lawyers. That is changing. There is one law firm out there with a $100M in revenues practice group comprised of lawyers . . . and consultants – almost half and half and treated absolutely equal, right down to their compensation.
I believe that one of the more interesting categorizations may be those that (1) believe their firms are all about “solving legal problems” versus those that (2) believe that their firms are there to “provide business solutions.”
To me, this defines a completely different type of segmentation, or categorization, or let’s call it diversity, that is so badly needed . . . Cognitive Diversity!
Just my thinking out loud.
Patrick: Thanks as always for your insight. Yes, the question of whether law firms compete qua firms or rather as practice areas or even as individual lawyers. This really gets to the heart of corporate or organizational structure, and poses the question made famous by Coase of why firms even exist.
My answer is that law firms do provide more than shared overhead, a website, some malpractice insurance, etc.: they provide a brand name which has meaning in the market. If a lawyer moved from (say) Patterson Belknap, a perfectly capable NYC firm, to Paul Weiss, a powerhouse among powerhouses, that person’s “value” would change. To push a sports analogy probably further than it can bear, Giancarlo Stanton was the “same” baseball player when he was with the Marlins as he is now with the Yankees, but the Yankees provide a rather different platform and brand. (Yes, yes, I know baseball is a team sport and many lawyers think they’re solo gunslingers, but the lawyers are just flat wrong, so let’s not give them credit for their delusions.)
In any event, I’ll talk more about this in the third and final installment.
Neat. A quick thought is that “Scalability” might be interesting to add to the list in future iterations.
So is your thought that the Grays are intrinsically more scalable than the Maroons; that, indeed, scale may be an advantage for a Gray? Such would be my instinctive reaction, but then what does one do with a Kirkland or a Latham which at least appear from the outside to be Maroons of rather impressive scale?
Yes, my instinct is the same as yours.
As to the examples you give, perhaps the exceptionally high financial stakes and complexity of PE deals may partly explain the exceptional size and profitability of the firms in question?
As lawyer numbers rise into the 1000s, I do think something has to give in the “classic partnership model” – at least as I understand that phrase.
Possible approaches might include
(a) Increasing control, i.e. becoming more top down / “corporate”.
(b) Relaxing control, either by maintaining smaller partnerships within a branded confederation or by greater individualism.
I fear that approach (a) risks turning Maroon into Gray, whereas approach (b) may have its own risks (see e.g. this week’s FT article on point –
https://www.ft.com/content/13696928-86d5-11e9-a028-86cea8523dc2).
I don’t have any easy answers to this.