Business Models: Strategy and Governance (Session Report, Georgetown Law Conf)
I am attending Law Firm Evolution: Brave New World or Business As Usual? at the Georgetown Center for the Study of the Legal Profession. Here is my session report for “Business Models: Strategy and Governance.”
Business Models in Legal Practice: Toward Definition and Assessment: Stephen Mayson, Director, Legal Services Policy Institute; Professor of Strategy, The College of Law, London
Evolution and Revolution in the Governance of Law Firms: Laura Empson, Director of the Centre for Professional Service Firms; Professor in the Management of Professional Service Firms, Cass Business School, City of London
Bruce MacEwen, President, Adam Smith, Esq.
Ralph Baxter, Chairman and CEO, Orrick, Herrington & Sutcliffe
Dan DiPietro, Advisory Head and Managing Director, The Law Firm Group, Citi Private Bank
Peter Sherer, Associate Professor, Haskayne School of Business, University of Calgary
Bruce sets stage for panel. What is strategy and governance really about? We are in an era where change is afoot. But we are not existentially challenged. We need to change but world as we know it will not end. AmLaw 20 firm chairman: “We are a very mature profession but a very immature market.” In recent survey of senior law firm leaders: 90% say challenges unprecedented but 57% say their firms’ changes are ‘mild.’ Eversheds report shows changes.
Strategy: what does your firm do, where do you do it, who do you do it for?
Governance: ranges from Athenian democracy to military-like command and control. Post-LSA (Legal Services Act) is big question mark. Don’t think LSA stops at UK border; “money finds its own level”
Issues: who should run law firms. Other industries don’t assume superb practitioners are c-level material. Does law firm train leaders – or potentially disable them? What would firms do with capital if they could raise money? Why don’t firms retain earnings when every corporation does?
The rewards to whoever answers questions right will be great – we are not the newspaper industry.
Stephen Mayson presents: Wants to answer the question “what is a business model?” Before specifying that the model is, what is meant by a business model? Indiscriminate use but no common meaning > formula for confusion. Sloppy language = confusion. In the literature, there is some agreement about a “business model”. It’s not the same as strategy. It’s not the same thing as a structure or organization. Legal structure (corporation v partnership) just a wrapper. Biz models are about how pieces of firm fit together and deliver on the strategy and create value.
Mayson tried applying “off the shelf biz models” to law firms and found them lacking. So, instead, focused on what are the robust characteristics of any business model. So defines business model as
– How a firm intends to create value
– What resources it needs
– What investment it needs to get the resources
– What are the returns on the investments
Thinks that whatever the business model of the old normal won’t work. Value creation requires understanding the market in which you operate. When he talks to lawyers about this, they have no idea of what the answers to these questions are. The question is under-analyzed. What does it take to be credible; it’s not just size. Law firms don’t have good articulation of value proposition (RF: “elevator pitch”).
In UK, unauthorized practice of law (UPL) is very different than in US. Cannot hold oneself out as lawyer and there are only a few reserved activities. In US, ethics rules create barriers for non-lawyers. So in UK, firms have to think about what task they do in adding value.
How should firms resources value creation process? Historically, it’s been by hiring lawyers. There is little capital reliance. Types of resources include financial, physical, human, social (networks), and organizational (what is institutional asset). There is shift from human resources to others such as financial and technological. Thinks BigLaw is not good at managing a broader mix of resources. This is an attitudinal failure. For example, firms have BPO and LPO outsourcing options. They have 3rd party or captive options. Lawyers can work part-time. So there is less need for traditional lawyer FTEs.
What are the finances required to acquire the right resources? What is the magnitude, the time scale of investment? Historically, most firms are financed by internal equity and external debt. Under the UK LSA, firms will be able to take outside capital – of course, that means they have to offer attractive return, which seems unlikely. To discuss investment, you must have an entity that can be valued. How can you value a law firm – they are barely institutions.
Returns are key to attract finances. Value capture and creation are key. Value capture is harder in the new normal with so many parties offering services and serving as agents for various players. Amongst more claimants in value change, lawyers are losing their bargaining power. Clients are bidding prices down; suppliers are bidding costs down. Evolution is going from revenue generation and profit extraction to something far more complex.
A robust biz model will fulfill all of the above four elements. And he model has to survive in an ever-changing world. Are we talking about biz model or several models.
Peter Sherer presents: who will be the winners and losers as business model shifts? Likes to build models but we don’t have data for this current economic situation. So he went back to Great Depression for data. Length, duration, and effect of Great Depression is closest to what we see today.
Discusses in positional standing of law firms – typically. they have been evolutionary. But there are periods of revolutionary change among positional standing of firms. We are in a period where positional standing will be shaken up.
From 1920 to 1940, firms grew from about 6 to about 10 partners. Low growth rate, but not shrinkage in depression. Shows list of top NYC firms in 1920, 1930, and 1940. Most firms from not 1920 no recognizable today; by 1940, the list is very recognizable compared to today’s top firms. In 1930s, the NYC firms grew much faster than their competition. Explanation for this; momentum, critical mass of flexible young partners, re-making of firm competencies, flight to quality by clients. The successful firms move from boom advising to bust advising.
What are the lessons for today? Conditions today are favorable for innovation. A key indicator for Sherer is having a critical mass of young partners.
Bruce to Dan: do you see any commonalities among higher performing firms in how they create value? Dan: history will not predict future here. Innovation and execution will be key. Firms have, over last decade, been successful in managing top line revenue growth. Going forward, they have to focus on efficient delivery. Challenge: as a whole managing partners have very high IQ but very low CEO-Q (RF: meaning they are not good managers).
Dan: how doe firms choose MP: trust, good lawyer, client skills. But ability to make decisions and implement is not on the list in selecting managing partners. Ralph would say it’s on the job training.
Bruce to Ralph: I’ve heard a lot of flight to quality and flight to value – what do you think? Ralph: Everyone wants quality. The level of quality buyers want depends on circumstances though. Clients will continue to seek the best value for their money. Clients increasingly recognize that don’t need “Cadillac” quality for their every legal need. This creates enormous opportunity for new entrants into market. Clients may want “Chevrolet” quality instead – good enough for the need. Dan adds that he hears from potential laterally moving partners that they want to go to higher quality firms; but from others, he hears that laterals no longer fit with current firm’s value proposition. This creates opportunities for AmLaw 2nd 100 to grab partners from 1st hundred. Bruce: partners are re-sorting themselves in the market.
Bruce: what are the criteria for a good leader. In past, ‘do no harm’ was enough but no longer. So what should partners look for? Dan: consensus building is key because even in streamlined partnership, you need to bring key players along. Ability to take calculated risks. Ability to execute well. Ralph: we need leaders and managers. For a long time, he thought leaders more important than managers. But right now, we need good managers. It’s clear change is needed and what the change is – the execution is the hard part. But leadership still very important. Ralph says most AmLaw 100 partners don’t get what’s going on in the legal market. Typical partner needs help understanding market forces, especially those whose practices are still doing well. Managers and leaders need to educate them on why change is necessary. Leadership is combination of vision and persuading partners on the vision.
Ralph agrees with Bruce that law is still a good business. Ralph thinks PE investors would put money into US law firms if they could. But profession is less attractive than it was in past. But costs most come down and value go up. Lawyers have never had to manage costs – now they do. This will separate winners and losers. Firms must examine the metrics they use to assess their progress. Income and revenue per lawyer is no longer the right metric. Orrick’s model will diminish revenue per lawyer over time. Firm has changed talent model – changing mix of resources. Many fee-earners will be at lower comp level. Once firm reaches its desired resource and biz mix, its revenue per lawyer will, by design, go down. So for Orrick to focus on RPL would target the wrong goal.
Dan: market is becoming of two minds about hours per lawyer. With AFA, hours matter much less. But metrics have not caught up with new approach to busineess.
Bruce: The “evil twin” to key performance indicators (KPI) is “key risk indicator”. What are the “KRI”? Dan says Citi looks at partner departures as a leading indicator. Citi is looking at percentage of partner interest departing (which weights importance of partners who are departing). On leverage, does not think debt is a big deal in legal market. Debt levels in legal are lower than most other sectors. Debt is only a risk indicator in presence of other problems.
Ralph: BigLaw is not dead. Some firms may go away and pecking order may change. But it’s still a good business. Relationships with clients, practice specialties are huge advantages. But it is a big challenge and creates opportunities for others.
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