Do or die – a survival plan for mid-tier firms

In the quest for greater efficiency and lower costs of operation, law firms risk engaging in a race to the bottom, with potentially devastating results, writes Colin Jasper.

I was recently shown an article by a consultant who I respect greatly, providing a survival plan for mid-tier firms in the current market. The article highlights the challenges faced by many mid-tier firms, given flat revenue, declining profits and greater price sensitivity among clients. It recognises that we are going through a permanent change in the legal profession and that treading water and hoping for a return to the good old days is a recipe for failure.

But what surprised me – even annoyed me – were the recommended actions proposed. The survival plan focused on managing equity, controlling/reducing capacity, increasing leverage, reducing staff remuneration and reducing costs in a range of other areas. That was it! That was the whole strategy!

I can understand the logic. The number one issue facing clients is to control or reduce legal expenditure. Hence mid-tier firms need to become more efficient to meet client needs. It can be argued that many leading firms can still justify their fees for premium work, while alternative business models are highly attractive for more commoditised work. What I do not accept is that an appropriate strategy for mid-tier firms should be based solely on efficiency.

Shifting sands
It has been interesting to watch how the prevailing attitude of law firms has shifted since the global financial crisis. The initial response was broadly to hold on for as long as they could and then cut where needed. Since then many firms have tried to retain as much work as possible, largely through agreeing to whatever clients request. Clients have sought fixed or capped fees. Clients have sought larger discounts. Clients have sought additional support free of charge. And firms have largely been happy to comply.

It seems to be generally accepted that power has moved from firms to clients and, if we wish to continue to serve them, then we need to match all their requests. Many partners are worried about the empty desk syndrome: “If I don’t agree to these client requests, I may not have any work to do tomorrow.” If a firm successfully implements the strategy proposed above, then its only way of succeeding in a competitive market is to be cheaper than the next firm. If the strategy is to reduce firm costs, the implication is that you intend to compete on price. The only reason you are giving clients to buy from you is a lower price.

But it is questionable if this strategy will deliver on that market promise. Those who successfully choose to compete on price generally achieve this end through innovation – taking costs out of the process – rather than simply shaving around the edges. If the intent were to compete on price, then the strategy would surely benefit from an element of legal process re-engineering – looking at all the steps involved in delivering the services provided to identify ways to automate activities, re-use work product or avoid costs. For this strategy to succeed, it is more important that you are only doing the few things that need to be done, rather than doing irrelevant tasks efficiently.

Danger ahead
Perhaps more importantly, any strategy that focuses on competing on price is inherently dangerous. Clients who buy on price will also switch based on price. The strategy only remains successful while you remain the low-cost provider. And if others are following the same strategy, it becomes a race to the bottom.

“There’s nothing more dangerous than constantly reducing your price so you can sell more. It’s a race to the bottom.”
– Bruno Pazzim

Do not get me wrong. I am not saying that efficiency is not important, but as a strategy for success it leaves a lot to be desired. So what is an alternative strategy for mid-tier firms? How about a strategy that is focused on being the leading provider of a selection of legal services to a targeted group of clients? How about aligning the strategy to buyer behaviour – aiming to be the preferred provider for a range of specific legal services.

“If you don’t have competitive advantage, don’t compete.”
– Jack Welch

You may not be seen as the leading M&A lawyers in the country, but perhaps the leading M&A lawyers to the aged care sector. It may even be as narrow as the leading IP commercialisation expert for one major client, achieved through developing extensive knowledge of the client and working so closely with them that others are not able to match the customised service.

In my experience, few clients choose law firms because they are cheap. More common is that they choose their preferred firm for a given service, then ensure the price is in the ballpark. The challenge for practice groups within mid-tier firms is to find the unique combination of services, sectors and clients, where they can become the preferred provider. Far better to send the message, “buy from us because no one can serve you better than we can”, than “buy from us because we’re cheap”.

“Perhaps the reason price is all your clients care about is because you haven’t given them anything else to care about.”
– Seth Godin

In a healthy client relationship we are not subordinate to all client requests, but rather partners in helping clients achieve their objectives. To justify this position, we need to focus more on building our knowledge of the client, understanding their challenges and goals, and developing our ability to support them through the challenges they face.

Perhaps if we can deliver on this we can move our thinking from merely surviving in a challenging market, to thriving in a market where clients are making shrewd purchasing decisions.

Colin Jasper is the founder of Jasper Consulting, which helps business-to-business service organisations create greater value for their clients.
www.jasperconsulting.com.au