Feature

posted 7 Sep 2005 in Volume 8 Issue 4

Building an effective practice strategy

For many firms, strategic development has taken an organic path with firms focusing on business planning as and when the market or competition demands it. Developing a more long-term practice strategy is essential, though, for sustained business success.

By Laurie Young

Many first-class professionals do not like to think of the service they provide as a business. They were drawn into their field because of interest in their subject and they put high value on their technical expertise. To behave as a business, with all that implies, can seem to compromise professional integrity. Yet all privately funded professions need to think about a range of business issues. They need to consider revenue growth, cost management, technical development, service expansion and human-resource policy; all of which affect the health of their practice. They also need to plan how these inter-relate, giving appropriate priority and resources to each one. In short, they need a strategy for their firm.

All organisations develop and change in accordance with the pattern of decisions taken by their leaders. However, if that direction is a rudderless drift, or if it flies in the face of market realities, or if it is not communicated throughout the firm, the health of the business is likely to suffer. The leadership of a firm has, therefore, a duty of care to create clear, market-conscious, achievable strategic direction.

Whatever the size and shape of a practice, leaders need to take time to think of the future health of their firm. They need to focus on the strategic imperatives relevant at any one time and allocate resources appropriately to tackle them. In fact, it may be said that they need to be as professional in creating and implementing their practice’s strategy as they are at developing their technical skill. Fortunately there a number of principles and a range of professional techniques that can help ensure success. For instance, a well-rounded strategy is likely to contain many of the components detailed below.

The components of a practice strategy

The vision and mission of the practice;
Objectives;
Strategic intent;
Intended market positions;
Human-capital policies;
Asset utilisation;
Target returns (revenue and margin);
Business-unit targets;
Broad inorganic growth plans (areas where acquisitions are intended);
Organic growth plans;
Potential investments and disinvestments;
Changes and enhancements to organisation, including process and system improvement.

Many strategies, however, fail. Some are poorly framed or are irrelevant wish lists, but the overriding reason for failure to achieve strategic intent is poor implementation. The strategies of many firms are simply impractical to the organisations for which they are designed. So how do leading professional-services firms ensure that they create an effective direction for their firm?

They create strategy in a manner appropriate to the style and culture of the firm

The development of strategy can be either procedural (where a number of logical steps are followed to arrive at a particular point), functional (where it is someone’s job to draw up a well-presented and detailed strategic document), situational (focusing on immediate strategic imperatives) or extant (consisting of a pattern of largely intuitive decisions by a leader). All of these approaches to strategy are seen in the professional-services industry. Each has its strengths and weaknesses and none is an ideal approach for all situations.

The procedural approach is recommended by many business schools and followed by most publicly owned companies. It was adopted, for instance by Littler Mendelson (see case study one), which is a corporation under Californian law. The approach will often distinguish between different time scales, determined by the firm’s market and investment horizon. There may be a set of one-year operational plans focusing upon short-term goals and medium-term (three to five year) plans where investment is needed. The strategic framework needs to embrace them all. It will often distinguish between corporate planning, strategic market planning and business-unit planning.

In implementation though, there are clear responsibilities given to different individuals. It is their task, delegated by the leaders, to achieve their element of the strategy.

The situational approach tends to be used in partnerships where leaders will identify and work upon immediate strategic priorities, often as part of an annual budget round. It is less logical, less systematic and less well rounded. In fact, many routine issues can languish due to lack of attention. However, once the major strategic thrust is identified, the firm tends to focus on the most important issues. Project teams are normally formed to implement different aspects of the strategy, often in addition to their normal jobs, and are disbanded when either the strategic intent is achieved or other priorities identified.

In the functional approach, a small unit exists within the firm that has responsibility for the creation and management of strategy. This is often led by a director of strategy who works closely with the leadership. They might also have responsibility for research, competitive intelligence, internal reporting and market analysis.

The unit is expected to manage the planning timetable, execute ad hoc strategic studies and share their analytical perspective in appropriate debates. Some large professional-service firms have executives in this role while others use trusted, specialist suppliers. A well-rounded strategy is normally developed. However, it is often difficult for the organisation to digest all the necessary tasks. The full plan is rarely achieved.

Extant strategy is determined only by a retrospective view of direction, deduced from the decisions of, normally, one dominant business leader. The pattern of past decisions reveals the direction of the firm and it is most frequently seen in single owner businesses. Staff in such firms can feel that they have no strategy to follow because there are no well-crafted written documents or clear planning schedules. Nevertheless, experience shows that firms led in this way can be very successful, achieving their strategic intent, particularly if the leader makes the direction clear to the people in the firm. Insight, decision and action follow each other quickly.

They make decisions about direction in the light of a perspective on the market

Theorists would argue that within business strategy are issues related specifically to the market in which the practice thrives and that these require marketing tools, judgement and experience if they are to be properly understood. For instance, Nirmalya Kumar of the London Business School argues that numerous decisions taken by business leaders are, in fact, marketing decisions that influence the direction of the firm. Leaders should therefore aim to adopt market-oriented strategy and planning. In other words, their strategic decisions should be made with a view to the dynamics of the market, or markets, within which the practice operates. At the very least, leaders should take a perspective on the strength of demand and the implication to their firm.

Yet this is not as straightforward as it appears because there are several different ways of understanding markets and their structures. For example, leaders may wish to base their decisions on client research. However, the clients that are researched, the techniques used to gain insight and the interpretation of results will all affect the quality of the decisions based on this approach. A poorly constructed research project could reduce the quality of strategic decisions and damage the firm.

Some take an economic view of a market. For them, supply and demand are irresistible forces that govern a firm’s success. It is clear that the fees from many services are affected by economics. Conveyancing suffers if the housing market is weak and due-diligence work when M&A activity is down. Clearly, external forces affect the revenues professionals can expect from services and issues such as their recruitment plans for different areas. Leaders might think broadly about competitor actions, regulatory policy or political initiatives, but this is primarily an economic view of market dynamics. In fact, much business theory stresses planning techniques that are geared to understanding an economic view of markets. Yet this is limiting.

Others take a behavioural view of markets. In other words, it is the behaviour of the suppliers and their interaction with clients that creates opportunities. Many professionals, for instance, suggest that their business success is ‘all based on relationships with clients’. In this view, the practice is a network of relationships with clients from which it draws its business. A market is seen as, primarily, a set of personal networks within which these mutually profitable business relationships occur. While economics is not irrelevant, the supplier can stimulate its interactions to create demand.

Professional-service firms can therefore examine their markets by profiling their client relationships and analysing the methods they use to stimulate more work from those clients. This might include, for example, cross selling other services to contacts or deliberately encouraging referrals. In fact, for business-to-business professionals, a market perspective based on a relationship or network profile could yield better strategic insights than some of the more accepted economic approaches developed by theorists.

Researchers are beginning to substantiate this experience. Their work has covered the fact that, in a project-based industry, working relationships may only occur during the duration of a project, whereas personal relationships have to continue over time. They distinguished between ‘bonds’ between key participants, ‘links’ over activities and ‘ties’ over resources. Most professional-service firms that think about the growth and health of their business have some form of relationship-mapping approach to key clients. The model described above, developed by academics and substantiated in research, formalises this thinking into a useful construct. It can be used to create a relationship profile of all the firm’s markets.

They use relevant tools and techniques

A complicating factor for the professions is that the nature of their business and the dynamics of the industry are so very different from sectors where much business theory has been pioneered. This makes many of the recognised strategy tools difficult to apply. Take, for example, the famous Boston Matrix. This was developed by the Boston consulting group (a strategy consultancy) in the 1960s. It is based on the experience curve of all businesses, which shows that, as time passes, they become more expert at their core business and costs decline. A new business is, therefore a ‘question mark’ because its rate of success is unknown, whereas an older business is a ‘cash cow’ because noticeable incremental success is now unlikely.

This tool is a useful framework for leaders to use in discussion about investment in different business areas. It is particularly helpful to a firm that has multiple practices. A leadership team that is established in litigation and wants to move more fully into, say, commercial law, or is recognised for its expertise with technology firms and wants to penetrate, say, the public sector, will find the language helpful.

Yet the concepts behind the tool and the detailed numeric construction of it may not be relevant to professional-services firms. It is based on two axes (revenue growth and market share) because it was an assumption of those who designed the matrix that these are the key success criteria of a business. However, that is not always the case in the professions. Very high market share may not be possible, for example, in small markets, where conflict of interest is an issue. Also, some firms pursue a strategy of margin maximisation rather than growth. This tool is unlikely to be helpful to such firms.

Similar caution needs to be applied to the myriad other strategic tools, such as the ‘Ansof matrix’, the ‘directional policy’ matrix, value-chain analysis and many others. Each has insight to offer the professional practice, if used in the right context at the right time, but they have to be used with caution because the way professional practices grow is so very different to other businesses.

The two main drivers of future revenue growth are the technical excellence of the work and the quality of client service. This creates a strong reputation (which may eventually turn into a brand) and this, in turn, draws in more work, as illustrated in figure three. This demand-pull has two very powerful benefits. First, it keeps the cost of sales low because the firm does not have to go out and get work. Second, it enables firms to keep prices high because, if clients come to them, practitioners can focus on diagnosing the need. Pricing then becomes a consequence, not a focus, of discussion.

Any strategy tools should therefore be aimed at enhancing the firm’s reputation. The issue for leaders is whether structured techniques, as introduced by other industries, can enhance the natural momentum of the firm in order to increase revenue and margin still further. Properly chosen and used in the correct context, they will. An appropriate strategy will increase revenues, control or reduce cost of sale and yield greater margin for partners or owners. To be successful, then, the leadership needs to find ways to select strategy techniques, processes and approaches that are relevant to the firm’s needs and the environment in which it operates.

They communicate the strategy to the firm’s people

Good strategy is a framework of ideas, developed by the leadership, which sets a course that it wants for the firm by creating a common purpose. It involves making decisions about direction, communicating those decisions and allocating the resources to go in that direction. It should become a touchstone for all decisions throughout the organisation. In fact, all strategic devices are aimed at achieving this common understanding. Yet it cannot create a common sense of purpose if no one knows the strategy or of they have misunderstood it. Properly communicated, members of the firm will use it as a reference point when making decisions. Without communication, decisions throughout the firm will be based on the judgement of local people with a local perspective and partial information, which, while valid, may conflict with the perspective of the total firm. Chaos and lack of results can then follow.

In any firm, there is a competition of ideas, policies and ambitions that uses both informal and formal mechanisms to influence the development of the firm. Every internal function has to successfully engage in this continual debate if it is to fulfil its role effectively. Those responsible for the strategy have to join the fray to achieve the outcomes that shareholders or partners have employed them to gain. They must participate in formal meetings and communicate effectively in one-to-one presentations to other leaders, carefully planning and engaging in an effective debate.

Strategy development also needs to be undertaken in light of the political landscape of the firm. This works at several levels. First, the ownership of the firm affects the approach. A partnership, for instance, works through mutual ownership and consensus. In fact, there is often very little clear decision making. Whereas in a corporate firm, individuals have clear accountability within a clear area of responsibility, initiatives in a partnership are more often created by a wide consultation or buy-in process, which creates a momentum for the idea. Providing nobody strongly disagrees with the initiative, it will become, more or less, common practice within the firm. It is unlikely to welcome a fully delegated strategy development and implementation process as conducted by a corporation like Little Mendelson.

Second, people have formal roles and need to be included in the strategy-development process at different times. The job requirements of, say, a financial director or a regional office partner might mean that they are included at different stages. Finally, people adopt different behaviours when exercising power at work. Some behave like a bully, some like a priest and others like an Arthurian king. Approaching them in the wrong way can undermine an innovation, whatever its merits.

Internal politics is one of the mechanisms by which people influence decisions and contribute to the health of the organisation. It is not unprofessional to think about how to achieve policies in this way. In fact, it is unprofessional not to. Politics is neither good nor bad, it simply is. A practical way of handling it is to create and follow a political map of the people who need to be engaged at both the development and implementation phase of the strategy process.

All professional practices, from the single partner office to the large multinational, need to develop a viable practice strategy. This needs to be created in the light of market dynamics and in a manner suitable for the firm. Above all, it needs to be handled as professionally as any piece of client work if the firm is to thrive. n

Case study one: Littler Mendelson PC

Littler Mendelson PC is the US’s largest labour and employment law firm. It is a ‘professional corporation’ under Californian law rather than a partnership. Wendy Tice-Wallner, chairman of the board and managing director, says that it has had two major strategy iterations at the beginning of the 1990s and the beginning of this century. The first set growth strategies but also agreed a governance structure aimed at enabling delegated decision making. For instance, it resulted in its first full-time managing partner (even though the firm was then 45 years old). She says that the second iteration formalised this further and allowed the firm to work with a managing committee authorised to implement the strategy. This has enabled it to respond to change and delegate clear actions to specialists in IT, marketing or HR. Each of these now sets its own implementation plan within the agreed strategic framework.

Case study two: Nabarro Nathanson

UK law firm Nabarro Nathanson reviews its strategy every three to four years, the latest occasion being the summer of 2004. “Initially this involves a small group of partners from across the firm but it is then rolled on to all partners who become involved in discussions on it,” says managing partner Nicky Paradise.

The firm’s view is that the legal market is now changing very fast and they base their discussion on those changes. They elicit feedback from professional bodies, partners and journalists. The resultant strategy covers areas such as financial targets, people and quality. It is then the responsibility of each practice area to implement the strategy, but progress across the firm is measured and reported to all.

Case study three: Rawlison Butler

Rawlison Butler is a UK partnership based on the south coast but with national and international clients. Strategy is developed by the leaders but, once identified, lead partners in each practice are responsible for implementation.

For instance, clients were thought to be increasingly seeing added value as an important factor when deciding which law firm to instruct. Tony Hyams-Parish, partner and head of employment, describes how the development of the firm’s employment micro-site has proved to be a valuable asset in attracting new clients:

“There were three key objectives, which we had in mind when deciding to develop a micro site dedicated to employment:

We needed to have a system of being able to identify users of the site so that we could use this information to generate leads;
The site needed to contain useful and constantly updated information for managers and directors with HR responsibilities on developments on employment law and its practical application to the types of problems that employers face;
It needed to have something different to offer members wanting to join the special membership area of the site called the conference room.

“The conference room enables us to build up very useful information about the users of our site and convert them into clients. This is done through inviting them to seminars run by the firm and by inviting them to special events for conference-room members. Key to its success, however, has been the launch of the employment-law web-chat facility. Currently, we run a web chat each month on a topical employment-law issue, which is published in advance. Participants can either participate in the web chat or watch the web chat in the spectators’ area. There are usually two lawyers in the web-chat room at any particular time, answering questions and engaging in discussion with participants.

The effect of the new micro-site has been a number of client conversions and an increased interest in our seminar and workshop programme.

Laurie Young has held senior positions within BT, Unisys and PricewaterhouseCoopers (as global marketing partner for its advisory division). His latest book Marketing the Professional Services Firm was published by Wiley on 28 July 2005. He can be contacted at lauriedyoung@aol.com