The Strategy-led Law Firm: Business Models that Work. Nicholas Bruch and John Cussons

Transcription

1 The Strategy-led Law Firm: Business Models that Work Nicholas Bruch and John Cussons Published by In association with

2 The Strategy-led Law Firm: Business Models that Work is published by Ark Group UK/EUROPE OFFICE Ark Conferences Ltd Paulton House 8 Shepherdess Walk London N1 7LB United Kingdom Tel +44 (0) Fax +44 (0) publishing@ark-group.com NORTH AMERICA OFFICE Ark Group Inc 4408 N. Rockwood Drive Suite 150 Peoria IL United States Tel Fax publishingna@ark-group.com ASIA/PACIFIC OFFICE Ark Group Australia Pty Ltd Main Level 83 Walker Street North Sydney NSW 2060 Australia Tel Fax aga@arkgroupasia.com Online bookshop Editor Evie Serventi eserventi@ark-group.com Head of content Anna Shaw ashaw@ark-group.com UK/Europe marketing enquiries Robyn Macé rmace@ark-group.com US marketing enquiries Daniel Smallwood dsmallwood@ark-group.com Asia/Pacific marketing enquiries Steve Oesterreich aga@arkgroupasia.com ISBN: (hard copy) (PDF) Copyright The copyright of all material appearing within this publication is reserved by the author and Ark Conferences It may not be reproduced, duplicated or copied by any means without the prior written consent of the publisher. ARK2137

3 The Strategy-led Law Firm: Business Models that Work Nicholas Bruch and John Cussons Published by In association with

4 Contents Executive summary...vii About the authors...xi Acknowledgements...XIII Part One: The global legal service market in 2012 Chapter 1: Globalisation of the legal market... 3 Globalisation gains pace... 3 The second phase of globalisation... 4 The impact of globalisation... 5 Increased operational complexity... 5 Chapter 2: Scale building Why size matters... 9 Demand side forces for scale building The effects of scale building Increased barriers to entry The effects of scale building Increased operational complexity The effects of scale building New strategic options The effects of scale building Increasing importance of growth Mergers as a means of scale building Chapter 3: Segmentation of the legal market Different forms of segmentation Increasing demand for specialist services Chapter 4: Differences in global legal markets United States Europe Asia Pacific Australia The Middle East Latin America Africa III

5 Contents Part Two: Business models that work Analysis of successful strategies Chapter 5: The increasing importance of strategy The increasing scope of strategic planning Chapter 6: The Global Elite Transaction-oriented strategy The Global Elite strategy Transaction-focused The Global Elite strategy The supportive structures The Global Elite strategy Profitability management The second tier of the transactions market Wall Street firms Chapter 7: International business law firms The IBL strategy The IBL strategy Supportive structures The IBL strategy Success on all fronts Chapter 8: Regional firms Regional firms in the US market Strategies for regional firms in large markets Strategies for regional firms in smaller markets Chapter 9: Specialist firms Similarities among specialist firms Practice area specialists Case study 1: Finnegan, Henderson, Farabow, Garrett & Dunner LLP Industry or client-focused specialists Case Study 2: Watson, Farley & Williams LLP Strategic considerations and risks Part Three: Key factors to consider when developing a successful strategy Chapter 10: The common thread Targeting a specific market position Structuring the firm for success Defining the competition Strategic commitment Process to achieve buy-in Chapter 11: Implementation Business planning Returning to the strategic planning process Mergers as a case study for implementation IV

6 The Strategy-led Law Firm: Business Models that Work Part Four: Future challenges Threats to the existing market structure Chapter 12: Possible future scenarios to consider Encroachment from below The case of DLA Piper Encroachment from above Alternative business models Three different trends in alternative business models The potential impact of equity investment Changes in a firm s client base Index V

7 Executive summary It is difficult to overstate the breadth of change that has swept through the global legal services market over the past two decades. Perhaps the most fundamental change is the fact there is a global legal services market at all. Only two decades ago, the legal industry was primarily local with few firms having offices or lawyers outside of their home market. In 1985, 86 per cent of top 100 US firms were considered regional with over 50 per cent of total lawyers in their home state or surrounding states. Even the largest firms had little presence outside of their home markets, with 21 of the top 25 US firms (84 per cent) considered regional. This implies that the legal market was not simply domestic, but was, for all intents and purposes, local. These market conditions, which were largely similar in the UK and continental Europe, created a relatively weak competitive environment throughout the 1980s and early 1990s, during which firms largely competed only with local rivals for talent and clients. In contrast, today s market is highly globalised with global clients, global talent pools and, increasingly, global competition. At the beginning of 2012 the average top US firm, a group defined as the largest ten firms by revenue, had 17 foreign offices and 640 foreign lawyers, representing a third of the firm s total lawyer base. This stands in stark contrast to 1985, when the median top US firm had only one international office, staffed with seven lawyers, representing only one per cent of the firm s total manpower. Europe has seen similar changes, with top firms in the UK Europe s largest legal market boasting over 60 per cent of total revenue from non-domestic sources. This figure is up nearly 200 per cent from only a decade ago. These changes, described in depth in Chapter 1, have fundamentally changed the legal services industry and the business of law firm management. Domestic firms must now contend with a larger group of competitors all vying for market share amongst their client base and talent pools. International firms face similar challenges but also must reorganise themselves structurally and financially due to the complexities inherent in managing a global business. Globalisation is just one of three forces which have been reshaping the legal services market over the past two decades. The second, scale building, has transformed the industry from small, collegial partnerships to multi-thousand lawyer firms in only a few generations. These changes, discussed in Chapter 2, have had a profound impact on the way firms organise themselves and on how they compete with their rivals. The most obvious change has been organisational. As firms have grown ever larger, they have been forced to embrace new organisational models that give greater power and autonomy to full-time managers fundamentally moving away from the traditional partnership model under which many firms were established. VII

8 Executive summary Segmentation, the third force driving the global legal services market, as discussed in Chapter 3, has been equally transformative. Historically, many European and US firms were a collection of like-minded, but largely independent partners, creating firms that lacked a coherent brand and a consistent service offering. Firms of this type created a market with relatively weak brands and little real differentiation between leading firms. These trends were reinforced by the small, localised nature of the legal industry through the 1980s and early 1990s. The difference between the average top ten US firm by revenue and the average US firm ranked 40 to 50 in 1985 was only 190 lawyers. Internationalisation and scale building over the past two decades has fundamentally changed this, ballooning the gap 800 per cent to 1,538 lawyers. Such changes have created real differences between firms and helped segment the market into distinct pools of firms defined by their sizes and specific capabilities. To respond to these changes firms have used an assortment of new and highly focused strategies, which will be covered in Chapters 4 to 9. While these strategies encapsulate a wide range of new business models ranging from greater use of leverage employed by many full service firms to the high-cost low-leverage model used by many niche specialists they have two things in common. The most successful strategies today are focused on a distinct group of services, targeted at a unique client base. In the corporate world these strategies are called pure play and are used to identify companies with a singular focus who dedicate their investment resources toward a single line of business or particular group of clients. In the legal world pure play strategies have become increasingly common over the past two decades. As clients have segmented their demand for legal services, firms have responded by becoming more focused. This focus has forced firms to move away from the generalist strategy that once was dominant and instead adopt highly-focused pure play-like strategies. Developing and implementing pure play strategies a complex undertaking that firm firms have mastered. Chapters 10 and 11 discuss how firms can identify their competitive advantage, choose a target market, and structure their firm to succeed in that market. For law firms, these changes in strategy have been profound. Many firms have had to make difficult decisions on which practice areas to focus and which to relegate to secondary status. Some firms have even had to cut non-core practice areas. In corporations, these choices are often incredibly difficult. In partnership situations where ownership is shared and decision making is still somewhat collective, these decisions can be traumatic and often disruptive. The voting power in many partnerships is such that partners can block any move to rationalise the service range, no matter how logical the proposal. The combined effect of these three forces globalisation, scale building, and segmentation have raised the level of competition across the legal services market and forced firms to compete across a wider geographic range. Globalisation has torn down national barriers and forced previously domestic firms to compete against each other, and with the ever-growing international firms. Scale building over the past two decades has created a new group of highly competitive mega-firms with a wide range of capabilities, professional management teams, and sophisticated business models. Segmentation has forced firms to specialise, thereby decreasing their flexibility and increasing their reliance on VIII

9 The Strategy-led Law Firm: Business Models that Work a smaller group of clients and practices. Combining these three forces reveals a highly competitive market, defined by large, globally spread competitors with relatively sophisticated business models and strategies. It is important to note that these changes are not simply relegated to a particular geography or segment of the market. Throughout the early 2000s, there was a widely held belief among smaller firms, particularly in secondary markets, that globalisation only impacted larger firms whose focus on large corporate clients and cross-border work exposed them to risk in this area. These hopes have proved partially true: large and medium-sized firms were more exposed, and slow movers have indeed become less profitable and fallen behind their peer group. But small firms have been affected as well, facing lower profitability due to client defections and increasing pressure from larger international firms. To respond to these challenges, firm leaders will need to keep pace with the increasing level of management sophistication among their peers and scenario plan around probable future events. Chapter 12 discusses how scenario planning should be done and explores several possible scenarios that firm leaders should be considering. Above all, firm leaders must be flexible to the changing nature of the legal services industry. Business models may need to be reevaluated, remuneration systems and performance management processes may need to be reformed, and organisational structures might require updating. To manage these kinds of changes in a way that remains coherent with their firms capabilities and strategic goals, firm leaders will need to understand how each of the three forces affect their markets and their service lines. This report is dedicated to evaluating each of the three forces in order to understand their origins and their impact on different segments of the legal services market. Each chapter will also analyse the organisational and financial impacts of these trends and evaluate the strategies that firms have employed to remain competitive in different segments of the market. IX

10 About the authors Lead author Nicholas Bruch Nicholas has over five years experience advising clients on strategy, international expansion and operational change. He has worked on projects in the US, Europe, Asia, Latin America and the Middle East in a wide range of sectors including but not limited to law, accounting, mining, banking, real estate and international trade. He focuses on long-term strategy, international expansion, market entries and facilitating internal change strategies. Nicholas, who recently received his Master in International Business (MIB) from The Fletcher School, Tufts University, has worked in the legal and professional service sector with small, regional, national and international firms. Much of his consulting work has focused on ensuring strategy is translated into achievable plans and on supporting management during implementation. Areas of work include: Domestic and international strategy This includes development of both domestic and international strategic plans and has involved the analysis of present and potential future business models, country attractiveness and competitive positioning. Client and practice management A number of engagements have involved developing client engagement strategies which allow the firm or specific practice groups to identify their key clients, develop models for managing client relationships and improve cross selling. Mergers This work includes the assessment of likely candidates in target markets, support during the approach to short listed candidates and during negotiations, as well as post-merger integration support. Nicholas can be contacted at: nbruch@huronconsultinggroup.com. Co-author John Cussons John has more than 12 years experience as a management consultant and project manager in sectors including professional services, mining, criminal justice, utilities and government. His clients span Europe, Australia, South America and South East Asia. John s experience in the legal and professional service sector includes working with small regional and national firms to large international firms. Key to his consulting work is to ensure strategy is translated into achievable plans and to support management during implementation. His main areas of focus are: Domestic and international strategy This includes development of both domestic and international strategic plans and has involved the analysis of present and potential future business models, country attractiveness and competitive positioning. Much of the work has also included supporting senior management teams to engage with their wider partnerships. XI

11 About the authors Client and practice management A number of engagements have involved developing client engagement strategies which allow the firm or specific practice groups to identify their key clients, develop models for managing client relationships and improve cross selling. An increasing area of work is also around the pricing of work and the structuring of teams to achieve profitability. Mergers This work includes the assessment of likely candidates in target markets, support during the approach to short listed candidates and during negotiations as well as post merger integration support. Partner and staff remuneration and performance management systems Typical projects involve significant engagement with partners and staff through interviews and focus groups. Options will be developed that align with both the strategy and culture of the firm. Draft recommendations are normally tested with partners and/or staff before final recommendations are made to the board. John Cussons is the author of Financial Planning and Management for Law Firms, Ark Group 2011 and has enjoyed contributing to various articles including Achieving Profitability, The European Lawyer, October 2010; The key to successful law firm management, Law Journal Newsletters, October 2010 and Profit Bullseye How to effectively measure and manage fee-earner performance, Managing Partner magazine, June John can be contacted at: jcussons@huronconsultinggroup.com. XII

12 Acknowledgements The authors would like to thank those who gave their time and expertise in the development of this report. In particular, many thanks go to Renuka Baliga, Phillip Brown and Alan Hodgart for their involvement and input throughout the development of the report. Note on references Various sources for law firm statistics have been cited throughout this report and for the sake of clarity, are referred to by report, study or survey title. Web links are also provided. XIII