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April 22, 2007

O STRATEGY, WHERE ART THOU?

While thinking about this posting, I read the April 16 posting Which Managing Partner Do You Most Admire?  (And Why)” by Bruce MacEwen at Adam Smith, Esq. that discussed the results of a survey distributed by Edge International that asked law firm leaders 2 questions:

•    Which law firm Managing Partner/Chair/CEO do you admire the most for their leadership?  [Outside your own firm.]
•    Why does that individual stand out in your mind?

I also ran across a memorable quote from Rear Admiral Grace Murray Hopper, who said, “You manage things; you lead people."  That quote – together with MacEwen’s posting - started me thinking about leadership and its link with strategy.

In Business Models, Competition, and Strategy, I noted that competitive strategist authors Bruce Greenwald and Judd Kahn (Competition DeMystified) and Gary Hamel and C.K. Prahalad (Competing for the Future) said senior management makes strategic decisions.  Noted Harvard Business School Professor Michael Porter briefly discussed several of his ideas about competitive advantage, operational effectiveness, strategy, and leadership in interviews with Fast Company published under the title “Michael Porter’s Big Ideas” in the magazine’s February 2001 issue; Porter previously covered these topics in more depth in an article entitled “What is Strategy?” in the November-December 1996 of the Harvard Business Review.  In Fast Company, Porter said:

The chief strategist of an organization has to be the leader – the CEO.  A lot of business thinking has stressed the notion of empowerment, of pushing down and getting a lot of people involved.  That’s very important, but empowerment and involvement don’t apply to the ultimate act of choice.  To be successful, an organization must have a very strong leader who’s willing to make choices and define the trade-offs.  I’ve found that there’s a striking relationship between really good strategies and really strong leaders.

Porter noted the primary goal of any enterprise is superior profitability or performance:  “If your goal is anything but profitability – if it’s to be big, or to grow fast, or to become a technology leader – you’ll hit problems.”  In the 1996 HBR article, Porter said operational effectiveness and strategy both are essential to superior performance; and all the activities in which a business engages in order to create, produce, sell, and deliver its products or services are the basic units of competitive advantage – an overall advantage or disadvantage results from “all a company’s activities, not only a few.”  The difference between operational effectiveness and strategy lies in these ever-important activities:  “operational effectiveness” means "performing similar activities better than rivals perform them"; while “strategy” or “strategic positioning” means “performing different activities from rivals’ or performing similar activities in different ways.”  In Fast Company he also said:

The essence of strategy is that you must set limits on what you’re trying to accomplish.  The company without a strategy is willing to try anything.  If all you’re trying to do is essentially the same thing as your rivals, then it’s unlikely that you’ll be very successful.  It’s incredibly arrogant for a company to believe that it can deliver the same sort of product that its rivals do and actually do it better for very long.  That’s especially true today, when the flow of information and capital is incredibly fast.  It’s extremely dangerous to bet on the incompetence of your competitors – and that’s what you’re doing when you’re competing on operational effectiveness.

In discussing the role of leadership in strategy, Porter said:

The challenge of developing or reestablishing a clear strategy is often primarily an organizational one and depends on leadership.  With so many forces at work against making choices and trade-offs in organizations, a clear intellectual framework to guide strategy is a necessary counterweight.  Moreover, strong leaders willing to make choices are essential . . . In many companies, leadership has degenerated into orchestrating operational improvements and making deals.  But the leader’s role is broader and far more important.  General management is more than the stewardship of individual functions.  Its core is strategy:  defining and communicating the company’s unique position, making trade-offs, and forging fit among activities.

At this point you’re probably thinking, “Interesting stuff, I know – but what relevance does it have to the business of practicing law?”  Maybe nothing – but more likely it has everything to do with how the business of practicing law will compete for the future.  I doubt many, if any, people would disagree either that we have a “knowledge economy” – a term generally accepted to have been used first by Peter Drucker in 1968 – or that the business of practicing law is a “knowledge business.”  As such, law firms are active participants in what has been called an “information value chain.“  Simply put, business events create raw data, which then must be organized into information in order to be useful.  That information must be analyzed, synthesized, and managed in order to become knowledge; and, knowledge then becomes the foundation for decisions.  A graphic illustration of this chain is:

I first came across the term and its graphic illustration in a September 2001 article entitled, “Adding Value to the Profession:  The Proposed Global Business Credential,” which discussed a new credential being considered by the AICPA as an offshoot of the CPA Vision Process, a collaborative effort between the AICPA and state CPA societies.

In a thought-provoking white paper entitled "The XYZ Concept:  Turning Knowledge into Value" that discussed the proposed new credential, it was noted:

[T]he rules for businesses of all sizes are changing dramatically. Advances in technology and communication now provide opportunities to use knowledge in new ways and with unprecedented speed. The pace of commerce has accelerated and the ability to innovate quickly has become an essential criterion for success. Lines between industries and professions have blurred or have disappeared. Value must now be reckoned in terms of intellectual, human and brand equity as well as financial and physical assets.

Raw data comes from various sources, is of various types, and, certainly in the past, has been deposited in separate repositories of knowledge (one such repository, e.g., being legal).  Today, however, there is value to be garnered from the information value chain by those who understand the linkages between once separate areas of knowledge, can capture relevant information from multiple sources, and can integrate that knowledge strategically for better decisions.  Pause for a moment and think about the various areas and ways where the “legal information industry” historically has been and currently is involved in the information value chain.  Think about the inroads that have been made through the leverage of technology to make legal information available through non-lawyer sources.  Think about how companies like Wolters Kluwer (a company mentioned in Bill Gratsch’s posting entitled "Changing Models:  Parallels Between Music and Legal Information" that calls itself “The Professional’s First Choice for information, tools and solutions that help professionals make their most critical decisions”) might increase its presence in the information value chain at the expense of the legal industry.  As I suggested in my last posting, think about how you’d parse or “tranche” what you do into various skills, tasks, and knowledge – where do they fit in the information value chain and which of them in the future might be provided by some nontraditional competitor outside the industry at a greater value to the client?  Picture what the legal industry’s position in the information value chain might be 10 years from now.  Think also about how music may be a form of “information” and the parallels between the “legal vertical” and the music industry that Bill Gratsch mentioned in his posting.  What different activities can law firms perform, or in what different ways can law firms perform their activities, in order to be a more valuable player in and contributor to the economic value that can be created by the strategic integration of knowledge?

The top 10 list of those most admired leaders according to MacEwen’s posting came from Latham & Watkins; Goodwin Procter; DLA Piper; Alston & Bird; Greenberg Traurig; Hogan & Hartson; Jones Day; Orrick, Herrington & Sutcliffe; Stites & Harbison; and, Womble Carlyle Sandridge & Rice.  I enjoyed the posting’s list of the reasons why those singled out for admiration were so identified.  I’ll mention here 5 of the major reasons:  committed to making change happen; has an ambitious agenda; handles the tough issues directly; aligns people behind his vision for the firm; and, maintains core values.  Those sound like some of the things people that are leaders do or some of the motives and traits possessed by people that are leaders.  Some of it even may touch on elements of strategy.  But are these leaders actively developing their firm’s strategy to compete successfully for the future?  If so, it’s not clear from the enumerated reasons – I would not have expected someone to talk openly about their strategy, but I would’ve expected the word “strategy” or the word “strategically” or some similar variation to be used by someone.  And, talk about “vision” is not enough.   Strategy involves more than “vision.”  It requires what Hamel and Prahalad call “industry foresight.”  Strategy requires not only the creativity and imagination inherent in a “vision,” but also “deep insight into the trends in technology, demographics, regulation, and lifestyles that can be harnessed to rewrite industry rules and create new competitive space.”

O strategy, where art thou? I’m afraid it may be lost in an “operational effectiveness” focus or, even worse, to that great fall-back position I’ve heard constantly over more than 30 years of being in and around the legal industry whenever change or forward-looking thinking are mentioned:  “We’ve always done it that way.”

With that, I’ll leave you with another great quote from Admiral Hopper:

I am now going to make you a gift that will stay with you the rest of your life. For the rest of your life, every time you say “We've always done it that way,” my ghost will appear and haunt you for twenty-four hours.

April 13, 2007

TOWARD A BRAVE NEW BUSINESS MODEL

With all due apologies to Aldous Huxley for bastardizing the title of his book A Brave New World for the title of this posting, I’d like to spend some more time on what I consider to be the need for a new business model within the legal industry.  Bill Gratsch concluded his March 28, 2007 posting entitled "Changing Models:  Parallels Between Music and Legal Information," with the following paragraph:

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.

His conclusion not only afforded me a great transition point as I mentioned in my last posting, but also struck a responsive chord with me and reminded me of a point made by the late Peter Drucker.  In “The New Society of Organizations,” an article first published in the Harvard Business Review in September-October 1992, Drucker noted:

In the society of organizations, however, it is safe to assume that anyone with any knowledge will have to acquire new knowledge every four or five years or become obsolete.

This is doubly important because the changes that affect a body of knowledge most profoundly do not, as a rule, come out of its own domain(Underlining emphasis added for this posting.)  After Gutenberg first used movable type, there was practically no change in the craft of printing for 400 years – until the steam engine came in.  The greatest challenge to the railroad came not from changes in railroading but from the automobile, the truck, and the airplane.  The pharmaceutical industry is being profoundly changed today by knowledge coming from genetics and microbiology, disciplines that few biologists had heard of 40 years ago.

Bill’s posting and the remembered Drucker observation brought to the surface for me a deeply buried, but long held, personal belief – the legal industry is just as susceptible as other industries to foundation-shaking and fracturing change.  I’m not talking about the kind of change wrought by the advent of the mag-card, the telex, the fax, FedEx, or computers used for word processing or number crunching, unfortunately all of which I’m old enough to remember.  No, I’m talking about the kind of change where prior success is, in the words of strategists Gary Hamel and C.K. Prahalad, “eroded or destroyed by the tides of technological, demographic, and regulatory change and order-of-magnitude productivity and quality gains made by nontraditional competitors.”  As Hamel and Prahalad have noted further, these prior success foundation-shaking and fracturing changes occurred “when the industry terrain changed shape faster than top management could refashion its basic beliefs and assumptions about which markets to serve, which technologies to master, which customers to serve, and how to get the best out of employees.”  Technology, which is behind the “seismic shift in the way consumers acquire music” as The Wall Street Journal put it in the article cited by Bill Gratsch, also is shaking foundations with its tremors in the film, TV, and publishing industries.  Technology already has improved document production and retention in the legal industry.  It also has made the process of doing legal research faster.  More importantly, technology now enables many to access “the law” who couldn’t before - and they can do so without lawyers.  The moat around the legal industry castle that long has existed and has protected it from outside influence and intervention – limited or no access to legal information without the payment of a substantial toll in the form of legal fees billed by the hour - now has a drawbridge across it.  With its ability to change the paradigm surrounding access to and distribution of all types of information, not just legal information, technology likely will fill up the moat with concrete and be an enabler that facilitates “upsetting the apple cart” with respect to legal industry business models.

For those who believe that the legal industry somehow is unique from other all industries and is impervious to change wrought by outside forces, I respectfully suggest that you (no, not pound sand as one of my friends would have it) read Bill Gratsch’s posting; read the articles on the changes in the music industry; read the 2006 annual report for Wolters Kluwer, a company mentioned in Bill’s posting and one that calls itself “The Professional’s First Choice for information, tools and solutions that help professionals make their most critical decisions,” and focus on what that company is doing with information and how it’s doing it; read the comments made at the Northwestern School of Law’s 34th Annual Securities Regulation Institute by Mark Chandler (Cisco’s General Counsel) about what clients want from lawyers (a link to his comments is in the margin under the heading “Articles of Interest”), especially his comments that, “From the law firm think perspective, ‘sales’ too often means a one to one relationship with a lawyer who bills by the hour. As a client, I can tell you what I want to buy is access to information, strategy, and negotiation, and, in the case of litigation, to courtroom skill as well”; consider the fact that we now have a generation of young people who believe information should be free; re-read Drucker’s observation above and think about from where the changes that will affect the body of knowledge in the legal industry might originate; and, think about how you’d parse or “tranche” what you do into various skills, tasks, and knowledge, some of which in the future might be provided by some nontraditional competitor outside the industry at a greater value to the client.

For those who believe the legal industry is susceptible to foundation-shaking and fracturing change, what should you be doing at your firm?  It is time, I believe, for you to “reconceive existing business models in ways that create new value for customers, rude surprises for competitors, and new wealth for investors”  (to borrow Gary Hamel’s phrase from my last posting) and to move toward a brave new business model.  The winners in tomorrow’s legal industry will start the competition for the future now.  They will develop a business model that incorporates a core strategy for the future that can enable them to “get to the future first without undue risks” in the words of Hamel and Prahalad and will compete today for tomorrow’s opportunities and new competitive space.  Hamel and Prahalad believe those firms will need, among other things, an understanding of how competition in the future will be different; a process for finding and gaining insight into the opportunities of tomorrow; and, an ability to energize the firm for the “long and arduous journey” to the future.  With a view that “competence” is a bundle of skills and technologies rather than a single discrete skill or technology and that a “core competence” represents the sum of learning across individual skill sets and individual organizational units, Hamel and Prahalad believe the firms that win the competition for the future will recognize that they must compete now for core competence leadership and that they must have a portfolio of core competencies as well as a portfolio of businesses.  It will not be easy.  It will be hard work and will take time and resources.  It’ll require challenging what Peter Drucker called, in a September-October 1994 Harvard Business Review article by the same name, “the theory of the business” for your firm.  In essence, these firms must challenge:

  • The assumptions about the firm and its environment, including the market, the customer, and technology – Drucker described it as defining for what the firm is paid.
  • The assumptions about the firm’s mission – in Drucker’s view, what the firm considers meaningful results.
  • The assumptions about the firm’s core competencies needed to accomplish its mission – to Drucker, where the firm must excel in order to maintain leadership.

To be a valid theory of the business according to Drucker, these assumptions must fit reality; fit one another; be known and understood throughout the firm; and, be tested constantly.  And, finally, the firms must have a blueprint for building the competencies necessary to dominate future markets – what Hamel and Prahalad call a “strategic architecture.”

William Jennings Bryan once said, “Destiny is no matter of chance. It is a matter of choice. It is not a thing to be waited for, it is a thing to be achieved.”  Those firms that begin competing for the future today begin the journey toward achieving success tomorrow.  For those firms that wait, the only music they will hear likely will be “Taps.”

April 05, 2007

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.

Recommended Books

  • Robert C. Higgins: Analysis for Financial Management (Irwin Series in Finance)

    Robert C. Higgins: Analysis for Financial Management (Irwin Series in Finance)

  • Gary Hamel and C.K. Prahalad: Competing for the Future

    Gary Hamel and C.K. Prahalad: Competing for the Future

  • Thomas A. Stewart: Intellectual Capital

    Thomas A. Stewart: Intellectual Capital

  • Gary Hamel: Leading the Revolution

    Gary Hamel: Leading the Revolution

  • Michael Lewis: Moneyball: The Art of Winning an Unfair Game

    Michael Lewis: Moneyball: The Art of Winning an Unfair Game

  • Eliyahu M. Goldratt: The Goal

    Eliyahu M. Goldratt: The Goal