Law Firm Strategies for the 21st Century: Strategies for Success, Second Edition

Consulting editor

Christoph H Vaagt on behalf of the International Bar Association

Managing director

Sian O’Neill

Law Firm Strategies for the 21st Century: Strategies for Success, Second Edition

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Law Firm Strategies for the 21st Century: Strategies for Success, Second Edition

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DISCLAIMER

This publication is intended as a general guide only. The information and opinions which it contains are not intended to be a comprehensive study, or to provide legal advice, and should not be treated as a substitute for legal advice concerning particular situations. Legal advice should always be sought before taking any action based on the information provided. The publisher bears no responsibility for any errors or omissions contained herein.

Table of contents

Introduction

Christoph H Vaagt

Law Firm Change Consultants

Part I. General aspects of law firm strategies

Strategies of small, midsize and larger law firms: does one size fit all?

Christoph H Vaagt

Law Firm Change Consultants

Strategy in law firms: what it is and why we should care

Bente R Løwendahl

BI Norwegian Business School

Drivers of change – driving strategy in law firms

Mats Anderson

Supreme Administrative Court (Sweden)

How to drive change in a partnership setting

Wolf-Peter Gross

Law Firm Change Consultants

Part II. Resource-side strategies

Resource-based approach to strategy: what makes your law firm unique today and tomorrow?

Dina Gracheva

Independent strategy consultant

The role of professional ethics in shaping law firms’ strategy

Tomasz Wardyński

Wardyński & Partners

Implementing a smart collaboration strategy

Heidi K Gardner

Harvard Law School

Ivan Matviak

Gardner & Co

Business model transformation as a tool for driving strategic innovation and growth

Robert Millard

Cambridge Strategy Group

Matter management in law firms – the emergence and impact of legal project management

Ignaz Fuesgen

smartvokat

Legal tech as a factor in strategic law firm development

Felix Dette

METIS Rechtsanwälte PartGmbB

Part III. Market-side strategies

Winning and keeping clients

E Leigh Dance

ELD International LLC

Global Counsel Leaders

Reputation management in professional service firms

William S Harvey

University of Exeter Business School

Timothy Morris

Michael Smets

Saïd Business School, University of Oxford

How to merge: lessons from 20 years of law firm mergers

Lisa R Smith

Fairfax Associates

How to screw up your international expansion: a 15-step guide

Robert C Bata

WarwickPlace Legal LLC

Professionalising the pricing and procurement processes

Richard Burcher

Validatum® and Virtual Pricing Director®

Silvia Hodges Silverstein

Buying Legal Council

Columbia Law School

About the authors

About Globe Law and Business

Introduction

Christoph H Vaagt

Law Firm Change Consultants

A book written under the auspices of the International Bar Association (IBA) on law firm management must take into account that the IBA has members from all over the world, and from law firms of different sizes. We can identify at least four different categories in each jurisdiction:

• sole practitioners, working on their own or as freelance lawyers;

• small, local law firms;

• midsize law firms with one or several offices within one jurisdiction; and

• large law firms with several offices in other jurisdictions.

Although the boundaries between these strategic groups are somewhat blurred, we intended to produce a book relevant to all of them. For this second edition, we have brought together authors who cover:

• the general aspect of law firm strategy;

• the resource side of law firm strategy; and

• the market side of law firm strategy.

We hope the reader will find it interesting to take a look at the different aspects of what law firm strategy is, discussed by active lawyers, academics and consultants, so that he or she may be able to understand better what a law firm needs in order to stay competitive.

The book starts by looking at what drives strategy in law firms, both through the observation of the market and by academia (Christoph H Vaagt and Bente R Løwendahl).

The historical perspective of how the market for legal services has changed is discussed by Mats Anderson, a lawyer previously at UK Magic Circle firm Linklaters in Stockholm and who is now a Justice of the Supreme Administrative Court in Sweden. Wolf-Peter Gross describes how law firms have successfully adapted in times of change.

The resource-based view on strategy is then introduced by Dina Gracheva, who worked in Russia as the business strategist in a leading firm in Moscow and asks: What makes your law firm unique today and tomorrow? Tomasz Wardyński of Wardyński & Partners in Warsaw delves into the important issue of professional ethics in shaping law firms’ strategies. How much collaboration helps law firms to become competitive is explored by Harvard Law School professor Heidi K Gardner and Ivan Matviak, who write about implementing a smart collaboration strategy. The business of law must adapt to changes in technology and thus Robert Millard looks into business model transformation of larger firms as a tool for driving strategic innovation growth from a consultant’s perspective. The practicalities of organisation based on process management is described by Ignaz Fuesgen, an old hand in law firm management. Finally, Felix Dette explores, from a midsize law firm partner’s perspective, how legal tech as a factor in strategic law firm development could be understood.

The market-side view explores changes on the client side of the business. E Leigh Dance’s chapter shines a light on how basic selling and servicing strategies of law firms must be designed nowadays, as all strategies are worthless if the clients are not at the centre of any law firm and, thus, of lawyers. The result is, one would think, a good reputation. However, as William Harvey, Timothy Morris and Michael Smets from the Universities of Exeter and Oxford show, reputation at the upper end of the market is not necessarily linked to superior knowledge; the emperor has no clothes one might exclaim after reading this thought-provoking piece, based on the latest research on reputation management in professional service firms.

Following on from this, Lisa R Smith looks at law firm mergers, based on her extensive experience in this field with more than 30 years of consulting with US law firms and beyond. Then, with his solid knowledge of the internationalisation of law firms, Robert C Bata describes how to screw up your international expansion with a 15-step guide, also applicable to midsize firms that want to set up offices outside of their main location. Finally, Silvia Hodges Silverstein of the Buying Legal Council and Richard Burcher of Validatum discuss the increasing importance of pricing in markets. This is a development which must be carefully observed by all market participants as the changes will produce a set of different legal ‘products’ to which law firms must somehow react.

We hope that the reader will be enlightened, and hopefully also enabled, to help his or her law firm stay competitive, whatever the markets, jurisdictions or circumstances in this fast-changing world.

Strategies of small, midsize and larger law firms: does one size fit all?

Christoph H Vaagt

Law Firm Change Consultants

The strategy of law firms is a subject often written about, but rarely will you find something to the point. David Maister¹ refused to define one; the only statement he was willing to pronounce is that strategy is to say no. In a way, he realised that most law firms are generalists which do not have a clear client intake policy. He also found that law firms are difficult to run in terms of strategy due to the partnership model lending each partner autonomy about the clients and matters dealt with. But he could not explain how strategy is formulated in law firms. In this chapter, I endeavour to give an overview of the process of, the elements important for and different perspectives to strategy formulation in law firms, as can be found in literature, our own consulting experience and the other chapters of this book.

A law firm partnership is a beast of its own. The particularities of law firm partnerships, as first described by non-lawyers as ‘professional partnerships’, are now better known and have been studied more intensively since the turn of the century.

1. Important frame to the strategy development in law firms: P2 archetype and business model

The first thing one needs to realise is that law firms tend to be ‘professional partnerships’ or ‘P2’, as defined by Greenwood and Hinings in one of the first attempts to describe strategy formulation in professional service firms, as law firms, among others, are described in academia.² All partners are owners, manage the most important client matters and, very often, they are also the most skilled lawyers who still take care of a good chunk of the legal work.

Several propositions for strategies of law firms have been formulated by Greenwood et al, and we find that most of them are (still) true today, but they need refinement, as they are increasingly true only for small to midsize law firms:

Proposition 1: Decentralisation of operating control will characterise professional partnerships. (Management is weak; the process of management is organised differently from corporations.)

Proposition 2a: The primary focus in a professional partnership will be the development and maintenance of professional standards. (While ignoring the potential of learning from assignments.)

Proposition 2b: Professional partnerships will have centralised control of the development and maintenance of professional standards.

Proposition 3: Professional partnerships will use general market controls. (There is no focus on key performance indicators.)

Proposition 4: Professional partnerships will have tolerant performance accountability embracing both non-financial and financial targets. (Profit is just as important as other criteria, like work–life balance, individual freedom etc.)

Proposition 5: A consensus-building approach to strategic decision making will characterise the pattern of interaction in professional partnerships. (Strategy is a difficult exercise as conflicting aims are in play.)

Proposition 6: A low to modest use of strategic rational analysis characterises professional partnerships.

All law firms sell time to clients. In essence, all law firms, all around the world, from small to large, share the same business model: lawyers are assigned to individual cases, working on them as if they were completely new to the firm and the lawyer, as well as billing the time spent on the matter (on any other billing scheme applicable due to local laws and regulations). Within this business model, strategy can unfold. But this business model also forms the limit within which strategies can be applied. That constraint makes it hard for new processes to take hold (as we shall see later, and in the chapter by Robert Millard).

1.2 The structure of the legal market: are the strategies of small, medium-size and large law firms different?

But first, let us clarify what strategy means in the context of a law firm. Very often, the strategies of the corporate world, essentially production companies, or very large business-to-consumer service industries, are applied to law firms. We strongly suggest that this is at least partially flawed.

Figure 1. Law firm entities (including individuals and employed lawyers) Germany, 2012

Source: Christoph H Vaagt, based on Benchmark study Der Kanzleimarkt in Deutschland, 2016; data from German tax authorities.

The structure of the legal market in each jurisdiction is divided into four major segments. In the case of Germany, this means:³

• 34,000 individual lawyers or small law firms with up to five lawyers caring for private clients and their needs (some 40,000 lawyers);

• 9,300 small law firms looking after private clients and small businesses (20,000 lawyers);

• 2,350 midsize law firms working mostly for family-owned or SME-type clients (with a turnover of €1 million to €10 million) with some 15,000 lawyers; and

• 140 large law firms with more than €20 million turnovers working primarily for listed companies, investors and the financial industry, with some 12,000 lawyers.

The US legal market is similar: with a market size of $326 billion and 440,000 businesses as clients, law firms tend to be rather small on average, with only 1.3 million employees overall. In the United States, there were approximately 1.33 million lawyers in 2017, working in 50,000 law firms, of which small law firms (<29 attorneys) generated approximately $108 billion, midsize firms (30–174 attorneys) approximately $73 billion, and large firms (>175 attorneys) around $95 billion. The structure of the market is the same as described above.⁴

The focus of most literature is on the strategy in large law firms, or even very large law firms with more than 100 lawyers, especially from the United Kingdom and the United States, as there is more data available.⁵ The larger law firms, however, represent around or less than 1% of all law firms in general within a given jurisdiction; in the case of Germany, 90 law firms with more than €10 million turnover employ all in all some 12,000 lawyers, while about 110,000 lawyers are active in the legal market in more than 25,000 law firms or as individual lawyers.⁶ Similar figures are available for the UK market:⁷ 26 law firms with more than 26 partners represent only 1.81% of all firms of 87,786 solicitors, not counting the 10,000 or so barristers. In Germany, about 10% of all active lawyers work in these large law firms, over 40% in midsize firms (with €1 million to €10 million turnover).

1.3 Strategic challenges for law firms of different sizes

The law firms in each segment are facing different challenges when it comes to strategy. A book written under the auspices of the IBA must take account of this fact.

Strategies must be formulated, we assume, when competitive pressures force businesses to do so. Given the structure of the legal market, we can observe in very broad terms:

• The private client market is the most sensitive to lawyers’ fees; thus, third-party service providers are the most likely source of competition. We note that in larger markets, such as the United States, the United Kingdom or Germany, these service providers are already gaining market access – first by serving client needs left unattended by law firms (eg, flightright.de, a company helping customers recover damages from flights cancelled or delayed within the European Union).

• The small or midsize law firms are only partially impacted by these changes, but they are squeezed in the middle between larger law firms, able to produce better legal advice in special areas of law, such as financing. Alternatively, cheaper or easier to use advice (eg, in personal injury cases) may be offered by highly specialised law firms such as Gordon & Slater, which can invest in software and marketing, overpowering smaller law firms in these areas of private client law.

• The large-firm market has become price-sensitive as the buyers of legal services are well experienced and increasingly make use of procurement processes and departments. Thus, large law firms, in particular in the UK or US law-dominated market segments, must try to reduce the costs for legal services, by making use of document automation, leaner processes with the help of legal process management or the like. The resource side of the equation accordingly receives a lot more attention. ⁸

Now the question is, what drives strategies in law firms, and how can they be adapted to changing markets? Professional service firms are not immune to the changes happening in society, so they are adapting as professions.⁹ How do law firms need to adapt, thus making use of ‘strategies’? Again, we suggest differentiating the different markets that law firms operate in, from small to large firms.

This book has been structured along the lines of resource and market sides, as we see that the impact on business strategies comes from these two perspectives (see also the chapter by Dina Gracheva).

2. The resource side

Traditionally, the focus of law firm partnerships was to generate growth through the development of skills by training people inside the firm. Young lawyers were trained and promoted according to their ability to serve, retain or attract clients. They were usually asked to focus on areas within the larger strategic focus of the firm, based on the kind of clients it can attract and the kind of matters handed to it. This observation is key to understanding the business strategies of law firms in general, and thus the focus on partnerships to keep talent inside the firm.

Figure 2. Market- and resource-based views of the business of law

2.1 Basic PSF strategy: developing the business strategy through learning feedback loops, thus increasing expertise

The law firm business strategy is the result of learning by the lawyers on assignments.¹⁰ The learning enables the firm to offer even better services, creating a feedback loop based on continuous learning of the practitioners in a law firm. Of course, internal communication is helpful, even without every lawyer constantly learning something new, thereby altering the offering and services of the firm to new clients. Thus, we could speak of a kind of ‘emerging strategy’.

Based on this very basic understanding of strategy in law firms of all sizes (which we can confirm based on more than 20 years of advising law firms of different sizes and scales in Germany and beyond), law firms address only those clients whom they believe to be able to serve with confidence; likewise, clients choose only those law firms where they believe they will find a sufficient degree of capabilities, experience and, sometimes, capacity to serve their needs.

This ‘learning’ is learning on the job, nothing formal or institutionalised. We are always surprised by the degree to which formal learning is neglected in law firms, while having in place an informal learning process which is driving the strategy of lawyers, and thus a firm. Bente R Løwendahl in her chapter empirically shows that learning in feedback loops is helpful for both people development and building institutional wisdom and insight. One example where this has been applied for centuries, for instance, are the conditions under which pupil barristers are learning in the barrister chambers in the Temple district in London, traditionally sitting in the same room as senior barristers, and learning by observation and under supervision.

Figure 3. Model of strategy development of PSF by feedback loops

Source: Adapted from Bente R Løwendahl, Strategic Management of Professional Service Firms, 3rd edition, 2005, p107.

2.2 Other elements of law firm strategy: service, reputation and relationship

Smets et al¹¹ argue that:

most professional service firms cannot build competitive advantage on their expertise alone but need a set of four interrelated resources: expertise, service, reputation and relationship. Individually, these form the necessary basis of a strong competitive position in the marketplace, albeit one that remains assailable.

They further contend that their expertise is not unique in any substantial way and is susceptible to imitation or replication. We would admit that this is true, but it is the result of a strategy, not a strategy in itself, nor a description of how one can successfully develop a strategy.

Most law firms enjoy some kind of reputation in a given marketplace, where each partner has his or her relationships.¹² The service level of the firm, or more often of each partner, plays a role too, as clients expect a certain level of service. All this, however, is based on the knowledge and experience of the lawyers which allow them to take on certain matters (and refuse others), building said reputation among a network of clients. The abstract ‘management’ of these four dimensions might be useful, and every law firm partnership of all sizes is looking at these four dimensions at some point. We find, however, that resources are generally reserved for the service element; the other dimensions are considered to a greater degree the larger a company is, if they are managed separately by individual processes. So, we would suggest that Løwendahl’s observation remains the main ‘driver’ of the strategic process.

2.3 Formal education and training

As the formulation of a strategy does very much depend on the skillset of a law firm, the way in which these skills are formed, changed and enlarged should be a central focus of law firms. This is implemented through internal or external training, hiring of people with special skills, and even the lateral hiring of partners.

All of this does happen, but only very reluctantly and in small steps. Larger law firms have started introducing internal education programmes, yet most of these efforts are rather limited or not so much focused on building competitive advantage instead of being able to offer some fringe benefits beyond salaries. However, we can see some internal training as building internal institutionalised knowledge, based on how we do things here. Smaller firms do often neglect the need for internal training and reflection.

2.4 Most importantly: who to make partner

As long as law firms are primarily constituted as partnerships, the core decision is who to make partner. Partners mostly stay in the same firm for their whole career, so it is a decision for the next 20 to 30 years and thus the most long-lasting choice.

We find what has been termed the partner-manager-producer dilemma, as famously described in the Harvard Business School case Bob Andersen at Cambridge Consulting Group.¹³ Here we find the most important traits of law firms, where:

1. Partners are owners

2. Owners are managers

3. Managers are producers

Thus, making someone a partner has an effect on the resource side as well as the market side. Elevating the designated lawyer values his or her quality and capabilities, which become part of the firm’s offering. Nothing is more important. This essential choice is also deeply entwined with strategic thinking. Making someone partner affirms their legal and entrepreneurial skills and thus affects the firm’s strategy for further development. So if a commercial lawyer is invited, this means enlarging the commercial law capabilities of the firm; by the same token, inviting a family lawyer to join the partnership strengthens that aspect. Accordingly, the decisions on who to elevate are indeed discussed very much in detail, both in regard to ‘personal fit’ and ‘strategic fit’.

Partnerships have been mostly formed among like-minded men. They share a similar attitude to work, clients and running a firm. This model is less attractive for female lawyers because most of the measured core qualities have been set by men for men. This might change in certain markets, in particular when clients require more diversity; it would also be an advantage for the partnership to include a more diverse workforce. Nonetheless, more observation in the future will be needed regarding whether this argument is included in the strategy debate.

2.5 Internal competition as a driver of business strategies: the inevitable development of the ‘generalist’ law firm

This model of learning produces, however, internal competition between partners if they were all to focus on the same clients and matters. Thus, there is a natural tendency to broaden the offering, to attract new clients and to avoid internal competition among partners. To do so is, nevertheless, not easy.¹⁴

The resulting specialisation of lawyers – on either areas of law, or within one field, different aspects of it or different types of clients or matters – has been one of the observations in law firms. Basically, one does not find a law firm where all partners look after the same clients, offering the same specialisations and working in the same manner.¹⁵ Thus law firms become generalist firms over time, offering services to different clients and in a variety of legal aspects. It is only in later stages that firms then start to refocus on particular clients and matters, based on their development over the years, thus eventually becoming law firms with a somewhat more refined reputation, and streamlining the services accordingly.

2.6 The profit-sharing system as an important driver in law firm business strategies

Most law firms are partnerships. Each partner has autonomy over which clients and matters to accept, within certain limits based on the fundamental skillset and experience within the firm. The way law firms operate can be compared to ‘holding companies’, where success is mainly determined by the financial contributions of each partner, representing a ‘business within the business’. Each partner must contribute within a certain range to be acceptable to the rest of the partners.

The degree to which there is a common strategic answer of the whole firm, or only parts of it, also depends very much on the internal structure of the firm, mainly the profit-sharing system.¹⁶ This formula is referred to frequently. We would speak here in broader terms of two kinds of system: those promoting the ‘equal share’ of partners in the profit or those rewarding ‘individual merit’. There are also some systems which try to promote both aspects, but our research shows that, in general, one of these two ‘cultural modes’ will dominate.¹⁷

In a law firm context, we understand this as describing each partner’s commitment to the firm, or the lack of it. Weick¹⁸ would speak of loosely coupled systems versus closely coupled systems. A loosely coupled system would be less able to follow a common strategy as the profit-sharing system rewards individual financial success. Thus, each partner would pursue individual market strategies rather than adapting to a joint approach. A closely coupled system – or law firms distributing profits not based on individual financial performance but rather common success, sharing according to a formula of equal shares, or by seniority like lockstep, or any other criteria not primarily linked to individual success – is a different case regarding formulating and following through strategies.

These examples illustrate how much strategic answers are dependent on the internal organisation of a law firm, whether small or larger. The resource side features several elements to consider, of which the profit-sharing system is certainly one of the most important.

2.7 The role of ‘management’ in midsize law firms vs group dynamics

When we discuss ‘management’, we should draw a difference between the following:

• Management as a structure: whether there is an entity within a law firm charged with the administration and, possibly, leadership of a law firm;

• Management as a process: the way in which the decision making takes place in a law firm; and

• Management as an outcome: management is often referred to as a fact, something which made it happen, whether by