Into the legal Twitter-verse: growth vs. scale and bigger vs. better

After an extended Twitter break, I’ve been inspired by several great conversations in my feed over the past few weeks. Thanks to Jae Um, Jason Barnwell, Ron Friedmann, Jordan Furlong, Ed Sohn, Oz Benamram and so many others for sharing and making me think, and for prompting one more Sunday post before the holidays.

There are two paths you can go by: specialist vs. generalist

Jordan shared a hypothesis regarding the future of law firms, suggesting that full-service firms who today provide a wide range of legal services to a wide range of clients will ultimately settle into “two parallel lanes”:

• those that provide a wide range of services to one client (or an extremely small handful of clients), and
• those that provide a very narrow and specific type of legal service to a wide range of clients.

This triggered a number of responses including from yours truly, as it’s a topic worth exploring further — especially this time of year as we gaze into our crystal balls.

Structural changes in demand → disaggregation of supply

I have similar conversations with industry experts and firm leaders about what the future holds for legal services. One popular view is that legal services will be further disaggregated: work previously handled by few broad providers will be unbundled and delivered by a range of providers who focus on more specific legal, business and industry needs. A reconfiguration of the legal supply chain, if you will. The duopoly of inside and outside counsel is slowly but surely being replaced by a much more diverse landscape that includes all manner of providers that look and feel very different from incumbent law firms.

Makes sense, as this trend has precedent:

• We’ve seen this with the proliferation of e-discovery tools and providers.
• We’re seeing it again with rise of law firm alternatives who focus on specific legal/business problems (a.k.a. ALSPs, law companies or robots, depending on who is blogging).
• We’re also seeing clients reassess their needs and choose to handle certain types of legal work themselves, effectively building vs. buying.

You probably don’t need a crystal ball to see that these trends will likely continue as it’s pretty clear what is driving them. Clients are redefining what “value” means to them and their businesses, causing fundamental shifts in demand. The supply will follow suit, because it must.

Go wide or go deep, but pick your plays wisely

These trends support Jordan’s hypothesis, though I think about it a bit differently: firms might respond to these shifts by offering fewer and more specialized products and services to more clients or by offering more and broader solutions for fewer specific clients. Specialist vs. generalist: two different models that require different product+market strategies.

• A specialist firm might offer the best value for a narrow range of services that go deep to address the specific needs of a broad enough market. Labor & Employment and Immigration, for example. Or perhaps “Legal and Risk Management Solutions for Human Resources”, or “Mobility Solutions for International Employers” in corporate speak? I emphasize solutions, as in solving the business problem and not just addressing the legal risks and issues.
• A generalist firm might offer a broad range of complimentary solutions to one or more narrowly defined markets. This is going deep into the client’s business and offering solutions across the full spectrum of legal, risk, governance and compliance needs. Corporate Advisory is a decent example of this in today’s practice vernacular. Experienced corporate attorneys often act as “general counsel” and cover a lot of ground with their business clients, advising across a range of legal/business issues.

Despite the “generalist” label both require sharp focus: on both product/service mix and target market segments. Both require choices about where and how to compete, and where NOT to compete.

This is a difficult choice for an incumbent law firm, as it likely requires saying “no” to certain practices, clients or both. And “no” is not in the strategic vocabulary of many of today’s multidimensional firms (multi-practice, industry, segment, jurisdiction, client). “Why would I say no to revenue?”, leadership might ask. They might also want to ask “how much is it costing us, and how long will it last?”.

Tough decisions are the essence of strategy: choosing to focus on one pathway at the expense of all others. Businesses that shy away from these challenges avoid tension and discomfort while the climb toward sustainable growth remains a Sisyphean task. And being bigger doesn’t make this easier — in fact, it often makes it a steeper hill to climb.

Growth without scale is a Pyrrhic victory

All businesses require sustainable and profitable growth to last. When business as usual is not delivering this growth, it’s time to change…which brings us back to innovation. As I’ve written about previously, businesses innovate for profit, growth and stakeholder value. They do so in order to pursue new growth vectors and to hedge against future threats.

But there is a fundamental and limiting factor in most law firms’ innovation and growth strategies, which was touched on in Jordan’s thread and in previous articles he’s written on the subject. And that factor is scale.

Scaling a business or achieving economies of scale are sometimes misunderstood concepts. I think of scale in a simple way: it’s getting more for less. It’s getting more output for the same or less input. It’s designing a business with all of it’s talent, techniques and technologies to generate more profit at the same or lower cost.

This may be a Herculean effort for any professional services business, but law firms remain uniquely stuck when it comes to achieving scalability. Primarily due to the fact that revenue is directly tied to the cost of labor. To grow the top-line, firms hire or acquire more lawyers. (In fact, the default answer to most problems in legal is to throw lawyers at them. See Casey Flaherty’s Lawyer Theory of Value: the lengthy but funny original here and abbreviated commentary by Bill Henderson here.)

And buying inorganic growth is a risky proposition. According to ALM Intelligence data, 96% of firm leaders cite lateral hiring as a key growth strategy yet 28% report it has been effective. Like Icarus, a few firms may fly too close to the sun with this approach: lateral hiring to climb the AmLaw rankings is unsustainable and likely to precipitate a fall.

Of course there are other growth vectors. A firm can push to increase productivity (more hours, same people) or raise rates (same hours, more revenue) but these levers are equally as limited, especially when faced with flat demand and increased rate pressure. The market has spoken and firms should listen.

Scalability in a services business is complicated, but those who figure it out will ultimately win. Firms need to learn new levers to pull for scalability: process and technology, product, pricing, packaging and the other P’s and C’s that leading product businesses already know. They must also shift focus from revenue to profitability and break from the more lawyers = more better = more revenue mindset.

Ron Friedmann started another thread that touched on these topics, from buy vs. build, partnerships and legal product management as means to address these challenges. Good luck following the whole thread, but it’s worth it.

Choosing the right path

Returning to Jordan’s specialist vs. generalist hypothesis, I assert that a firm would decide one or the other based on their ability and desire to scale. And this choice will dictate their growth strategies, as they would look very different.

A specialist’s growth strategy might largely rely on increasing market share (emphasize business development and new client acquisition) while a generalist’s might largely rely on increasing wallet share (emphasize account management and cross-sell).

I agree that firms will eventual face the choice to specialize or generalize, both of which are viable paths forward. But diversification without growth is just dilution, and specialization without growth is just shrinkage. Either way, I predict that the Siren’s call of growth without scale in today’s legal market might win a few skirmishes for some but may lose the war for others.