Adventure of Strategy

Law firms in the state of New Jersey have just received the 'green light' to own other law firms as subsidiaries. (In most other jurisdictions and previously in NJ, law firms could own other kinds of commercial entity, but not other law firms.) The opinion was issued jointly as Opinion 704 of the New Jersey Supreme Court Advisory Committee on Professional Ethics and Opinion 37 of the Committee on Attorney Advertising.

The prohibition on fee sharing with non-lawyers remains, but subsidiary firms can turn over profits to the parent firm. While the subsidiary can have a different name to the parent firm, it still needs to contain the name/s of lawyers working in it. The relationship between the firms also must be explicitly disclosed through inclusion of the phrase "a subsidiary of X law firm" beneath or next to the subsidiary's name.

This development presents a great opportunity for firms with diversified practices. Law firm marketing professionals have been quick to point out the marketing implications (see Larry Bodine on the topic here) but the possibilities go far further, to the very roots of strategy.

One of the great enigmas in so many law firms is that they contain a mix of practice areas from the highly differentiated (e.g. high-end M&A or corporate finance work) to highly commoditized (e.g. conveyancing, debt collecting and low-end insurance defense work.) One of the basic tenets of strategy, first espoused by Michael Porter of the Harvard Business School in the 1980s, is that there are three and only three strategic sources of competitive advantage. They are:

Differentiation. Being different to one's competitors in a way that is valued by clients, enabling one to charge a higher price for one's services.

Cost Leader. Being the cheapest service provider in a given area (critical where client cost sensitivity is high.)

Niche. Exploiting a small, focused part of the market that requires intense specialization.

It is perfectly possible to develop superior profits with any of the three generic strategies. However: the drivers in each case are so different that it is impossible to optimize the strategy if one tries to mix them. It would not be sensible to have a boutique in the corner of a WalMart (cost leader) selling Cartier, Mont Blanc and Lamborghini products (differentiation) or antique toys (niche.) If a high-end corporate law firm also does general debt collecting or petty criminal litigation, it not only devalues their brand but causes major internal strategic inconsistencies as well. Why? The answer is simple when we unpack the drivers in a bit more detail. Here are just a few of them:

The Client Problem

Cost Leader - We need a cost-effective solution to a simple or everyday problem
Differentiation - This is a problem that is complex and important to the firm, so we need well-informed and skilled assistance with it
Niche - This is a highly specialized problem that requires unusual skills or knowledge

Critical Success Factors

Cost Leader - Established methodologies and processes; efficient service delivery processes; uniformity and standardization
Differentiation - Highly customized solutions; the best brains available; excellent diagnostic and problem solving abilities; state of the art skills and knowledge
Niche - Having unique skills and knowledge in the area of specialization

Selling Proposition

Cost Leader - We can provide acceptable service at the lowest cost
Differentiation - We're the best around
Niche - We're the only ones that can do this work

Staffing Priorities

Cost Leader - Acceptable levels of skills at the lowest possible cost
Differentiation - The best available talent
Niche - Those with the specialized skills necessary

Profit Drivers

Cost Leader - Drive down the cost per transaction to the firm; high volume low margin
Differentiation - Premium fees; focus on services where clients are cost insensitive
Niche - A balance of above average and premium fees, depending on the value that the client ascribes to the service

Culture Focus

Cost Leader - Efficiency, compliance with procedures, high cost consciousness, highly leveraged staffing (with less expensive staff and/or technology,) relatively impersonal client relations
Differentiation - Excellence and premium reputation, individual focus; low to very low leverage; highly personal ("trusted advisor") client relations
Niche - Specialist focus; aversion to diversification; remaining at the "cutting edge;" knowledge based client relations.

Degree of Lawyer Autonomy

Cost Leader - Very Low to Low
Differentiation - High to very high
Niche - Varies according to area of specialization; usually high

From the above, it should be obvious why it is so difficult to mix strategies in the same organization, under the same roof. Being able to create law firm subsidiaries allows a firm to group practice areas involving services reserved for attorneys into entirely different business units, each employing the most appropriate strategy. Branding issues may still remain because of the requirement to explicitly disclose the link, but there are precedents for this. Several hotels have a range of brands from the differentiated (eg Hilton's Waldorf=Astoria collection) to budget (cost leader.)

This allows a firm's shareholders to optimize the profitability of all the services that they choose to offer, by applying the strategic drivers in the most appropriate way in their different firms. The various firms need not even be in the same premises. Nor, arguably, should they necessarily be. A cost leader strategy may dictate that the firm be at least in cheaper offices, perhaps even in a different city where staffing costs are lower too. The optimum compensation systems for each generic strategy would vary too, and having people on different systems in the same office would be a recipe for trouble, too. Carefully implemented, though, the scope for increased overall profitability could be significant. Especially for "full-service" law firms.

Of course, for those following the Clementi-driven process in the United Kingdom, this will all sound familiar. The transformation of legal services in England and Wales will open the same opportunities in that part of the world, too.

Comments, as always, are most welcome and may be posted below.