Feature

posted 5 Jun 2001 in Volume 4 Issue 2

Why strategic planning does not work!

While some claim that profit-per-partner is growing (and for some it has been) don’t be fooled, it is not going to last much longer for those playing the game by following the same old rules. Patrick McKenna of Edge International discusses how law firms should actively challenge the traditional concepts of management and embrace a new approach to the time old problem of strategic planning.

Look behind these profit numbers. Across the profession, leverage is flat, margins are starting to erode, and utilisation is quickly reaching its peak of human endurance. When we conducted an extensive analysis of the numbers, we discovered that only 19 of the Am Law 100 were above-average revenue-per-lawyer (RPL) performers over a ten-year period from 1990 to 1999. We also found that based on a similar RPL comparison, only 25 of the Am Law 200 outperformed their peers over the last two years (where comparative statistics were available).

So what is it that these few star performers are doing differently?

Based on our research, meetings with the leadership at literally hundreds of law firms over the past few years and our observations grounded in two decades of working within the profession, we believe the overwhelming difference can be attributed to how these firms see the future, how they determine their particular direction, and how they craft their competitive strategies.

Strategic planning is the recognised process whereby any organisation sets out to determine its overall direction, what specific actions must be taken to achieve the desired direction, and how those strategies will get executed.

We have witnessed the evolution of strategic planning in law firms gravitate from a status of virtually no planning (“we’ve done well without it thus far”) to a grudging recognition that planning may have some minor relevance to a firm’s future success.

In its earliest rendition, strategic planning was seen as nothing more than next year’s budgetary extrapolation of the past. Remember a time when we asked our partners how much revenue they each expected to bill over the next year? And voila – we had our plan.

We then graduated to the era of the annual planning retreat, believing that strategy was simply an agenda activity best left to the weekend partners’ gathering. Traditionally, these retreats began with some consultant describing “what other firms were up to”, evolving into a relatively unstructured discussion by the partners on their favourite issues. In fact, partners would be quick to admit that the views expressed by many of their colleagues at these gatherings were already so familiar to them that they could usually finish their colleagues’ sentences without prompting. Some firms eventually became more sophisticated and began to initiate a formal strategic planning process. Unfortunately, as we have had the opportunity to review many of these strategic plans, it becomes very apparent that the overriding focus of these plans was predominantly internal – on the issues or concerns partners had about each other and the firm – rather than on reflection and consideration of the external, competitive marketplace.

Many of these more formal plans focused on developing specific actions to address various objectives such as:

* To maintain and improve our human capital,

* To use technology to become more efficient and obtain a better quality of life,

* To attract and retain the highest quality personnel,

* To adopt a series of initiatives to improve and expand client relationships,

* To continuously improve the firm’s economic performance.

(Fear not. No one leaked us a copy of your strategic plan. These are just a few of the more common objectives we find listed in every law firm strategic plan that we see).

In the past it probably didn’t matter since virtually every firm during the 90’s was growing and making more money than any partner thought possible. There really was no crying need for effective strategy.

But our star RPL performers took a different view of the world. These firms recognised, earlier than most, that they were practicing in a dynamic environment in which rivals, like MDP’s, could come from anywhere looking to eat their lunch and that the pace of change was becoming blindsiding. They recognised that the practice of law, for those firms playing by the same old rules, was destined to become a lot less profitable. These firms began to look to the horizon to see what changes might have an impact on their practice – not in preparation to adapt because then it’s too late, but in anticipation of getting out in-front-of-the-curve.

Let’s take a glimpse at a few of the critical issues that these firms might be looking at today.

Reality check: feeling the heat

What can you do to see if your strategy still has a pulse? Here are seven critical issues

that any worthwhile strategic plan should take into account:

* Your practice may be dramatically affected by convergence trends: where companies like DuPont (and my partner Dan Mahoney) once used 430 law firms – and now use only 34 firms. In fact, according to a very recent survey of the Fortune 1000 companies: 70 per cent of the Fortune 1000 plan to decrease the number of firms on their approved list over the next 5 years; 57 per cent of the Fortune 1000 plan to decrease their use of outside law firms over the next 5 years.

* Even more alarming, when general counsel of Fortune 1000 companies were asked the question: “How satisfied are you with the specific partner who handles your companies matters?” Only 5 per cent responded “very satisfied”.

When we sight those statistics to most firms, few will take us seriously. Try it out for yourself. Ask your partners how satisfied they think clients are with the level of service the firm provides? It is indeed hard not to believe the high percentages that your partners will offer. We ourselves had a hard time believing the reported 5 per cent.

Then we came across some proprietary data, from survey results in a number of top ten US markets, where the question was phrased slightly differently. Here CEO’s and business owners were asked: “If a law firm, you’ve never used, wanted to attract some of your company’s legal work, what is the best approach they could take to get their foot in the door?” Now compare the fact that only 6.9 per cent responded: “Nothing, they couldn’t, we’re completely satisfied!”

* Don’t think professional services are immune from the competitive pressures brought about by the empowerment of the internet. Clifford Chance is but one law firm that is implementing innovative new strategies and aggressively forecasting that online services could account for 20 per cent of the firm’s business within the next five years.

* New online auction services pit law firms against each other to bid for big legal jobs. As of January, eLaw Forum has conducted about 25 auctions, expects to conduct more than 400 by the end of this year, and estimates that it has driven legal fees down by an average of 30 per cent.

* More and more legal work is becoming commoditised. As that happens, what many lawyers charge for their services is destined to drop significantly. Smarter corporate counsel are keeping more of their legal work in-house and pushing fixed-fee arrangements on some of their pricier firms. They are also farming more of their low-margin commodity work to cheaper firms.

* The future may very well favour those firms that become well known for servicing specific industry sectors. When Fortune 1000 counsel were asked the question: What skills do partners lack most? The highest rated was: understanding our industry – 51 per cent.

* Finally, according to a recent study by PricewaterhouseCoopers – “Law firm marketing suffers most noticeably from firms having a tough time focusing and agreeing on what really ‘differentiates’ their practices.” How many of these critical issues have you developed specific actions to address in your latest strategic plan?

Eyes wide shut

Many firms, that have been involved in conventional strategic planning, are failing to improve their ability to differentiate themselves, their competitiveness or their relative growth, in spite of the investment of time and effort in the planning exercise. How many firms with a beautifully presented strategic plan have anything meaningful to show from their efforts? One would think that the application of strategic planning methodologies would have achieved more measurable results.

Our star RPL performers long-ago recognised that the typical strategic planning exercise now conducted, and infused with massive quantitative data, misses the essence of the concept of strategy and what is involved in being innovative and differentiated. Meanwhile, the word ‘strategy’ has unfortunately become a devalued term, challenged only in the buzzword hall of shame by ‘paradigm’ and perhaps ‘out-of-the-box thinking’. Some supposedly enlightened consultants are now promoting ‘strategic thinking’ or ‘transformation’ as the latest terminology.

But the problem here for most of us isn’t with terminology. The need for crafting competitive strategy could not be more acute. The real problem is one of helping firms understand that continuing to utilise a shop-worn, tired old approach, simply doesn’t work anymore.

If you’re interested in learning how those firms who produce above-average RPL results are doing it, it may be instructive to start with what doesn’t work, before we turn our attention to what does. Let’s delve into the typical strategic planning process as is so often practiced or proposed by outside consultants, and conduct a quick review of seven of the most time-worn methodologies that are still so often employed, and explore why they are so often a waste of time.

1. Financial review

“We will review your financial data and convert it into templates that allow us to advise you on how you compare to similar firms.”

Many of us are just old enough to remember that in the early days, firms often recruited their first law firm administrator from either the military or the police force (I guess managing partners needed someone with that kind of background training and clout to help herd the cats!). But now, the executive director at a top firm is a sophisticated administrator with ample financial training and access to reams of comparative statistics. Do we really think that this professional has not been doing the job?

Top performers appreciate that all too often firm leaders forget that financial numbers are an abstraction, and often give the illusion of precision. They are largely historical and can serve to blind leaders to future changes. As an example, when American Express was experiencing a competitive crisis in the early 1990s, one of its executives

commented, “Our return on equity had been in excess of 20 per cent a year for decades. The attitude was, ‘Who can argue with those numbers?’” If you have chosen to retain the assistance of a consultant in helping with your strategic planning, then having that individual conduct a financial review, look at your firm’s organisational structure, peruse your partnership agreement, and audit past business development achievements. These are all legitimate steps – in an ‘orientation process’ that any consultant should just naturally take to get to know your firm. But why would you start a strategy process (that implies looking forward) with a formal step that serves to focus internally and look backward?

The top performing firms understand that the task at hand is to craft a competitive strategy, not conduct an operational review, and this course of action doesn’t exactly set the tone for a process that should be concerned with creating new wealth.

2. Partner interviews

“We will conduct one-hour, in-person interviews with the appropriate mix of lawyers and staff.”

We trust that everyone can fully understand the importance of obtaining ‘buy-in’, especially from our partners, to any strategic planning initiative. We ourselves learned many years ago that no partner will support, get truly enthusiastic about or willingly participate in implementing any plan, that they themselves have not had some part in formulating. But we are also convinced that there are far more effective (and far less time consuming) ways of getting everyone actively involved, than having a team of consultants running around your firm giving everyone half-an-hour to articulate their pet peeves.

3. Firm vision

“We will commence our work with you by helping to develop and communicate to the partnership, a guiding vision for where your firm is going into the future.”

Remember mission statements? Mission statements first came into vogue in the 1980s. A single page document filled with more platitudes than you’d find in the average prayer book, spelling out your firm’s business mission. No one remembered the darn things, it was business as usual, and the document didn’t have the profound impact on the fortunes of firms that their creators had hoped for. The mission statement exercise was quickly forgotten – except at those few firms who chose to have them laminated as cards for every lawyer to keep in their wallet. Then came the 1990s and...every firm needed a vision. It was a new name, but quickly became the same old silly exercise.

All your sceptical partners exchange winks and knowing glances. The executive committee will have to be indulged one more time. In 99 per cent of all cases, the result was to be the same – having a vision changed nothing. We are not aware of one single firm among those achieving above-average RPL performance who have invested partner time in developing a mission or vision statement.

4. Client assessments

“We will conduct in-person interviews with a number of your most significant clients. These interviews make it possible to assess the service levels your clients perceive as well as identify areas in which you excel or need improvement.”

How do you argue with motherhood? Yes, yes, it seems that in spite of the numerous articles written in law practice management journals, on the extraordinary merits of assessing client satisfaction, there are still those firms that have not made it an operational habit. But, once again, this is an operational issue. Assessing client satisfaction should be an ongoing process and not merely relegated to being part of your strategic planning.

The strategy issue is not client satisfaction! The strategy issue is client (and prospective client) ‘needs’ – and the highest performing firms clearly understand that. It wasn’t client satisfaction that drove a UK firm like Linklaters to devise an internet service that investment bankers and portfolio managers would ultimately pay a one-time initiation fee of $200,000 and an annual subscription of $72,000 to receive. It was an acute understanding of client needs. So we don’t hold out much hope for firms being able to create new markets, new clients, or new revenue streams from asking clients about their level of satisfaction with our parking availability.

We have long advocated that partners should make it their business to understand what it is that is keeping their clients awake at nights. But when you are seeking to craft strategy, you have to go even beyond what is keeping them awake, to truly understand their much deeper needs.

Understanding what clients need is a whole different process. There are five levels of client needs that should be explored: explicit needs, observable needs, tacit needs, latent needs, and emerging needs. Many are satisfied if they can get a handle on their clients’ current needs. But, this is not the total answer. You must also think far ahead of the curve. You must lead the pack by anticipating clients’ needs before clients even know those needs exist.

Innovations like 3Com’s Palm Pilot and Federal Express’s overnight delivery literally created new client needs to achieve growth. Dave Pottruck, the co-CEO of Charles Schwab says that most of Schwab’s huge innovations have come from asking clients, “How can we make your life easier?” Please don’t misunderstand. Improving client satisfaction is a critically important issue. It just should not be the primary focus for conducting in-person interviews with clients, when seeking to craft strategy.

5. SWOT’s Analysis

“We will develop our strategic plan in the context of market realities and the firm’s strengths and weaknesses, and offer suggestions.”

Almost every firm that goes through the conventional strategic planning process uses some form of SWOT’s analysis. To the uninitiated, SWOT is an acronym for ‘strengths, weaknesses, opportunities, and threats’. It means, quite simply, that we will all engage in an exercise to have a look at what are the various internal strengths and weaknesses of the firm, and then look to what particular threats and opportunities there are that could be exploited. Sounds sensible enough. And it is, if you are a boutique practice or smaller firm of perhaps 50 attorneys or less. But the process, as it is currently, most often executed, is a complete waste of time for firms of any significant size. In some cases it has probably done more harm than good. In fact, let us press this point by providing you here, with a rigorous analysis of your firm’s current strength and weaknesses:

Strengths

* Many talented attorneys,

* High level of client satisfaction,

* Excellent opportunities for cross-selling,

* Quality of firm’s legal work,

* Ability to serve most client needs,

* Strong reputation,

* Collegial culture,

Weaknesses

* Insufficient team approach to providing services,

* Trend toward too much me – not enough we,

* Relatively high attrition rate of associates,

* Insufficient cross-selling,

* High hourly rates for commodity legal work,

* Unwillingness to make hard decisions like terminating unprofitable work,

* Weak differentiation from competitors,

* Unevenness of marketing efforts among partners,

* Communication between management and partners.

Does any of this sound familiar? So what is the relevance of all this to strategic planning you might ask. Nothing whatsoever. All too often this turns out to be an exercise in identifying the most trite descriptions of firm strengths and weaknesses!

The real question, that the above-average RPL performers are continually asking themselves, is: are there any attributes, which signify meaningful differentiation, that clients regard as valuable and distinct to our firm?

The proposition that we would put forward is that a SWOT’s analysis (like marketing) is irrelevant at the firm level – other than to perhaps help assess image, geographic aspirations, culture or governance. Any meaningful assessment of strengths and weaknesses is best left to the practice group level where we can instinctively understand that it is going to be far different for each practice group – which leads nicely into our next point and one of the most critical.

6. Practice Group Contribution

“We will hold meetings with your practice groups to allow members to voice ideas and opinions about the firm’s strategic plan.”

If the only contribution the practice groups are expected to make is to voice opinions about your firm’s strategic plan, or sit quietly by waiting patiently for their marching orders from on-high, then we have effectively short-circuited the audience that could make the most meaningful contribution to your firm’s strategy.

It has been long debated as to whether the most effective strategic planning is a top-down process or bottom-up process. Our observations and experience convinces us that it is both.

The top-down process needs to be concerned with the growth and direction issues that result from looking to where the profession is evolving and how we might best allocate critical resources to take advantage of the future.

Instead of advocating a top-down approach, strategy should be set in a dialogue involving all levels. The aim is to help firms, from the practice, group-up and create distinctive strategies to keep them ahead of the competition. Staying ahead is easier said than done. It requires a depth of insight that most firms depend on when they are young, but lose when they age.

The bottom-up process is simply a recognition that the greatest opportunities for truly differentiating your firm and gaining competitive advantage emanates from individual practice groups. If we recognise that a firm is comprised of discrete business units, we see that the way in which you market a securities practice is likely to be very different from how you might market a heathcare practice. So, too, your securities group competes with a very different collection of firms than your healthcare group might compete with. What naturally follows is that the ‘needs’ of securities clients, and the emerging opportunities for the securities practice to explore, requires that the group develop their own strategies interdependent of the firm as a whole.

What we have learned from those firms achieving above-average performance is that they have balanced the need to develop an overall top-down strategic plan for the firm – with having multiple bottom-up plans developed by each practice group – where many of the most important growth opportunities exist.

7. Implementation

“This process usually takes nine months to complete. We would be pleased to help you implement your strategic plan. However, we do not include fee estimates for implementation here because we cannot predict the form your strategy will take.”

We understand that it takes nine months to give birth to a baby, but we also believe that everyone instinctively realises that a lot can happen in nine months. It took less time for an e-mail service called Hotmail to go from a standing start to millions of users, or for the NASDAQ to lose half its market value.

It’s a brand new, do-more-faster age. Today’s global economic dance is no Strauss waltz. It’s break dancing at break-neck speed. Success in this new marketplace is directly proportional to the competitive growth strategies and management sophistication that your firm can bring to bear, and how fast you can do so. What is difficult to fathom is why implementation cannot be a natural part of any strategic planning process. Why can’t you build ongoing implementation into various steps in the process? Rather than spending time interviewing every partner to build buy-in, why can’t you engage the partners in an exercise that allows them to participate in assessing the firm’s competitive position, identifying growth issues, and setting to work on some initial actions and perhaps, some small limited-risk experiments? Where is it written that you have to wait for the better part of a year, until your plan is finalised?

In light of these glaring flaws is it any wonder that some of the best performing firms have concluded that strategic planning, as currently practiced, is passé? If you begin to play that out, it leads inevitably to a very different kind of strategy process than you may have experienced thus far.

It’s time to change the way you think about strategy

We believe the state of most strategic planning tends to be too structured. It is too unimaginative, too backward-looking, too conformist (to precedent and what has gone before), too data and numbers oriented (a budget is not a strategy), too analytical, and far too similar (to plans developed by competitive firms). In the final analysis most of these strategic planning ‘systems’ appear to result only in massive paper, solemnly clad in three ring binders, gathering dust – their specific prognostications long forgotten. They have been of little help to firms in developing truly innovative and differentiated strategies, or achieving above-average RPL results.

You must be able to challenge conventional thinking in order to grow. Conventional thinking only leads to mediocrity and being stuck in the middle of the pack. To grow you have to be willing to break the rules. You can’t grow by following in the footsteps of competitors. You have to break away from the pack. Unfortunately, some firms tend to drift along with everyone else, reacting to changes in the tide, hoping that maybe things will start coming their way. From these firms, we continue to hear that “strategy is the easy part, it’s the implementation that is hard”.

Implementation may indeed be a challenge, but the notion that strategy is easy rests on the mistaken assumption that conventional strategic planning has anything to do with strategy-making. Of course strategy appears easy when the conventional planning process narrowly limits the scope of discovery, the breadth of involvement, and the amount of intellectual effort expended, and when the goal is something far short of growth, differentiation, and wealth creation. Little wonder, that in many firms, the whole notion of strategic planning has been so devalued. How often has it produced any real strategic innovation?

What is your measure of success in the development of strategy – a lengthy written document that finds its eventual resting place on the shelf of some managing partner’s bookcase – or – a process that leads to competitive differentiation and wealth creation?

What we have learned is that the best performers are taking an entirely divergent tact. The way in which they are approaching the strategy process is based on some fundamentally different principles that I will explore in part two of this series.

Patrick McKenna is the principal of Edge International and can be contacted at patrick.mckenna@attglobal.net.