Preparing for an Unpredictable Future: Scenario Planning Tips

It hardly needs saying that the future is difficult or impossible to predict. Law firm pessimists often indulge in catastrophizing many situations that they think will be threatening or disastrous to the firm. Optimists, on the other hand, may become even narcissistic in exaggerating the firm’s special market position and often over-emphasize the chances of upturns and a positive competitive environment. At the same time, complacent partners are almost always tempted to stay in their comfort zones and to assume that life will carry on much as before.

“Scenario planning” is a useful way of setting out a number of possible pictures of the future for the firm, dependent on potential changes in the market or within the firm. By scenario planning, the firm can assess the implications and influences for their preferred strategy that their view of the possible future implies. The process enables both contingency planning and the exploration of the various strategic options, and can help to lift the eyes of partners from internal obsessions to view the external horizon with a greater degree of realism. The standard approach is to view three possible scenarios – optimistic, neutral and pessimistic – which allows for a number of possibilities to be illustrated and for responsive plans to be developed.

A slightly more nuanced version is shown by the four-box matrix in the table, which enables a comparison between two major likely changes in the market, leading to four possible scenarios to be developed. Consider, for instance, the economy in general and market competition, which provide two of the drivers of change in the future for law firms.

Ten years ago, some pessimistic experts were predicting that the legal profession would meet hugely increasing challenges from clients (on pricing and service delivery) from NewLaw Providers (using new business models) and from technology (providing a huge impetus to change). These forces have increased steadily but not at the pace that some predicted. In the UK, for instance, some experts predicted that half of the nation’s law firms would go out of business within five years, and this has not happened – only a modest reduction has occurred. Hence, it would be quite within the bounds of possibility to envisage a short to medium future in which firms experience much the same increase in competitive pressures in the next five years as has been suffered in the last. Equally, the approach of a tidal wave of competitive pressures cannot be discounted, bringing about the possibility of a potential doomsday scenario. At the same time, on an economic front, whilst the worst of the downturn seems to be over, it is difficult to predict how strongly global and local economies might recover. Hence, scenarios at both ends of the economic forecast can help firms to plan better.

The combined approach helps to suggest trends that should influence the sort of plans that might result – whether to invest and grow boldly, move aggressively, hunker down or contract and prepare for a bleak and negative climate and era for law firms.

Taking Advantage of Emerging Practice Areas

The economy is making a lot of firms nervous about the future of their traditional practice areas.  So, it’s not surprising that firms want to look at “emerging” practices – areas where they might be able to establish a position of strength before competitors are even aware that the practice exists.   But new niche practices require law firm leaders to develop a different mindset and a unique set of skills compared to what is required for a traditional legal practice – and not every emerging practice turns out to be a success.

As law firms look at their strategic options there is always a desire to find unique niches of market opportunity that competitors have missed and in which a firm could spring to dominance.  There is a life cycle to practices and while some slide into maturity, others emerge as new opportunities for lawyers and their law firms.

“Emerging” generally refers to areas of legal practice that represent new marketplaces – marketplaces where clients have not previously demanded nor been offered services.  Emerging practices can be whole new areas of legal practice (like Islamic Finance which involves the interpretation of the Koran and the structuring of business transactions to conform with limitations on the ability of Muslims to charge interest) or traditional legal practices as applied to a new purpose (like Homeland Security).

There are several characteristics that epitomize emerging practices:

• Typically, there is low demand for an emerging practice but, because there are few lawyers who can provide the service, the pricing of emerging practices can be quite aggressive.  For example, the first cases involving biomedical issues related to the patenting of human genes brought together patent law, medical ethics, and advanced biology resulting in extraordinary fees to the participating lawyers because there were so few lawyers sufficiently knowledgeable to handle the matter.
• Often, an emerging practice appears not to be a legal practice at all, as is the case with HIPPA and IP lawyers who are arm-deep in the new technologies allowing hospitals and physician practices to share client files.
• Finally, emerging practices often don’t mature into real practices in which a law firm can derive a profit.  The best example is in 1999 when many firms invested heavily in creating a Y2K practice.

But, despite the problems, like the “forty-niners” rushing to California, law firms creating strategies will always consider capitalizing on some form of emerging practice.  And like the gold rush, it only takes a few found nuggets to justify the risk.

Let me suggest seven things law firms should consider before they roll the dice on an emerging practice.

1. Is there a distinguishable legal service?  It is not uncommon for firms to list emerging areas on their website without really having the capability or even knowing what is involved.  For example, homeland security is viewed as an emerging practice by many firms but, when you read their website description of what a homeland security practice involves, it is hard to envision what a lawyer would actually do for the client.  A good test is to create three hypothetical engagements and describe to yourself what the firm would do, which lawyers would be involved and how much you would likely charge for the engagement.  If the answer doesn’t make sense to you, it probably won’t make sense to a client either.

2. Can you leverage existing expertise and experience or would you have to build a capability from scratch?  Many emerging practices are really new industries where there may be some new legal skills involved, but the bulk of the practice involves adapting the firm’s existing knowledge to a slightly different application.  For example, when Indian gaming law emerged as a practice a lot of firms attempted to simply adapt their regulatory experience to a new area.  But the state by state regulation of gaming and the unique Federal and tribal laws involved made it very expensive for firms to develop a foothold.  The test is, if your firm won an engagement today, what lateral experience would you have to acquire and where would you get it?

3. Is the niche large enough to justify the effort and risk?  Imagine that someone gave you a tip on a $10 stock so you bought 500 shares.  If, a week later, the price doubled it would be a huge win, but you would only have made $5000, not quite enough to retire on.  Betting on emerging practices takes a lot of management, recruiting and marketing effort that draws resources away from proven practices.  Test the emerging area by defining what would realistically be a big win and see if it justifies the investment and the risk.

4. Is this a service that clients will buy?  An old marketing line is that, “It doesn’t make any difference if you build a better mousetrap unless the customers think they have mice.”  We had a client that laughed at the suggestion of one of its partners about creating a homeland security practice – until they talked to a couple of clients with international operations and learned that one of their top concerns was corporate immigration issues.  Test the concept with the basic client question: “We’re building a capability in ___ ;  would that be of value to you?”

5. What is the life expectancy of the practice?  Is this a practice that has a long shelf life or is it related to a specific event?  For example, a lot of firms are developing distressed property liquidation practices to respond to the current meltdown of the mortgage markets.  Clearly, that is not a long-term practice, so the question is, can the firm obtain enough business to make it a legitimate short-term entrepreneurial opportunity?

6. Can you protect a first mover advantage?  You can always tell the pioneers – they’re the ones with the arrows in their backs.  Are there sufficient barriers to entry to make it difficult for other law firms to jump on board after you have pioneered the emerging practice?  If not, does it make better sense to sit back and wait until some other firm makes the investment and takes the risk and then, when the practice proves itself to be successful, jump in with both feet?

7. Can your firm manage a fluid practice?  For an emerging practice to pay big dividends, a firm has to be able to manage its investment.  That means being able to decisively double down on successful practices and jettison those that don’t take root.  I have heard countless firms rationalize a decision about a new office or a lateral by saying, “We can always reverse our decision (close the office, fire the lateral, dump the practice) if it doesn’t pan out.”  That’s easy to say, but for many firms, difficult to do.  So, firms creating an emerging practice should set benchmarks for success at the end of a reasonable period.

The bottom line is that emerging practices are fun and exciting but, like any new business, their likelihood of being a windfall success is low.  A law firm’s core strategies have to remain their sustaining practices.  Or, to put it another way, “Don’t shoot the plough horse until you learn how to drive the tractor.”