The Cultural Calculus of Competitive Advantage

Strategic planning is a firm's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy, including its capital and human assets. It is the formal consideration of a firm's future course. All strategic planning deals with at least one of three key questions:

• What do we do?
• For whom do we do it?
• How can we do more of it?

For most firms, the answer to this third question results in the decision to grow the firm geographically, through the development of niche practice areas, through industry focus, through practice specialization or through some combination of the above. Strategic options typically fall within two choices: Buy it or build it. Grow inorganically or grow organically. The emphasis in many firms is weighted toward buying growth (inorganic growth) through laterals, acquisitions and mergers, primarily because this growth path is quicker, more manageable and returns on the investment easier to substantiate.

Inorganic growth strategies accept the premise that clients benefit from a law firm's faster-than-market growth and bigger-than-average size, and in many respects they do. But in numerous ways, clients do not benefit from an expanding and increasingly complex law firm. In fact, one could argue that a lack of attention to organic growth initiatives in firms is at the heart of the disconnect many in-house counsel feel for their outside law firms.

The reality is that in-house counsel are not crying out for more lawyers or bigger law firms with more offices and more practice areas. They are asking law firms to become better aligned with their business interests, to understand their businesses more deeply, to become familiar with their technology and their processes, to continuously improve their efficiency in delivering legal services and to elevate their levels of service. They are asking firms to build better, more client-focused firms. And that's good for law firms because strong client-centered firms attract and retain clients like the gravitational pull of large planets.

Asking the Right Questions

The problem may be that law firms are not asking the right questions in their strategic planning initiatives. It may be that law firms need to ask questions that will lead the strategic planning process toward identifying the firm's unique and sustainable competitive advantages, advantages that will differentiate the firm's offering and results in organic growth. Growth for growth's sake is underwhelming as a value proposition. Size is a double-edged sword. On the other hand, a differentiated value proposition is inherently client-focused, providing clients with more value and unique quality ' something that will result in the firm's growth. Law firms need to address both types of growth in their planning. They need to buy the right attorneys, practices and firms as well as build sustainable competitive advantages in their operating methods, processes and procedures. The latter requires that firms pay more attention to managing and directing the cultures of their firms.

Firm Culture

Culture is the DNA of the firm. It is the unique blend of the firm's policies (formal and informal), procedures, processes, compensation practices, governance policies, behaviors, values (both expressed and experienced), history, folklore and beliefs. Culture is soft and notoriously difficult to measure, let alone construct or change. It is the yolk that feeds and protects the core competencies and competitive advantages of the service firm. Culture management is critical to the success of all service organizations.

Most strategists understand that 'culture eats strategy for lunch.' Building a sustainable competitive advantage requires firms to deeply understand the culture of their organizations and identify the core competencies that can create a competitive advantage for the firm. But today's law firm strategic planning models do not include tools that construct and measure the pervasiveness and economic value of a firm's culture. For instance, after a typical strategic planning process it would be unlikely that the firm could define the specific and measurable value that a client derives from that firm's 'collegial' culture, let alone what policies, procedures and values insure that ' 'collegiality' is encouraged and promulgated? More to the point, they would not be able to define the portion of the firm's revenue growth, which could be attributed to this 'collegial' attribute.

If you think about it, corporate culture is not so much for the benefit of those who must exist in it as it is for those who must co-exist with it. In the final analysis, the firm's clients are the net consumers of the firm's culture. Therefore, firms today need a penetrating, 360-degree review of the firm's culture and the core competencies within that culture. The review requires a deeper level of client inquiry and analysis than law firms have ever done.

Defining the Culture

Typically, law firms define their culture internally through a survey of its attorneys. Firms should go the important step further and attempt to understand which aspects of the firm's culture clients actually perceive and, of those attributes that show up on their radar, which ones they find value in. You can say that your firm's core competence is its 'collegiality,' but if clients are frustrated by not getting the best legal talent in the firm because the partners couldn't negotiate a fee sharing arrangement, then your 'collegiality' has failed to offer real value to your client.

Core Competencies

For the purposes of this discussion, it is important to distinguish what constitutes a core competency versus mere capabilities of the firm. According to Gary Hamel and C.K. Pralahad in their landmark book on strategy, 'Competing for the Future,' core competencies must meet all three of the following criteria in order to qualify as such: 1. They must be differentiated in the marketplace (meaning also that they are scarce in the marketplace); 2.) They must be highly valued by the firm's clients (meaning the competency enables higher prices); and 3.) They must be extendable by the firm to other marketplaces (that is, they must be extremely difficult to duplicate). If a core competency does not meet all three criteria, then it is simply a capability of the firm, albeit in some cases a high-performing capability. In order to have a distinctive competitive advantage, the firm must have at least one core competency that it is known for. Where none exists, which is common, the strategic planning process will most likely need to focus on building a core competency that can create competitive advantage for the firm.

The reason that legal skills rarely rise to the level of a core competency that provides competitive advantage can be understood by applying Hamel and Pralahad's criteria. Legal skills can rarely meet the three-part test of differentiated and scarce; valued with inelastic price sensitivity; and extendable and difficult to duplicate. Instead, competencies tend to be found in how a firm operates, its processes and its values and commitments. That means the culture is what must be managed.

Conclusion

Mapping and measuring a firm's culture and core competencies is undoubtedly an exhaustive process with numerous stages of analysis. Done correctly, it will likely challenge many of the firm's longest held beliefs and assumptions. For those willing to undergo this rigorous analysis, the result will be a strategic framework that identifies the sources of its competitive advantages and enables the firm's management to focus its efforts on manufacturing and perpetuating the cultural attributes that will sustain the core competencies of the firm.

In addition, the process can provide the firm with a clear, written and rationalized understanding of the firm's culture, the value it kicks off for clients and the competitive advantages it provides. It enables the firm to align its culture with the most important needs of its clients, to identify areas and attributes that require further development and a context in which to evaluate and prioritize future initiatives and opportunities. It even provides a means to evaluate the cultural fit of another firm, practice group or attorney, thereby improving the success of firm combinations. But, most importantly, it provides a path toward the development of a sustainable competitive advantage and a means to continuously improve it.

Eric Dewey has nearly 25 years of marketing, strategy and business development experience in both the professional services and corporate arenas. He holds an MBA, two industry marketing certifications and has published numerous articles on integrated marketing and strategic planning in a wide range of industries. He is currently building the marketing and strategic planning capabilities of an AmLaw 200 law firm based in the Midwest. He can be reached at 740-689-0741.

Strategic planning is a firm's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy, including its capital and human assets. It is the formal consideration of a firm's future course. All strategic planning deals with at least one of three key questions:

• What do we do?
• For whom do we do it?
• How can we do more of it?

For most firms, the answer to this third question results in the decision to grow the firm geographically, through the development of niche practice areas, through industry focus, through practice specialization or through some combination of the above. Strategic options typically fall within two choices: Buy it or build it. Grow inorganically or grow organically. The emphasis in many firms is weighted toward buying growth (inorganic growth) through laterals, acquisitions and mergers, primarily because this growth path is quicker, more manageable and returns on the investment easier to substantiate.

Inorganic growth strategies accept the premise that clients benefit from a law firm's faster-than-market growth and bigger-than-average size, and in many respects they do. But in numerous ways, clients do not benefit from an expanding and increasingly complex law firm. In fact, one could argue that a lack of attention to organic growth initiatives in firms is at the heart of the disconnect many in-house counsel feel for their outside law firms.

The reality is that in-house counsel are not crying out for more lawyers or bigger law firms with more offices and more practice areas. They are asking law firms to become better aligned with their business interests, to understand their businesses more deeply, to become familiar with their technology and their processes, to continuously improve their efficiency in delivering legal services and to elevate their levels of service. They are asking firms to build better, more client-focused firms. And that's good for law firms because strong client-centered firms attract and retain clients like the gravitational pull of large planets.

Asking the Right Questions

The problem may be that law firms are not asking the right questions in their strategic planning initiatives. It may be that law firms need to ask questions that will lead the strategic planning process toward identifying the firm's unique and sustainable competitive advantages, advantages that will differentiate the firm's offering and results in organic growth. Growth for growth's sake is underwhelming as a value proposition. Size is a double-edged sword. On the other hand, a differentiated value proposition is inherently client-focused, providing clients with more value and unique quality ' something that will result in the firm's growth. Law firms need to address both types of growth in their planning. They need to buy the right attorneys, practices and firms as well as build sustainable competitive advantages in their operating methods, processes and procedures. The latter requires that firms pay more attention to managing and directing the cultures of their firms.

Firm Culture

Culture is the DNA of the firm. It is the unique blend of the firm's policies (formal and informal), procedures, processes, compensation practices, governance policies, behaviors, values (both expressed and experienced), history, folklore and beliefs. Culture is soft and notoriously difficult to measure, let alone construct or change. It is the yolk that feeds and protects the core competencies and competitive advantages of the service firm. Culture management is critical to the success of all service organizations.

Most strategists understand that 'culture eats strategy for lunch.' Building a sustainable competitive advantage requires firms to deeply understand the culture of their organizations and identify the core competencies that can create a competitive advantage for the firm. But today's law firm strategic planning models do not include tools that construct and measure the pervasiveness and economic value of a firm's culture. For instance, after a typical strategic planning process it would be unlikely that the firm could define the specific and measurable value that a client derives from that firm's 'collegial' culture, let alone what policies, procedures and values insure that ' 'collegiality' is encouraged and promulgated? More to the point, they would not be able to define the portion of the firm's revenue growth, which could be attributed to this 'collegial' attribute.

If you think about it, corporate culture is not so much for the benefit of those who must exist in it as it is for those who must co-exist with it. In the final analysis, the firm's clients are the net consumers of the firm's culture. Therefore, firms today need a penetrating, 360-degree review of the firm's culture and the core competencies within that culture. The review requires a deeper level of client inquiry and analysis than law firms have ever done.

Defining the Culture

Typically, law firms define their culture internally through a survey of its attorneys. Firms should go the important step further and attempt to understand which aspects of the firm's culture clients actually perceive and, of those attributes that show up on their radar, which ones they find value in. You can say that your firm's core competence is its 'collegiality,' but if clients are frustrated by not getting the best legal talent in the firm because the partners couldn't negotiate a fee sharing arrangement, then your 'collegiality' has failed to offer real value to your client.

Core Competencies

For the purposes of this discussion, it is important to distinguish what constitutes a core competency versus mere capabilities of the firm. According to Gary Hamel and C.K. Pralahad in their landmark book on strategy, 'Competing for the Future,' core competencies must meet all three of the following criteria in order to qualify as such: 1. They must be differentiated in the marketplace (meaning also that they are scarce in the marketplace); 2.) They must be highly valued by the firm's clients (meaning the competency enables higher prices); and 3.) They must be extendable by the firm to other marketplaces (that is, they must be extremely difficult to duplicate). If a core competency does not meet all three criteria, then it is simply a capability of the firm, albeit in some cases a high-performing capability. In order to have a distinctive competitive advantage, the firm must have at least one core competency that it is known for. Where none exists, which is common, the strategic planning process will most likely need to focus on building a core competency that can create competitive advantage for the firm.

The reason that legal skills rarely rise to the level of a core competency that provides competitive advantage can be understood by applying Hamel and Pralahad's criteria. Legal skills can rarely meet the three-part test of differentiated and scarce; valued with inelastic price sensitivity; and extendable and difficult to duplicate. Instead, competencies tend to be found in how a firm operates, its processes and its values and commitments. That means the culture is what must be managed.

Conclusion

Mapping and measuring a firm's culture and core competencies is undoubtedly an exhaustive process with numerous stages of analysis. Done correctly, it will likely challenge many of the firm's longest held beliefs and assumptions. For those willing to undergo this rigorous analysis, the result will be a strategic framework that identifies the sources of its competitive advantages and enables the firm's management to focus its efforts on manufacturing and perpetuating the cultural attributes that will sustain the core competencies of the firm.

In addition, the process can provide the firm with a clear, written and rationalized understanding of the firm's culture, the value it kicks off for clients and the competitive advantages it provides. It enables the firm to align its culture with the most important needs of its clients, to identify areas and attributes that require further development and a context in which to evaluate and prioritize future initiatives and opportunities. It even provides a means to evaluate the cultural fit of another firm, practice group or attorney, thereby improving the success of firm combinations. But, most importantly, it provides a path toward the development of a sustainable competitive advantage and a means to continuously improve it.

Eric Dewey has nearly 25 years of marketing, strategy and business development experience in both the professional services and corporate arenas. He holds an MBA, two industry marketing certifications and has published numerous articles on integrated marketing and strategic planning in a wide range of industries. He is currently building the marketing and strategic planning capabilities of an AmLaw 200 law firm based in the Midwest. He can be reached at 740-689-0741.