published May 5, 2015

Self-delusion among Law Firms

Most law firms are pretty good organizations, but very few of them are truly great organizations. Many firms are held back from achieving real greatness by a set of myths about their current position. The resultant misconceptions and self-delusions drive fuzzy or non-existent strategies.

Often law firms face self-delusion without even realizing it, which stops them from achieving greatness.

Strategic thinking begins with a hardheaded and clear assessment of where the firm is today, cutting through the myths. At most firms, the partners lack a clear, collective understanding of their present market position. Consider some of the myths we mean, common to many firms:

There is a reason why some lawyers can command substantially higher billing rates for the "same type" of legal work. The reason is it's really not the same. For many lawyers, unfortunately, the idea that they are not, as a firm, "just as good as" somebody else implies lower self-worth for the individual lawyer. Many firms customarily lament the work they "lose" (as if they somehow had it to begin with) to "Wall Street" (or, "Big Name Firm"), rather than focusing on the areas where they can best compete.
Unfortunately, there is a difference between an individual lawyer providing good service and the firm providing it as an institution. There is also a difference between providing good service as a firm, and providing a level of service that distinguishes your firm in the marketplace. That sort of service is extraordinarily difficult to provide and relatively few firms do so.
  • "We can handle any type of public securities or M&A matter. There is no difference between a $50 million deal and a $2 billion deal." Or, insert "litigation" for "deal." This is the Failure to Recognize a Market Differentiation. Occasionally, some firms do a public offering. And, yes, from time to time, most commercial law firms handle a merger or acquisition. But, the average deal size at most firms is relatively small and, in many of these cases, the law firm is handling the sale of their client to a somewhat larger acquirer, who may well be driving the deal.

Most law firms cannot handle the billion-dollar deal on a routine basis, and certainly not two such deals concurrently, and should not worry about chasing them. A small number of firms will handle most of the larger transactional matters because they are recognized as having the strength, depth, experience, and infrastructure to do them well.
  • "Any practice is fine, as long as it is profitable." This is the Failure to Understand the Concept of Core. Too many firms have grown by grafting on whatever good lawyers they could find with portable practices, and without considering how the practices fit together. The result is a lot of unrelated work, typically with a variety of value positions, with limited or no interdependence or coherence. When the number of lawyers in the firm divided by the number of practices listed on the firm's website falls below two, you really know there is an issue!

Why do lawyers in most commercial law firms today have a very poor understanding of their strategic position?

Several reasons come to mind:

Confusing personal opinion with reality. This problem bedevils many intelligent people. Lawyers believe they totally understand the market position their firm occupies because, after all, they regularly and successfully operate in that market every day. Opinions are formed. "We provide better service than firm X," or "firm Y is better known for litigation," and so on. In the lawyers' everyday lives, there is no one to contradict them or dissuade them from their beliefs.

The blissful confusion gets reinforced because there is still relatively little publicly available data that offers clear insights into the market positions of most commercial law firms. The market remains highly fragmented. (There are increasing amounts of information available to differentiate among the firms at the top of the market, and some comparative financial performance data is available for at least the 200 US firms with the greatest revenues through the American Lawyer.)

Limited market understanding. Few law firms spend significant effort to objectively determine who their true competitors are. Fewer still then develop and use the data necessary to analyze their competitors' market positions and assimilate that data into their strategic thinking. Why don't they? Well, it's not easy to do, and the perceived return is not too high.

Individual lawyers have some sense of whom they are seeing in beauty contests and other competition, but usually they don't understand how that work fits into the competitor's overall portfolio. More often, they assess their competitors too experientially, based on who is on the other side of particular cases or deals rather than who is the most likely alternative to them for their client.

Limited understanding of clients because they don't ask. Many lawyers have only a murky sense of what their clients want and need and, in many cases, do not even have a clear understanding of why the firm was hired in the first place. Yes, they know the basics, such as perceived competence, acceptable price, good reputation, and the like. But in many cases, they fail to understand what is really driving the client decision, or how at risk they are with the client.

The problem is especially acute with larger clients who tend to utilize a range of different law firms for different services. Such clients regularly differentiate among firms for different types of legal work. Focusing on price for some segments, service for others, and expertise for others still, with many other factors playing a role. For example, one firm may be viewed as a great provider of routine real estate leasing services, but cannot make the jump to major real estate transactions. Yet, the firm will think of itself as, at least, a "full service" provider for significant real estate companies, oblivious, really, to the client perception of them as the easy-to-deal-with, competent commodity level providers. Until you get beneath the surface of what is really driving the clients, it is difficult to understand your position.

Confusing self-worth with market value. If, as we've suggested, clients see their legal needs falling across a wide range of value positions, then some things will be strategically important to the company or have enormous monetary value, while other things will be more routine and less critical. Overall in the marketplace, as well as in any given specific local market, there is far more routine, non-strategic, and less "valuable" legal work than there is high-value, critical strategic work. Meanwhile, any new type of service gradually erodes in value as it becomes more understood and more firms start to provide the services.

On average, then, most legal work for most law firms falls in the lower to middle ranges of the overall value spectrum. Usually, however, partners in the firm believe their work is typically in the upper middle to high end of the value spectrum. The source of this self-delusion is frequently the partners' own collective self-worth. They cannot (or will not) individually or collectively recognize that the services they provide do not match their own perception of their own market position. All the data is there, often manifest as significant resistance from clients to raising relatively low rates, but the reality is not seen for what it is even then.

Unwillingness to recognize that not all businesses are core. Public companies divest themselves of business lines on a regular basis. The reason given, often as not, is to "focus on our core business." Law firms rarely (not never) divest themselves of any practice line. On most of the rare occasions when they do, it is not typically initiated by the firm, but rather by the individual lawyers making a collective decision to leave the firm.

The importance of building a successful business around a clear, carefully constructed core is well established. What is a core business? It is the engine that drives the firm's growth, profitability, and reputation. It is what the firm does best. It should be the central focus that attracts target clients to the firm. Around that core it is both possible and desirable to build a set of related or adjacent businesses that reinforce and augment the core business. But not all practices achieve that, and fewer still are legitimate candidates for "core services."

What role do these "non-core, non-adjacent" practices have to play? At the very least, the role (if there is one) should be radically different from the role of the core services, and cannot be allowed to obstruct or hamper the growth and development of the core business, not even by competing with it for internal resources. To properly prioritize resources, the firm has to face the fact that not all practices have the same level of strategic importance or value, but that is an extraordinarily difficult moment of truth at most law firms, because such acknowledgements, and the reallocations of resources that follow, cause significant personal insecurity for some lawyers.

Failure to understand competitive differentiators. Most US firms really do not understand their own competitive differentiators. If you ask the partners why clients hire them, the most consistent answer is, "We have really terrific lawyers and we provide really terrific service." But, if this is true everywhere (and I have only once in my life been asked, "Our real problem is we are mediocre, now what do we do?"), then that cannot by definition be a differentiator.

In reality, a few firms do manage to create a market differentiation based on service or skills. Most don't, because they really aren't all that differentiated. But, and it's an important "but," they often do not even begin to understand the challenge because they assume they already know how they are seen in the marketplace.

With so much working against them in terms of marketplace perception, it is not surprising that relatively few firms develop practicable strategies that can drastically improve their own fortunes. Instead, they focus on launching marketing efforts to get the clients they wish they had, without making sure they offer those prospective clients what they want and need. Or, they focus on pushing up hours, or fixing systems or processes. The improvements might be necessary, but they are not strategic.

Worse yet, many firms develop "plans" that seem strategic, but are not built on a well-founded and shared understanding of where the firm is today. So, the plans die on the vine, often because partners simply don't understand the foundations of good strategy; often because they are unwilling to invest the time, energy, and money necessary to get it right; and often because they don't recognize or perceive the value.

What can you do if you see your firm in this position? First, step back and take a hard look at where you are today. Cut through the myths by confronting your partners with facts. Ask the hard questions, even if it requires stepping on some toes. Get help if you need it, as sometimes an outside perspective can be crucial.

In the end, almost any firm can benefit from clear-headed strategic thinking applied consistently and repeatedly over time. Unfortunately, too many lawyers are unwilling or unable to look beyond their myths to develop the kind of tough but valuable strategies that will do them the most good.

Those who can and do are tomorrow's profession-leaders.

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