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By Andrew Hedley, Hedley Consulting
We have seen many examples of efforts to improve efficiency and to reduce costs since the start of the great recession. We have witnessed firms conduct restructurings, enter into outsourcing arrangements, implement process reengineering, invest in IT and knowledge management systems, reshape partnerships and consider alternative business structures and external investment.
The core challenge, however, lies in developing strategy which is not centred on running the same race as everyone else, only faster or better. Such “me too” strategies in a law firm context are difficult to sustain in the longer term. This is because, within a peer group, incremental operational efficiencies can be relatively easily replicated and so any cost or profit advantage that has been achieved is fast eroded. The risk is that the reality of pursuing such strategies over an extended business cycle is simply a reduction in fees-charged per unit of activity in what fast becomes a race to the bottom. That is not to say that innovation in operational efficiency is not important but rather that it is unlikely to be sufficient.
These operational efficiency centred approaches rarely change the fundamentals of the client proposition nor create any high-value differentiators. They simply mean that the firm can make a little more short-term profit until downwards pressure on price requires another cycle of streamlining and reengineering.
The real test lies in developing, and of course then delivering, a strategy map which focuses on a different race; one which proposes deep and fundamental shifts in the taken-for-granted assumptions about how a law firm acquires, processes, prices and delivers its services as well as how it engages with its clients in the longer term as well as structuring itself to allow for alternative types of investment and new ways of profit distribution.
What this can mean in practice is being prepared to challenge the whole value-creating process. This is best achieved by looking at the notion of value through the eyes of the client – a perhaps obvious but nonetheless radical approach for many firms. If what we are doing does not add client-centred value, either directly or through a supporting process, then we must ask what is its purpose? Additional cost without incremental improvements in added value simply erodes margin. Cost should not simply be thought of in strict financial investment terms but also by considering the opportunity costs of deploying resources, time and thinking into areas which do not add to the sustainable success of the firm.
Since strategy guru Michael Porter first proposed the idea of the Value Chain in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance, businesses have sought to better understand the ways in which their processes, systems, competencies and people can combine in ways which deliver hard-to-replicate value in order to build competitive advantage over the longer term.
Firms have adopted a range of positioning strategies in order to appeal directly to specific client groups. These have generally be achieved by applying the strategic principles of Segmentation (dividing the market into homogenous groups of clients with similar requirements), Targeting (deciding which of these we can best service profitably either immediately or by building our business to match these needs) and Positioning (putting in place internal and external elements which make the firm attractive to its target segments).
At the same time, the over-arching generic approach adopted by firms may be summarised as one of client intimacy. In simple terms, the firm’s strategy aims to create client relationships in which superior value is delivered through a better understanding of client needs, coupled with a service model which allows these to be satisfied in a manner which is profitable for the firm and hard for competitors to copy.
In a deregulated legal services market, the opportunity for the implementation of such radical thinking will often lie with the new firm or the new entrant. In simple terms, the reshaping of an existing large firm is a wholly more challenging proposition than the “clean sheet of paper” building of a new client proposition. This is not, in my view, fundamentally because of the inertia created by existing systems, infrastructure, fixed-costs and process re-engineering. It is because of deeply entrenched cultures, attitudes and behaviours held by large numbers of people in the business.
A striking characteristic of the new entrant organisations that I have met and worked with is that they come at old problems with fresh eyes. Refreshingly so! They are unencumbered by the sort of thinking which says “people like us don’t do things like that” and this is why they pose such a profound challenge. They will compete in ways which are industry disrupting.
Some of these approaches will fail, of course, and be seized upon by those wishing to find examples of why such innovation will never succeed. But many will bear fruit and, in so doing, will change the very nature of client expectations and raise the bar in ways which traditional firms will find difficult to match. More strikingly they will change the very nature of competition – not simply raising the bar but creating a new one!
This is the true strategic challenge which the longer term thinking of law firm leaders must contemplate. In an industry which has been historically characterised by tradition, lack of competition and risk aversion how do we shape our businesses to run this different race; whatever that race may be!
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