From Georgetown Law: the future of law firm strategy and governance (with video interviews)

Part of our coverage of “Law Firm Evolution:  Brave New World or Business As Usual?”, a conference held March 21-23, 2010 by the Georgetown Center for the Study of the Legal Profession.  For all our posts on the conference click here. 

Reported by: Gregory P Bufithis, Esq.    Founder, ThePosseList.com/ProjectCounsel.com

The panel “Business Models: Strategy and Governance” consisted of  Stephen Mayson (Director, Legal Services Policy Institute; Professor of Strategy, The College of Law, London),  Ralph Baxter (Chairman and CEO, Orrick, Herrington & Sutcliffe), Dan DiPietro ( Advisory Head and Managing Director, The Law Firm Group, Citi Private Bank) and Peter Sherer (Associate Professor, Haskayne School of Business, University of Calgary).

The panel  moderator was Bruce MacEwen, President of  Adam Smith, Esq., who in addition to providing high-end consulting writes one of the premier online publications covering law firms and their economic structure.  More about Bruce later in this post.

Bruce got things moving by simply asking “just what is strategy and governance really about?”  We are experiencing a sea change yet, he said, “the world as we know it will not exactly end”.   And he quoted AmLaw 20 firms who say “we are a very mature profession but a very immature market.”

But the key, said Bruce, was strategy:  what does your firm do, where do you do it, who do you do it for?   As for governance, well, it ranges “from Athenian democracy to military-like command and control”.   Management might very well determine if you have the ability to effect your strategy.

Stephen Mayson presented parts of his excellent paper “Business Model in Legal Practice” (click here for the full copy) and tried to answer the basic question “what is a business model?”  He said “we use it indiscriminately, having no common meaning, which is a formula for confusion.  It is just sloppy language”.   Having read the literature, he said that while there is some agreement about what a business model is “this is not the same as strategy nor is it the same thing as a structure or organization”.   We might have any manner of legal structure such as corporation or a partnership (what Stephen called “the wrapper”) but when it came to identifying the business model it was about how the pieces the firm fits together to deliver your strategy, create your value.  Quoting Stephen: “A business model is an articulation of a firm’s core logic for creating value and capturing some of it to generate returns from its investment in and use of resources”.

In his presentation (and in great detail in his paper linked above) he defines the business model using four elements:

–  the value creation element

–  the resource element

–  the investment element

–  the returns element

As Stephen stated, each of these core elements is affected by the others and these elements are generic to every business model.  What makes a particular business model “firm specific” — and thus more difficult to replicate — is the “unique or special application of those elements in the context of an individual firm”.   Value creation — the key — requires “understanding the market in which you operate” and says Stephen “when I talk to lawyers about this they have no idea of what the answers to these questions are”.  

But how do law firms use their resources to create value?  Historically it’s been by hiring lawyers.  Lawyers create value when they advise, document and negotiate in the context of a  business transaction, for instance.  Creation of value for the client constitutes the heart of the lawyer-client relationship. But that is changing because the available resources are changing, a change in the types:  financial, human and social networks.   There is a shift from human resources to others such as financial and technological.  But Stephen says law firms (well, BigLaw at least) do not have a good skill set in managing a broad mix of resources.  This is due to “attitude”.  But they are learning.  For instance, BPO and LPO outsourcing options.  More law firms are folding LPO into their offerings and into their model (recent examples being Allen & Overy’s offshore document review option and the move by Simmons & Simmons to set up a core team in India).   Firms also have technology and pressures for a better work-life balance opening the possibilities for lawyers to ply their trade using alternatives to the traditional law office and/or on an “as needed” basis.

And what about returns?  Stephen maintains that “value capture and creation are the key”.  And it will be a struggle because the “new normal” means there are multiple parties offering a Chinese menu of services.  This “value change” means lawyers are losing their bargaining power as clients find alternative sources to allow them to bid prices down.  As Stephen pointed out (and all the panelists were in agreement) we will see/have seen an “evolution process” whereby the simple model of “generate revenue, extract profit” moves toward a more complex process of cost management, cost control, cost optimization and client retention.

His paper is detailed and authoritative and goes into all these points and more.  See our link above.

Peter Sherer then presented his analysis of “who will be the winners and losers as business model shifts” but noted we don’t have the data for our current economic situation so he went back to the Great Depression for data.  He built a model based on the length, duration, and effect of the Great Depression and why he thinks that is closest to the situation we have today.  For Peter, he sees an evolutionary pattern but one that was “spiked” with periods of what he called “revolutionary change” as regards the standing or position of law firms.  He believes we are in such a period where we will see a definite shake-up in the standings of the top BigLaw firms. 

He ran a lot of data past us but one of the more intriguing points was that from 1920 to 1940, law firms grew on average from about 6 to about 10 partners which showed a low growth rate but not the reduction one fully expected during the Great Depression.   He showed a chart that tracked the top NYC firms in 1920, 1930, and 1940.  You would not recognize any names from 1920.  But if you took the 1940 list and compared it to today’s listings you will recognize almost all of the firms.   He attributes this to a “fast track” in the 1930s into the 1940s that saw these top firms grow much faster than their competition.  Those top firms distinguished themselves from their competitors in order to maintain and grow market share.   They had a well-defined strategic plan which allowed them to fare better than those without one and we saw an emerging trend contributing to a firm’s differentiation.  Peter attributed this to: (1) momentum, (2) a “critical mass” of flexible young partners, (3) a re-making of firm competencies, and a “flight to quality” by clients.  He also noted that successful firms move “from boom advising to bust advising”.  He said that the lesson to take away from this was that law firms must have a “critical mass of young partners”.

There then followed a panel discussion which was probably most notable (based on the media headlines and the Twitter and Facebook chatter) for Ralph Baxter’s comment that “BigLaw is not dead”.  Yes, during the conference it seemed as if Ralph and Tom Yannucci (Chair Emeritus of Kirkland & Ellis) were in everybody’s sights.   But Ralph’s defense was “some firms may go away and the pecking order may change but we are still a good business”.  He noted that relationships with clients might change but the whole market is a challenge that will create opportunities for others.  And yes, there will be the issues of “flight to quality and flight to value” because everyone wants quality: “Clients will continue to seek the best value for their money”.   He also acknowldged that clients do not always need a “Cadillac” for their every legal need, hence his comment on the opportunity for new entrants into the legal market. Clients may want “Chevrolet” quality instead – good enough for the need.

There wa also much comment about leadership in law firms.  As Bruce phrased it “what are the criteria for a good leader because in the past “do no harm” was the watch phrase and that simply is no longer good enough”.   Even Ralph agreed “we need leaders and managers” and while it’s clear the change is required the panelists expressed the opinion that “execution may be in the hardest part of the process”.  

So clearly we are in a disruptive environment (the legal market, not the conference).  But we had Bruce MacEwen there who was the moving force behind the first conference held at Georgetown Law in Spring 2008 titled “The Future of the Global Law Firm” which was the first of its kind in the U.S exploring potential sea changes in law firm ownership. A lawyer and consultant to law firms on strategic and economic issues, he founded and published “Adam Smith, Esq.” (AdamSmithEsq.com) in 2003 which generates a third of a million page views per month.  He provides insights on the business of large, sophisticated law firms:  the economics of law firms, covering such topics as strategy, leadership, globalization, M&A, finance, compensation, and cultural considerations and partnership structures. We had an opportunity to interview Bruce during the conference to hear more about his views on how law firms are moving to a corporate model with management roles filled by nonlawyers and leadership roles filled by lawyers.  And his belief that “we are in the greatest place to be”.  Here is our interview:

Stephen Mayson is professor of strategy and Director of the Legal Services Policy Institute at the College of Law in London.  In this role, he is responsible for monitoring developments in the legal services market and engaging with government, regulators, professional bodies, practitioners and others. The Institute’s mission is to encourage the supply of effective legal services by strong, independent providers through practitioners who are appropriately qualified to offer professional advice and to manage their businesses.    Stephen had more to say about the characteristics of a law firm business model and the evolving corporate style and framework, and he gave us an overview of the Institute.  Here is our interview: