Sunday, October 21, 2012

The New Economics for Law Firms: Growth Is Dead

Bruce McEwen has posted a six-part series of articles on the Adam Smith, Esq. blog entitled Growth is Dead.   This is a very important set of articles for anyone interested in the economics of law firms.

He writes, "From more or less 1980 until approximately September 15, 2008, the industry of BigLaw enjoyed an unprecedented run of growth in revenue, profitability, and headcount, with compound annual growth rates in the middle to high single digits for virtually that entire period, with only the occasional hiccup.  This is almost unheard of in modern economies. . . .  Everything changed with the Great Reset."  The result: "Clients, who had always had power but might not have known or exercised it, realized they did and they could. This will not change back. Pricing pressure is here to stay."  Most importantly, "The BigLaw industry suffers from excess capacity on several levels, including a surfeit of JD graduates being churned out by US law schools, too-high levels of leverage among traditional associate ranks, overpopulated ranks of non-equity partners, underperforming equity partners."  He concludes, "And excess capacity at the most fundamental level, I fear, means too many undifferentiated firms chasing too much of the same types of business, and tempted to engage in short-sighted, self-defeating pricing to keep revenue flowing."

McEwen suggests that to solve these problems, law firms should look to how other industries have been solving similar problems for a long time.  Growth in most industries means a rate approximating population growth.  One source he looks to concerning this reality is A.G. Lafley, CEO of Proctor & Gamble:

"1. In an age of disruption, growth is getting increasingly difficult. [That's precisely the point.]

2. Companies need to take the long view. Lafley said he finds it hard to watch CNBC for more than 7 minutes because the focus is so short term. 

3. The customer needs to be the center of the innovation equation. When Lafley took over as CEO in 2000, he said he saw too many managers on their cellphones, or buried in spreadsheets, in essence “showing customers their behind.”

4. Experimentation is key. Lafley talked about the value of giving customers even crude prototypes to test an idea. He also described how different parts of his organization approach innovation differently, and that’s a good thing. 

5. Complex organizations need to simplify to successfully innovate. Lafley said he seeks Sesame Street simplicity. 

6. The CEO has to be the “Chief External Officer” to manage external pressure and the “Chief Innovation Officer” to push the innovation agenda forward. [Neither of which roles comes naturally to most lawyers.]"

In sum, "I dwelt on P&G under Lafley because they faced a market landscape with intrinsically limited growth, as do we, and he approached it in ways we would never dream of, including inviting ideas from outside the firm and developing totally new products in segments thought to be stagnant. . . . I dwelt on A.J. Lafley and P&G earlier because they confronted these Darwinian pressures of the marketplace a dozen years ago, and responded in an enormously creative, not to mention successful, fashion. Will we have the imagination, the applied intellectual horsepower, and most critically of all the unswerving resolve, to do the same?"

There is much more to learn from this series of articles.

(Scott Fruehwald)

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