Know Your Buyer, Know Client’s Internal Clients

At the risk of expressing pablum, KNOW YOUR BUYERS! More importantly, KNOW THE INTERNAL CLIENTS OF YOUR BUYERS! I was reminded of these insipid (yet important!) refrains during work with a client. My law firm client had three seemingly unrelated practices that all served the needs of the same particular buyer of legal services inside of a corporate environment, yet they shared none of the same clients. How could this badge of cross-selling failure happen, you ask? It actually makes sense if you understand something about lawyers, the businesses they serve, and their knowledge (or lack thereof!) of the roles certain people play inside companies. Net, net, however, it was a big failure and lost opportunity for my client firm.

Now the particulars. The three practices at the intersection of all this were my law firm client’s L&E practice, tax practice, and corporate practice. You’re probably asking yourself, “What obvious connection could exist among these three practices? What could the client stakeholders in an employment discrimination dispute have in common with the managers who count beans with tax lawyers, let alone the business managers who structure deals, alliances, and ventures?” While the matter types associated with these practices are very different, the thematic similarity lies in the nature of the internal clients these practice groups at times can share. Peeling back the onion a bit further, think about the tax practice that in part deals with ERISA and other benefits related tax issues, or think about the corporate practice that structures multi-year outsourcing arrangements involving the HR function of a client business. The intersection becomes clearer now as you see that there are occasions when each of these three disparate practice areas serve the same functional area of a business, namely the corporate HR function; now the opportunities for real cross-selling opportunities start to emerge!

For law firms that work primarily with in-house law departments, you should think about the internal clients of your own law department clients. Just as the HR department can keep law departments (and their law firms!) busy with benefits planning tax work, highly structured outsourcing arrangements, or employment discrimination cases, product development departments can keep law departments busy with IP work as well as with products liability litigation. As a law firm partner serving these clients, make sure you understand as much as you can about the activities of each functional department of your law department client’s business, and how those business activities can translate into legal work. Don’t be surprised if your immediate clients – the law departments themselves – don’t have full knowledge of what their internal clients do outside of the work they see or pass out to you. For law departments that are looking for broader ways to support their employer, you can position yourself as a consigliere of sorts by helping them take an inventory of the other operational activities of their internal clients and, in so doing, helping them take additional turf.

So get your client’s organizational chart and sit down with your law department clients so you both can begin to know your buyer even more!

Bigger vs Better: Should your firm merge?

First, see if it can answer “yes” to one essential question.

So law firm mergers are back in the news again, to the continued fascination of the legal press. For every combination that’s completed and announced, you can count on several others bubbling under in conversations within executive committees and at luncheon gatherings of senior partners, so there likely will be more such deals announced throughout the balance of the year.

It’s not clear that “mergers” are the best word to describe many of these transactions. Some of them involve global behemoths swallowing up comparatively modest firms in desired regions, resembling not so much a business deal as the annexation of territory. Others are billed as marriages of equals, but with so many of these merged firms maintaining their own profit pools, they seem like marriages where the spouses have no joint bank account and keep separate residences.

The common thread among all these deals, however, is that the merging firms go to great lengths to publicize the impressive size of the new entity, the huge number of lawyers, offices, and jurisdictions it will boast. It’s the kind of tactic you could understand if, say, two ice-cream dealers merged and could now deliver 70 flavours in one location, rather than 30 and 40 in separate stores as before. More volume and greater selection are obvious customer benefits in that kind of market.

It’s more difficult to make out clear customer benefits from law firm mergers. There’s an unspoken assumption that more lawyers in more offices in more locations is self-evidently a good thing, a competitive advantage and a client service. And maybe there are tactical benefits to be gained, especially around marketing strength, talent acquisition, and the like.

Yet I can count on the fingers of no hands the number of corporate clients I’ve overheard wishing their law firms were bigger and farther-flung. To the contrary, many clients greet news of a merger with a certain exasperation, having to turn their minds to identifying and resolving potential conflicts, or to awaiting the inevitable rate increases from the new entity.

Any law firm that’s considering a merger or acquisition should ask itself one question — the same question, really, that it should raise whenever any foundational or strategic decision is in play: “Would this make our firm more effective?” It’s a powerful question, because it forces the firm to focus its attention on its fundamental business purpose.

The point of any business is to serve its customers. For a law firm, that translates into helping clients in its chosen markets achieve their goals by addressing their legal challenges and opportunities. A law firm should be considered successful only to the extent it helps clients achieve their law-related objectives. Would a merger allow the firm to accomplish this mission more effectively? And if so, how?

Effectiveness, remember, is defined from the perspective of the client, not the firm. Clients consider a firm effective if it anticipates and meets their legal needs in the context of their business realities, demonstrates real commitment to procedural improvements that increase quality while reducing cost, provides reliability and competitiveness around pricing, and keeps lines of communication buzzing and productive. Mergers, by themselves, aren’t going to move the needle very far on any of those criteria.

Mergers might very well deliver competitive advantages, although I’d love to see a study that contrasted those advantages with the costs of merger, which are manifold and substantial. But potential mergers ought to be scrutinized primarily with specific reference to how they will enhance the firm’s effectiveness in its chosen markets, rather than with vague assurances that “global clients want one-stop shopping.”

Size alone is no longer a significant differentiator for law firms. Increased profitability does not correlate strongly with increased size, nor does talent retention, realization rates, client satisfaction, or a host of other measurable criteria with which firms should be closely concerned. There is little evidence that becoming bigger means your firm becomes better. If you’re unsure about this, feel free to call up a few key clients and ask them what they think about your merger plans. Their responses should be illuminating.

Local Clients, Local Work

The biggest factor in most law firms’ success is the quality of their client base. In large measure this is because different clients have differing volumes of work, complexity of legal needs and price sensitivity. Appropriately, therefore, many law firms’ strategic plans are built, at least in part, around improving their client base. Unfortunately, there is a lot of misinformation floating around about what constitutes a “top quality” client and many firms are blinded by incorrect assumptions about the kind of clients they want to generate. Firms naturally gravitate to large clients with high visibility and marquee names. But while such clients might look good on the firm’s representative client list, whether they actually represent an improvement to the client base may be an entirely different question.

Each firm has a “recipe,” a combination of capability, experience, quality of lawyers, geographic location, pricing and dozens of other features that make up its business model. The business model is the structure and way of practicing that provides the best value to the client while producing an acceptable profit to the firm. A law firm can either design its business model around its existing clients or it can create a business model and then seek clients that suit the model. It is therefore logical that, if a law firm’s business model perfectly fits its client base (just the right levels of services, prestige, pricing, etc.) and the firm desires to change its client base, it is likely that the firm will have to adjust its business model.

Here’s the surprise — in a lot of firms the business model is not particularly well suited to the firm’s clients. There are a variety of reasons for this incongruity, but frequently firm leaders have a myopic view of the type of work their firm is doing for their big name clients. We recently worked with a large law firm that boasted a major bank as one of its largest clients. The firm’s managing partner described with pride the large transactions and significant litigation matters the firm had handled for the client. But as we met with the practice group chairs it became apparent that such sophisticated cases were, at best, episodic, and really represented the work the firm had more routinely done five or ten years before. The bulk of their practice for the bank today was heavily commoditized at sharply discounted rates, while the sophisticated stuff was now going to firms in New York and Washington, DC.

The managing partner was not lying or purposefully mischaracterizing the work the firm was doing. Rather, there is a natural tendency to focus on the best work and forget about the less spectacular practices. As my golf pro recently pointed out to me, many golfers are subject to what is called “distance illusion.” This is where amateurs select clubs based on the farthest distance they have ever hit a club instead of the distance they normally hit. As a result, the majority of golf shots by amateurs are well short of their target. Similarly, many law firms have a business model built on the illusion of the practice they (a) used to have, (b) think they currently have, or (c) hope to have in the future.

Since change requires knowing both where you are and where you want to go, let me suggest a basic technique for analyzing and targeting a firm’s client base. Start by recognizing that in almost every law firm, 80 percent of revenues come from 20 percent of the firm’s clients. This means that 80 percent of your clients make up only 20 percent of your revenues, so it makes sense to focus on the clients where a firm makes most of its money and forget about the small potatoes. Divide the top 20 percent of your clients into two categories, local clients and non-local clients.

LOCAL CLIENTS

Local clients are those businesses located within the law firm’s primary geographic marketplace. This involves clients whose selection of a law firm is based almost entirely by the convenience of geography and, secondarily, by the firm’s reputation in that market. Local clients generally represent the middle of the market in terms of the size of the client’s business. Extremely large clients are likely to send much of their work to large, high-profile firms in capital market cities. Very small clients may seek legal counsel at the fringes of the marketplace, perhaps even the internet.

The same is true for the work being performed. The most sophisticated work in almost any practice area has the potential of being sent out of town to a non-local law firm, particularly if there is a third party involved such as an investment banker. At the other end of the spectrum, the lowest level of work may be so commoditized that it can be handled by specialty firms outside the local legal market.

Local work can create a strong tie between the law firm and the local client. While a common location may lead to a highly stable and loyal relationship, the billing rates charged are strongly dictated by the marketplace. Therefore, the ability to increase revenues from local work for local clients through higher rates or increased volume of work is very difficult. Further, the work is in jeopardy to firms moving into the geographic market or as the result of the client’s merger or acquisition. For most firms, local work for local clients makes up 70 to 80 percent of their work.

Firms may also have the opportunity of performing non-local work for local clients. Non-local work is in a geographic location where the firm does not have an office and comes to a firm largely as a result of the relationship built up with the client and the client’s appreciation of the firm’s capabilities and knowledge of their business. In giving a firm non-local work, the local client is saying that the value of the relationship and the client’s respect for the firm’s capabilities exceed the cost of travel involved in the representation.

Non-local work for local clients is often performed at rates the firm charges the client for local work, regardless of where it is situated. Therefore, pursuit of this work may represent an increase in volume but not necessarily benefit the firm’s profitability. For this reason, if the opportunity is sufficient, firms will often consider opening offices in locations representing higher rate opportunities, thereby changing the non-local work for one office into local work for another. In the process, the work is now billed at the new offices rates, e.g., if a St. Louis firm opens a New York office to serve a St. Louis based firm, they will presumably charge New York rates for that work. Nonlocal work for local clients represents about 10 to 15 percent of most law firm’s work.

NON-LOCAL CLIENTS

Non-local clients represent opportunities at the highest and lowest ends of the practice. In most situations, the most profitable opportunity for a law firm is non-local work for nonlocal clients. This normally occurs when a client has a matter in a jurisdiction and wants the best possible law firm to handle the case, regardless of where they are located. This may be because the firm is recognized for its expertise and capability or it may be its experience in handling similar matters for the client. For example, a Midwestern corporation may bypass its local legal counsel and select a Wall Street firm for a securities offering due to their expertise and reputation among investment bankers. The same company may choose a specific litigation firm for liability cases across the country because of the firm’s technical knowledge of the product and winning record.

In almost all circumstances nonlocal work for non-local clients represents the greatest opportunity for a law firm to enhance the sophistication and profitability of their practice. Because the work often permits premium rates, firms find the ability to attract non-local work as an attractive benefit of dominance in industries or highly specialized areas of practice.

The lower end of non-local client relationship is local work. This is work generated largely by the firm’s geographic locations. It includes serving as local counsel and doing commodity litigation cases including insurance defense. There certainly are cases where a client is seeking special expertise and experience for a sophisticated matter and may select a local firm where the work is situated. However, in such situations the firm is largely tied to local billing rates and opportunities for enhanced profitability are limited.

CLIENT IMPROVEMENT STRATEGIES

If a firm’s objective is to improve the sophistication and profitability of its practice by improving its client base, the most productive strategy is likely to involve non-local work. To obtain this work, a law firm must develop a very focused strategy.

1. Be Realistic A local firm, no matter how good their relationship with the client, is unlikely to wrestle away a billion dollar transaction from Skadden Arps. Therefore, it makes sense to focus on specific areas of work the firm has a realistic chance of obtaining.

2. Depth no Breadth To do local work for local clients you can get away with being an inch deep and a mile wide. That doesn’t work for non-local work. Even if a local client respects your capability to do sophisticated work, there is a common concern that local firms don’t have the horsepower to handle multiple deals at the same time.

3. The Guilt Card Most clients want to be good corporate citizens in the communities in which they are located. Assuming a firm can demonstrate its capability and depth, selling the value of hiring a local firm is a valuable tactic to getting non-local work for a local client.

4. Business Knowledge The worth of industry knowledge, particularly in a transaction or litigation matter that involves specific business issues, is invaluable. A firm seeking non-local work for non-local clients has two strategic options. One is being the leading law firm expert in a specific industry.

5. Track Record The other strategic option for getting non-local work from non-local clients is having a winning track record. Having successfully closed a lot of similar deals or won similar cases is a huge selling point. Improving a law firm’s client base is not just a marketing or salesmanship issue. It involves an understanding of both the type of client and type of work being targeted and designing the firm’s structure, business model and capability around the objective.