BUSINESS MODELS, COMPETITION, AND STRATEGY

In my second posting on this blog, “Is It A Business?!” I noted near the end:

I long have believed that the businesses that deliver the highest value to their customers and create the greatest value for their stakeholders are those businesses whose business model and execution successfully integrate and manage three key elements: strategy; capital; and, operations.  As a business, the practice of law should be no different.

I opted to focus this blog initially on the operations tripodal leg and, in particular, on financial operations measurements in the legal industry.  With a little luck and far too many words, I hope that through LawBall and its predecessor postings about metrics I’ve demonstrated not only that these measurements can and should be used as a “snapshot” of what happened in a law firm and where it stands at any given point in time, but also that the measurements can and should be used as a “panoramic view” over time to see why things happened and where the firm is heading.  These metrics also show a firm how it measures up to its competition and how effectively it deploys its capital as it competes.

In a recent posting entitled "Changing Models:  Parallels Between Music and Legal Information," Bill Gratsch discusses what the upheaval being experienced by the music industry might portend for the “legal vertical.”  Bill’s excellent posting provides an opportunity for me to transition away from my initial metric-driven focus and to move toward the strategy tripodal leg.  Bill concludes his posting by observing:

As the music industry has discovered, in the face of changing technologies and consumer expectations, old line business models become vulnerable.  The old business models for the legal information industry may be transformed – for better or worse – sooner than we think.

Perhaps the legal industry must take the initiative and, as Gary Hamel said in Leading the Revolution, “reconceive existing business models in ways that create new value for customers, rude surprises for competitors, and new wealth for investors.”  Hamel calls this “re-conceiving” of business models “business concept innovation” and says that at its core “is a capacity to create new wealth-generating strategies that are as revolutionary as the time we live in.”  Hamel further postulates that:

Business concept innovation starts from a premise that the only way to escape the squeeze of hyper-competition, even temporarily, is to build a business model so unlike what has become before that traditional competitors are left scrambling . . .

Strategy and competition are inseparable.  In an earlier work, Competing for the Future, Hamel and C.K. Prahalad noted:

Any strategy that is not grounded in a deep understanding of the dynamics of competitive rivalry will fail. . . Strategy is both a process of understanding and shaping competitive “forces” and a process of open-ended discovery and purposeful incrementalism.

Strategy is big; and it’s not easy.  The idea that setting strategy is easy emanates from the false assumption that strategic planning and strategy setting are one and the same.  Hamel and Prahalad note that most strategic planning is strategic in name only, is ritualistic and formulaic, and seldom is deeply creative.  Hamel further asserts that strategy appears easy when the planning process “narrowly limits the scope of discovery, the breadth of involvement, and the amount of intellectual effort expended.”  Hamel and Prahalad believe that “Competition for the future is competition to create and dominate emerging opportunities – to stake out new competitive space.”  To develop a strategy for a company to shape it’s future, they say, is hard work and that,

Creating a compelling view of tomorrow’s opportunities and moving preemptively to secure the future are tasks neither for dilettantes nor the merely intellectually curious.

Bruce Greenwald and Judd Kahn echo Hamel and Prahalad’s thoughts about the difficulty in setting strategy.  In their book Competition DeMystified, Greenwald and Kahn say:

Unlike tactical choices, everyone knows strategic decisions mean long-term commitments for the organization.  They require large allocations of resources.  Top management makes the strategic decisions.  And setting strategy entails arduous research and bone-wearying meetings.  Changing strategies is like changing the direction of an aircraft carrier – it doesn’t happen quickly . . .

Formulating effective strategy is central to business success.  It is also extremely challenging.

With respect to time and resource demands on senior management, Hamel and Prahalad say:

As a benchmark, our experience suggests that to develop a prescient and distinctive point of view about the future, a senior management team must be willing to spend about 20 to 50% of its time, over a period of several months.  It must then be willing to continually revisit that point of view, elaborating and adjusting it as the future unfolds.

Is the legal industry up to the task of proactively setting strategy in ways that might help it avoid the upheaval caused by a forced transformation brought about by what Bill Gratsch characterized as “the lack of vision and innovative thinking by the music industry companies in proactively adjusting their business models to meet changing consumer expectations”?  I have my doubts, primarily because I question whether or not the fervor and time commitment required to “create a compelling view of tomorrow’s opportunities and moving preemptively to secure the future” are present.  The legal industry is one whose business model has been described by Mark Chandler, the General Counsel for Cisco, as one where sales “too often means a one to one relationship with a lawyer who bills by the hour” and where “the most fundamental misalignment of interests is between clients who are driven to manage expenses, and law firms which are compensated by the hour.”  This singular focus on the preeminence of the billable hour within the legal industry is represented, I’m afraid, by such practices that likely are closer to the norm than the exception as the chairman of Dewey Ballantine, who is described as being an “active, and successful, practicing lawyer,” billing 3,300 hours last year while managing the firm in his “spare” time and admitting that “Management is not my passion”; and at Cravath, Swaine & Moore where the firm head has been quoted as saying that a manager’s credibility depends on “your credibility as a practitioner,” and where the lawyers believe that the law is a profession – not merely a business.  How do you think most lawyers would answer these questions from Hamel and Prahalad about their firms?

Does senior management have a clear and broadly shared understanding of how the industry may be different ten years in the future?  Are its “headlights” shining farther out than those of competitors?  Is its point of view about the future clearly reflected in the firm’s short-term priorities?  Is its point of view about the future competitively unique?  Do senior executives possess a keen sense of urgency about the need to reinvent the current business model?  Is my firm more intent on challenging the status quo than protecting it?

By its own choosing, the legal industry just might not have the time for setting strategy; and, if that’s the case, it just might have to “face the music” at a time not of its own choosing.