We submit it looks like this:
In other words, for the Maroons the only critical external force they need to worry about is the bargaining power of lawyers. (One of our more droll friends calls this the Kirkland & Ellis effect.) Desirable laterals—and your top-drawer home-grown incumbents—know their value on the market and by and large any social or reputational restraints on seeking to capitalize on it have fallen by the wayside. That’s why we noted that a strong and defensible PPP is a KPI for the Maroons.
On the other hand, what do they not have to worry about? There won’t be any new entrants, at least not without a decade or more’s warning; price is not a selection criteria for Maroons’ clients so take that effectively off the table; and there is no substitute for what they can do.
Of course—and this always should be a bedrock assumption—they do have to worry intensely about their competition, the other Maroons. But presumably they’ve been doing that for a long time.
Now, shall we apply Porter’s model to the Grays?
The exact inverse result.
I have doubled down on emphasizing “rivalry among existing competitors” because the competitive set for the Grays includes not just other Grays but their own in-house corporate clients’ legal capabilities, and NewLaw—and combinations of all of those. So the “rivals” of Grays is a much more complicated, shifting, landscape than it is for the Maroons, who only have the other Maroons, a limited and highly proscribed category, to worry about.
Threat of new entrants? You bet. The CAGR of NewLaw revenue over the past two to four years (Thomson Reuters and Adam Smith, Esq. estimates) is 20—40%. Even at 20%, NewLaw revenue would double in four years. (If you think a healthy growth rate for law firm revenue lately is 5%, that would grow just over 20% in four years.) Nor should you comfort yourself, if comfort it would be, with the easy assumption that $1.00 to NewLaw represents one and only $1.00 away from law firms. Actually, based on substantial data, the real multiplier is on the order of 3—4X. For every $1.00 of revenue NewLaw gains, law firms lose $3-$4.
Bargaining power of buyers: This is what the incessant mantra of clients’ demanding “more for less” is all about; remember that a defining selection criteria for clients among Grays is price. Once capability is stipulated—and it is or you wouldn’t even be on the client’s short-list—price can be decisive, or at least highly influential. If we have heard the lament from law firm partners, “We can’t get the rates we need,” once we have heard it hundreds of times. Of course this complaint brutally exposes how many lawyers misapprehend the most fundamental reality of how markets work. Clients do not pay their service providers what the providers “need;” they pay what the market says is the going rate for that service.
Threat of substitutes? Also very real. But it’s not only (a) other grays; (b) in-house capabilities; and (c) NewLaw, it’s also one other substantial if impossible to quantify threat: Doing without. That is to say, from the perspective of the corporate buyer, many times the opportunity to address a problem by applying legal services to it is no more than that: An opportunity and not a requirement. There may be other simpler or more direct solutions, including just plain doing nothing.
Our experience tells us that many law firms underestimate how much of legal spending is actually discretionary in the eyes of their clients; or, even if a matter must be addressed, it can be done economically with minimal fuss (a stern letter in lieu of a court filing, e.g.).
So all in all, Porter’s five forces expose how dramatically different are the business landscapes facing Grays from that facing the Maroons.
If you’re a Maroon
Basically, you know how to do this. Running a Maroon is running a law firm a lá the classic Cravath Model, which we’ve been working under for over a century. Always keep top of mind that your first priority is performing your core competency of recruiting, retaining, and training lawyers practicing at the highest levels—who have solid business acumen as well. Superb legal talent is your scarcest resource and the one most susceptible to being competed away by your most effective competitors.
This means a high, strong, and defensible level of PPP is actually a KPI for Maroons, whereas it’s nothing of the sort for Grays. We can spot Grays their desire to have bragging rights about PPP, but frankly that’s all it is, whereas for Maroons a subpar—worse, declining—PPP can represent an existential threat in the shockingly near term.
Another way of articulating the challenge for a Maroon firm is: Don’t screw it up. Maintain your relentless focus on what you’ve always done best. Accept no “B” players either among your partners nor, frankly, among client matters you regularly accept. (We’ll talk a bit at the end about whether any given firm can be both a Maroon and a Gray, so hold your fire on this for a minute.) Brad Karp, Chair of Paul Weiss, nicely summarized the “focus” mantra in a recent interview with The American Lawyer:
“Our goal was to develop market-leading practices in litigation, white-collar defense, public M&A, private equity and restructuring. To achieve this, we needed to make some bold strategic investments and wisely deploy some of the capital we had created,” Karp says. …
“One of my first actions as chair, back in 2008 and 2009, was to shift resources away from certain niche practices and geographic regions that were peripheral to our strategy and to focus our energies on mission-critical, client-centric practices for a firm centered in New York and Washington,” he says.
He also succinctly identifies the firm’s positioning in the bullseye of the Maroon target: ““Our goal is to be the go-to firm, the safe choice, for the most important companies in the world, on their most important matters, where the stakes are highest.”
Does this mean Maroons can ignore all of the operational discipline and process-optimization hygiene that have to be the Grays’ calling card? No, it just means that rather than those capabilities being the primary feature of the firm—what it’s “about,” if you will—those capabilities need to be excellent as part of the comprehensive package of service delivered to the client, which also includes world-class legal expertise. Think of it this way: Toyota needs to be very good indeed at “kaizen,” or else they risk forfeiting what makes Toyota distinctive. But Mercedes and BMW better have fit and finish and quality control on a par with their prestige (and pricing) as well. That’s just not the primary thing you’re buying when you go for a Mercedes or a BMW.
And the implications if you’re a Gray
In 25 words or less, a more business-like approach must infuse all aspects of the firm’s services and delivery.
Amusingly or alarmingly, depending on your point of view, when we recommend to law firms that they operate in a more “business-like” fashion, the single most common reaction we get is, “What does that mean?”
If that’s what you’re thinking, read on.