Marketing Change: Differentiation Amid Upheaval

Of course, many law firms are not embracing alternative fee arrangements so much as acquiescing to client demand, because many law firm leaders believe that non-hourly billing will probably lead to lower revenues and certainly will lead to lower profits. In reality, law firms are one of the few businesses that fail to incorporate the concept of a learning curve as a fundamental driver of profitability. Law firms that continually reduce the costs of goods sold (not just overhead) will be able to improve profit margins even in the face of flat or declining revenues. Imagine the widget manufacturer that makes each product by hand while the competition uses technology to streamline the process, generating hundreds of units in less time at a lower per unit cost. The second manufacturer can generate higher profits even at a lower price point, while improving quality through repetition.

Law Is Not an Assembly Line

But how many lawyers fondly recall the long days in law school, dreaming of practicing commodity law and churning out widgets to satisfy consumers? Comparing the practice of law with manufacturing products is a surefire way to rankle law firm partners who view the practice as a unique and artful profession. And it can be. The trouble is, buyers of legal services have opinions too.

Corporate executives are constantly trying to reduce inefficiency and waste in those activities that repeat over time. Naturally, they expect repetitive legal services to cost less over time. When large law firms have refused to distinguish between cutting edge legal work and repeat legal services that can be routinized, clients have turned to alternative legal service providers, legal process outsourcing firms (LPOs) and smaller firms with lower rates. Clients also embrace those law firms who employ legal project management techniques to improve predictability and communication during the course of an engagement, even in high stakes matters with highly variable outcomes.

Not all legal work can be reduced to checklists and Gantt charts, of course, but the troubling reality to many law firm leaders is that the clients dictate when a service has become more commodity than custom. It's the inevitable and inexorable movement of all goods and services from a unique and market-leading position to one in which multiple suppliers can deliver similar results at ever-lower costs. The key, then, is for law firm leaders to take charge in identifying which practices, and which components within each practice, are declining in value, and find corresponding ways to deliver these services at a lower cost. Or stop delivering them altogether. In other words, beat the LPOs at their own game!

It's Not Just Good Business, It's Good for Business

In the Altman Weil survey, law firm leaders report only a small percentage of matters incorporating non-hourly billings to be as or more profitable than hourly matters. But, for some, simultaneously embracing alternative fees and a business process improvement campaign, imposing cost controls across the firm's expenses and incorporating legal project management across the delivery of legal services, has lowered costs while improving both quality and profitability.

This new way of thinking is challenging to implement for a variety of good reasons: Compensation systems are geared to reward the production of hours, not profits; clients have varying appetites for alternative fees; variable partner compliance; and so on. But a wider view of law firm finance can change behaviors.

Most law firms have the ability to identify profitability by practice group, and many can do so at the matter level. These figures, coupled with utilization and realization, have become important criteria for determining success. But most law firms fail to study the costs to pursue and win new business, and therefore there isn't sufficient importance placed on winning new engagements from existing clients, which always come at a much lower cost of sales. If we factor in retention rate, or the number of clients that purchase multiple legal services over time, it becomes crystal clear mathematically how client satisfaction can have a meaningful impact on the top and bottom line. Too few law firm leaders view the world this way. Generating a profit one matter at a time, while dissatisfied clients seek alternative suppliers for the next matter, is not a winning formula. Generating repeat work from satisfied clients lowers the cost of sales, further improving profits.

If Everyone's Doing It, How Will We Stand Out?

The bar has never been lower to achieve differentiation in the law firm marketplace. Take a cursory look around at the typical law firm's marketing message: We're skilled, we're educated, we're diverse, we work in tall, shiny buildings, we've worked on many deals, etc. If a law firm really wants to stand apart from the masses in the present climate, all it takes is the promotion of the firm's newfound business sense and capabilities. Of course, others will catch up eventually. But the “first mover” advantage is a common business concept in which the first to establish a foothold in the market can become the market leader by default.

The typical law firm partner believes that brochures, capabilities statements and pitch books promoting the firm's capabilities are primary means of generating new matters because, after all, we all did a lot of that in recent years and we won a lot of business. In fact, this is really post hoc ergo propter hoc in action: Near unlimited demand for legal services was the real driver of new business, and many of the marketing efforts turned out to be nice to have rather than critical to the firm's success. The proof: Since client demand has dropped off, these old techniques are demonstrably less effective at generating new work than in the past. To be clear, rather than turn their backs on legal marketing, now more than ever law firms need experienced marketing professionals to help differentiate in a time of great change. But the tactics have changed.

In a typical strategy-planning exercise conducted in corporations across the globe, business leaders compare their firm's capabilities with the competition; they identify factors likely to increase or decrease demand; they compare each product and service to the competition to identify which are at risk of commoditization; they look for pricing elasticity where change in price will influence demand; and many more factors. How many law firm strategy exercises include any of this analysis? Imagine the increased flexibility law firm leaders would have if they were able to clearly understand the impact of pricing on the ability to win work, or to understand which practices were in highly competitive arenas versus those enjoying high demand with little competition.

This is where a modern law firm CMO should be spending his or her time, so as to better inform the board room conversation. Of course, there are the many routine tasks that need attention, but if a law firm marketing leader becomes too bogged down in the day-to-day churning out of “brochure-ware” and can't focus on the big picture, the firm will suffer.

What's the Payoff?

Modern law firm leaders must embrace business concepts as diligently as they have learned their legal practice. They should rely on experienced business professionals who have strategic experience and who can advise them in the boardroom, rather than from the staff building across town. They should embrace innovative pricing because the clients demand it, but also embrace innovative business process improvement campaigns because one without the other is flawed and risky. The modern law firm leader will embrace differentiation. Clients will notice. Profits will improve. Happiness will ensue.

Of course, it's much easier to say than to do. Law firms are particularly resistant to change, especially when a peer firm hasn't led the way. However, the underlying lesson of the recent economic downturn is that a law firm is, inarguably, a business. Whether it makes widgets or not is immaterial. Market forces are indifferent. While this may be a startling revelation to some law firm leaders, to others this is good news. Rather than struggle with how to cope in times of turmoil, all one needs to do is study what has worked in other market segments. The business lessons are clear and available for those who are looking. And for those who act first, the rewards are there as well.

Recent news reports suggest that large groups of outraged consumers can influence the pricing policies of large businesses and financial institutions. The Occupy Wall Street movement? No! In-house counsel have, after years of grumbling, finally motivated law firms to act differently, putting client needs above the law firms' own arcane business models and billing policies. However, few law firm leaders view these changes as positive, so many do a poor job of promoting their enhanced capabilities as a competitive advantage.

What Has Really Changed?

According to a recent study conducted by legal management consulting firm Altman Weil, most law firm leaders believe that increased price pressure is a permanent fixture in the buying and selling of legal services. Accordingly, nearly all large law firms employ some version of non-hourly billing. (See Law Firms in Transition 2011 at www.altmanweil.com.)

Of course, many law firms are not embracing alternative fee arrangements so much as acquiescing to client demand, because many law firm leaders believe that non-hourly billing will probably lead to lower revenues and certainly will lead to lower profits. In reality, law firms are one of the few businesses that fail to incorporate the concept of a learning curve as a fundamental driver of profitability. Law firms that continually reduce the costs of goods sold (not just overhead) will be able to improve profit margins even in the face of flat or declining revenues. Imagine the widget manufacturer that makes each product by hand while the competition uses technology to streamline the process, generating hundreds of units in less time at a lower per unit cost. The second manufacturer can generate higher profits even at a lower price point, while improving quality through repetition.

Law Is Not an Assembly Line

But how many lawyers fondly recall the long days in law school, dreaming of practicing commodity law and churning out widgets to satisfy consumers? Comparing the practice of law with manufacturing products is a surefire way to rankle law firm partners who view the practice as a unique and artful profession. And it can be. The trouble is, buyers of legal services have opinions too.

Corporate executives are constantly trying to reduce inefficiency and waste in those activities that repeat over time. Naturally, they expect repetitive legal services to cost less over time. When large law firms have refused to distinguish between cutting edge legal work and repeat legal services that can be routinized, clients have turned to alternative legal service providers, legal process outsourcing firms (LPOs) and smaller firms with lower rates. Clients also embrace those law firms who employ legal project management techniques to improve predictability and communication during the course of an engagement, even in high stakes matters with highly variable outcomes.

Not all legal work can be reduced to checklists and Gantt charts, of course, but the troubling reality to many law firm leaders is that the clients dictate when a service has become more commodity than custom. It's the inevitable and inexorable movement of all goods and services from a unique and market-leading position to one in which multiple suppliers can deliver similar results at ever-lower costs. The key, then, is for law firm leaders to take charge in identifying which practices, and which components within each practice, are declining in value, and find corresponding ways to deliver these services at a lower cost. Or stop delivering them altogether. In other words, beat the LPOs at their own game!

It's Not Just Good Business, It's Good for Business

In the Altman Weil survey, law firm leaders report only a small percentage of matters incorporating non-hourly billings to be as or more profitable than hourly matters. But, for some, simultaneously embracing alternative fees and a business process improvement campaign, imposing cost controls across the firm's expenses and incorporating legal project management across the delivery of legal services, has lowered costs while improving both quality and profitability.

This new way of thinking is challenging to implement for a variety of good reasons: Compensation systems are geared to reward the production of hours, not profits; clients have varying appetites for alternative fees; variable partner compliance; and so on. But a wider view of law firm finance can change behaviors.

Most law firms have the ability to identify profitability by practice group, and many can do so at the matter level. These figures, coupled with utilization and realization, have become important criteria for determining success. But most law firms fail to study the costs to pursue and win new business, and therefore there isn't sufficient importance placed on winning new engagements from existing clients, which always come at a much lower cost of sales. If we factor in retention rate, or the number of clients that purchase multiple legal services over time, it becomes crystal clear mathematically how client satisfaction can have a meaningful impact on the top and bottom line. Too few law firm leaders view the world this way. Generating a profit one matter at a time, while dissatisfied clients seek alternative suppliers for the next matter, is not a winning formula. Generating repeat work from satisfied clients lowers the cost of sales, further improving profits.

If Everyone's Doing It, How Will We Stand Out?

The bar has never been lower to achieve differentiation in the law firm marketplace. Take a cursory look around at the typical law firm's marketing message: We're skilled, we're educated, we're diverse, we work in tall, shiny buildings, we've worked on many deals, etc. If a law firm really wants to stand apart from the masses in the present climate, all it takes is the promotion of the firm's newfound business sense and capabilities. Of course, others will catch up eventually. But the “first mover” advantage is a common business concept in which the first to establish a foothold in the market can become the market leader by default.

The typical law firm partner believes that brochures, capabilities statements and pitch books promoting the firm's capabilities are primary means of generating new matters because, after all, we all did a lot of that in recent years and we won a lot of business. In fact, this is really post hoc ergo propter hoc in action: Near unlimited demand for legal services was the real driver of new business, and many of the marketing efforts turned out to be nice to have rather than critical to the firm's success. The proof: Since client demand has dropped off, these old techniques are demonstrably less effective at generating new work than in the past. To be clear, rather than turn their backs on legal marketing, now more than ever law firms need experienced marketing professionals to help differentiate in a time of great change. But the tactics have changed.

In a typical strategy-planning exercise conducted in corporations across the globe, business leaders compare their firm's capabilities with the competition; they identify factors likely to increase or decrease demand; they compare each product and service to the competition to identify which are at risk of commoditization; they look for pricing elasticity where change in price will influence demand; and many more factors. How many law firm strategy exercises include any of this analysis? Imagine the increased flexibility law firm leaders would have if they were able to clearly understand the impact of pricing on the ability to win work, or to understand which practices were in highly competitive arenas versus those enjoying high demand with little competition.

This is where a modern law firm CMO should be spending his or her time, so as to better inform the board room conversation. Of course, there are the many routine tasks that need attention, but if a law firm marketing leader becomes too bogged down in the day-to-day churning out of “brochure-ware” and can't focus on the big picture, the firm will suffer.

What's the Payoff?

Modern law firm leaders must embrace business concepts as diligently as they have learned their legal practice. They should rely on experienced business professionals who have strategic experience and who can advise them in the boardroom, rather than from the staff building across town. They should embrace innovative pricing because the clients demand it, but also embrace innovative business process improvement campaigns because one without the other is flawed and risky. The modern law firm leader will embrace differentiation. Clients will notice. Profits will improve. Happiness will ensue.

Of course, it's much easier to say than to do. Law firms are particularly resistant to change, especially when a peer firm hasn't led the way. However, the underlying lesson of the recent economic downturn is that a law firm is, inarguably, a business. Whether it makes widgets or not is immaterial. Market forces are indifferent. While this may be a startling revelation to some law firm leaders, to others this is good news. Rather than struggle with how to cope in times of turmoil, all one needs to do is study what has worked in other market segments. The business lessons are clear and available for those who are looking. And for those who act first, the rewards are there as well.