Recently I spoke to a group of lawyers about a subject I mentioned in Toward a Brave New Business Model – the legal industry being just as susceptible as other industries to foundation-shaking and fracturing change - and that those changes make now the time for those in the industry to “reconceive existing business models” (to borrow Gary Hamel’s phrase) and to move toward a brave new one.
When discussing competitive advantage during the presentation I briefly mentioned, and then with a few members of the audience after the presentation I spoke at more length about, “virtual law firms.” This is a topic a good friend (and former law partner) and I have talked about for years and is one he and I lately have talked about a great deal more with several other friends. Yesterday’s on-line edition of The National Law Journal featured an article entitled “The rise of the model firm” that focused on “a handful of law firms, most launched within the last few years,” that have been “formed under varying business structures” and that “tout the advantages of offering drastically cheaper rates for corporate clients and a different work culture for highly credentialed attorneys put off by big-firm practice.” According to the article, attorneys for these outfits work mostly on-site in corporate counsel offices and typically are free from the burden of billing huge numbers of hours to support high rents and leveraged partners. And, at least with respect to one of the companies mentioned in the article, the attorneys also work from their own homes.
The firms mentioned in the NLJ article appear to have captured a number of the elements my friends and I over the years have attributed to virtual law firms, so I thought now a good time to talk briefly about virtual law firms, particularly as they relate to competitive advantage and new business models. First, let me share with you some of the general elements that my friends and I believe represent the essence of a virtual law firm (VLF) as it’s evolved in our discussions - it is a law-based knowledge network that’s:
- Created by lawyers with a collaborative mind-set to manage, enhance, and distribute their legal knowledge for a fee. (Since state disciplinary rules of professional conduct with respect to what constitutes the practice of law and what constitutes the permissible sharing of legal fees between lawyers and non-lawyers vary from state to state, I’m not going to incorporate into this discussion the idea of lawyers collaborating with non-lawyers in order to manage, enhance, and distribute their knowledge for a fee.)
- Based on collaboration, knowledge sharing, flexibility, and responsiveness.
- Linked not by physical facilities - but by technology, including the Internet, intranets, extranets, and other tools, not only among themselves but also with information and knowledge resources.
- Focused on sophisticated business clients whose work requires experience and/or expertise.
- Committed to creating the highest delivered value for clients.
Is a VLF a “brave new business model” and will it create a “competitive advantage” for those who choose to operate in such a manner? Simply put, I do not think a VLF alone is the sort of “re-conception” of the business model that will be a rude surprise to competitors or that will give a VLF a competitive advantage. I do believe, however, that if one accepts the definition of “virtually” to be “almost or nearly as described, but not completely or according to strict definition,” then the VLF will have virtually an advantage – albeit one that will not be sustainable or durable over a long period of time. Let me explain.
In Sometimes Lawyers are Great Mimics . . . But Would Be Even Better Mimes, I noted that:
“Competitive advantage,” on the other hand, means being able to do something that your competitors cannot – and doing it over a long period of time. It’s what Warren Buffett calls a “wide moat” – a sustainable, durable advantage that allows the business to earn profits greater than its cost of capital for long periods of time.
Then, in O Strategy, Where Art Thou? I discussed Michael Porter’s 1996 Harvard Business Review article “What is Strategy?” in which 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.” Porter also said the difference between operational effectiveness and strategy lies in these ever-important activities: “operational effectiveness” meaning “performing similar activities better than rivals perform them”; and, “strategy” or “strategic positioning” meaning “performing different activities from rivals’ or performing similar activities in different ways.”
To be sure, those VLFs on the scene first, especially those that focus on sophisticated business clients whose work requires experience and/or expertise and then match their assets (lawyers) with the demands of their clients’ business base, should be able to “perform similar activities better than rivals perform them” – thus gaining an initial operational effectiveness advantage. This early VLF advantage likely would stem from:
- Lower infrastructure costs from little or no facilities costs and reduced administrative costs.
- Lower financial capital costs for, and greater speed in executing, geographic expansion.
- Reduced lawyer-related costs as (1) the business demand requirements (experience and/or expertise) would eliminate the need for “warehousing” and training young lawyers whose costs (particularly at today’s outrageous starting salaries) exceed their revenue generating capability, and (2) the network character of the firm would enable it to associate with lawyers outside the firm who have special expertise on a project-by-project basis and therefore avoid carrying the overhead expense for that expertise when it’s not needed.
- Greater pricing flexibility than firms carrying higher infrastructure and lawyer-related costs.
- Greater opportunity to deliver higher value to clients resulting from better positioning within the professional asset capability matrix combined with the improved cost structure.
But without more, VLFs likely will not gain a competitive advantage. One can’t gain a competitive advantage by focusing on operational effectiveness alone, as Porter noted in an interview reported in the February 2001 issue of Fast Company that I also mentioned in O Strategy, Where Art Thou?:
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.
What's worse, a focus on operational effectiveness alone tends to create a mutually destructive form of competition. If everyone's trying to get to the same place, then, almost inevitably, that causes customers to choose on price. This is a bit of a metaphor for the past five years, when we've seen widespread cratering of prices.
Since rivals in all likelihood could replicate the essential VLF elements, the operating effectiveness advantage gained by early VLFs probably would last only until more and more firms became virtual and started siphoning away excess profits from those early movers, causing the initial advantage’s economic erosion – unless the operating effectiveness advantage were coupled by a VLF with something of strategic significance, perhaps such as better positioning in the information value chain. Without that strategic something “extra” that would create a sustainable, durable advantage over a long period time, I think VLFs will achieve only virtually an advantage – but will not enjoy a competitive one.
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