If things go awry at your law firm, how can you pursue a Plan B?

[Australasian Law Management Journal,General Management,Marketing & Business Development,Strategy & Leadership] March 7, 2019

Most law firms focus on a particular business plan, but at a time of considerable change and disruption in the legal sector it is incumbent on partners or management to have an alternative vision for the future, writes Joel Barolsky.

Law firms need a Plan B. Such a plan addresses the scenario of your firm primarily selling talent, and then shifting to selling a combination of talent, technology and data. It means moving from the pyramid to the rocket business model (read this BCG report if you don’t know I’m talking about). It’s about the digitisation of professional practice.

These 10 questions may be helpful in crafting your Plan B.

#1. How big do we need to get?

Economies of scale have not traditionally been a key success factor in talent-heavy professional services firms. One shining example of this is Wachtel Lipton Rosen & Katz, which is one of the world’s most successful law firms, despite being a relatively small single-office partnership.

With the addition of technology and data to the mix, there may be specific advantages that larger firms have over smaller rivals, including:

  • deeper pockets; that is, the ability to wear the risks of technology-related R&D, software and start-up acquisitions;
  • bigger footprints; that is, the ability to deploy new technology in more relationships and in more markets; and
  • more data; that is, the ability to develop better analysis, insights and products.

Small may be more nimble and cosy, but if you can’t afford the new bright shiny toys, clients might stop playing with you.

#2. What’s our dividend policy?

Be they partnerships or incorporated entities, many traditional professional service firms tend to do more handing out than hoarding when it comes to profits.

The ‘cash burn’ phase of new technology acquisition is generally much longer than that of new talent. It took Amazon more than 20 years to turn a profit. Firms need to re-align their dividend policy and balance sheets to suit their business models. Without patient capital, firms won’t be able to invest in or acquire the new tools necessary to compete.

#3. How do we (re)structure ourselves?

The rocket model raises a range of interesting organisational design issues:

  • Do we keep the suits and skivvies separate or together?
  • How do we structurally protect the core traditional business, while we invest in creating the new?
  • Is there a structural solution to the problem of improving the digital literacy and experience of everyone in the firm?
  • Do we structure our new firm primarily around practices, processes, products or technologies?
  • Do we separate sales from delivery?
  • How far do we locate the laboratory from the surgery?

#4. Who can become a partner in our firm?

Most firms see ‘multi-disciplinary’ as adding more work types or professional disciplines. With the onset of the rocket model, this definition might need to widen to include designers, technologists, project managers, marketers and sales engineers.

It is interesting to note that Herbert Smith Freehills (HSF) recently appointed the head of their Alternative Legal Services business as an HSF partner.

#5. What do we measure?

Renowned consultant David Maister’s profit formula (Leverage X Hourly Rate X Utilisation X Margin) has been the foundation of measurement (and therefore reward) for practice management and pricing for the past four decades.

The key assumption in this model is that the core asset being leveraged is human capital. With new tech-based assets and products, however, firms will need to radically transform what and how they measure things. To illustrate, if a firm sells compliance systems and artificial intelligence tools via a subscription model, tracking staff utilisation will not only be meaningless, but dangerous.

#6. How do we price?

Time-based pricing will be less prevalent in a talent + data + technology world. New pricing models will be required to set, communicate and capture value. This will include things such as user licence fees, subscriptions and retainers with incentives. What constitutes a ‘fair price’ will become more complex and need to factor in development costs and risks, IP fungibility, the scale and scope of application, and the duration of benefit.

#7. Who are we competing with?

In 1960, Ted Levitt published a brilliant Harvard Business Review article called Marketing Myopia. He cited the example of US railway companies going out of business because they defined themselves as competing in the railway business rather than in the transport industry. In a world where the client solution includes a combination of talent + technology + data, your biggest competitor may not be the lookalike firm three floors up, but rather the software vendor who is using your firm to iron out bugs before attempting global domination by going directly to your clients.

#8. Which clients do we say ‘no’ to?

There is a general trend towards more co-created integrated solutions between firms and their clients. In this environment, firms may be forced to choose target clients, not on size, scope or sector, but rather on systems sophistication and complementarity. One could imagine a very progressive firm not being able to service clients who were technology laggards. Platforms and standards could equally determine relative client attractiveness.

#9. How do we adapt our talent pipeline?

The pyramid model creates a ‘tournament’ whereby a large group of aspirants start at the bottom and are encouraged to beat their peers on the way up. The rocket model potentially changes the game, with far fewer recruited at the bottom and a philosophy of retention rather than competition. It also challenges the apprenticeship system of learning and development.

On the plus-side, the rocket model opens up a number of new career pathways and facilitates a more diverse talent pool. At more senior levels, the prerequisites for partner promotion might need to shift to include digital literacy, project management and solution integration. Partners need to be able to supervise people who are not like them. They also need to be able to align clients’ needs with the firm’s full talent + technology + data offering and be confident in selling it.

#10. What kind of culture do we want to become?

Many professional service firms have technical excellence as the dominant cultural norm. In the end, it’s scarce specialist knowledge, advice and skill that clients are willing to pay for. In changing the business model, firms need to question the kind of culture they’d like to become and what constitutes ‘cultural fit’. The new culture could be anchored around things like:

  • the client experience,
  • the client relationship,
  • navigating change,
  • digital literacy,
  • experimentation/innovation,
  • collaboration, or
  • operational excellence.

Your next strategy workshop

Rather than focussing on reviewing or tweaking Plan A in your next strategy workshop, run an ‘alternative futures’ session and flesh out your Plan B. As stewards of the firm, you owe it to your partners to have thought through these possible futures and your contingency plans.

Joel Barolsky is managing director of Barolsky Advisors, Senior Fellow of the University of Melbourne and creator of the Price High or Low smartphone app designed to help with pricing projects. Visit  www.barolskyadvisors.com for more details.