Order in chaos: Why law firms' sector strategies don't work

Shortly after law firms emerged from the cocoon of non-marketing they had, universally, occupied until 1985, they began to realise that they needed to differentiate themselves from one another.

When, in 1988, The Legal 500 hit the profession like a twister hits an Oklahoma farmstead, law firms were for the first time being listed and, heaven forbid, rated by what types of law they practised. Differentiation was a must.

Soon, law firms began to organise themselves into sector-based groups. This was a perfectly logical response in businesses that had grown exponentially and in which individual lawyers had ceased to be generalist and now needed to cross-market their emerging specialties.

One proposed new structure, as expounded by the doyen of legal management consultants, was that of a ‘tabletop’ of service types – corporate, litigation, real estate, and so on – from which extended ‘legs’ representing the various sector interests – energy, financial institutions, public sector, and so on.

This was a neat way of looking at the often-problematic matrix system of horizontal and vertical service and practice group construction favoured by virtually all professional service firms.

Twenty years on, the principle of sector-based organisation and marketing is well-established, but how has law firm thinking evolved in the meantime, and what’s missing from the sector offerings?

Defining strategy

From a firm management point of view, sectors need to be carefully selected. It’s very tempting to try to carve up the entire firm into four ‘neat’ (but more often straggling) chunks. However, if they look odd from the outside, everyone might start to wonder why the firm is one entity in the first place.

An example of this phenomenon is the long-departed Frere Cholmeley Bischoff, whose sector specialisms included real estate, media, banking, collective investments and aviation. It was not long before the firm had fragmented into more comprehensible chunks, many of whose lawyers are still thriving today.

There are few such disparate firms out there today, but where there is little or no interplay between sectors – i.e. where a sector strategy is simply a method of organising an untidy firm – the danger is that the firm becomes siloed, which can also lead to a breakup.

The irony of such a strategy is that a sector approach implies that it is client led, which is surely how it should be.

Differentiation

Part of the difficulty with sector specialisation is that everybody’s doing it.

“You can’t differentiate by presumption,” says Paul Lippe, founder of US legal community LegalOnRamp.

By that, Lippe means that just being something isn’t enough to differentiate the firm. So, just saying “we focus on energy” isn’t enough. You need to make that specialisation ‘live’ for the client.

This is not something that law firms are great at doing, as many clients have noted. Very often, law firm sector groups seem simply a convenient way of organising lawyers around the kind of work they’ve done, bringing together disparate practice areas, with no obvious advantage to ?the client.

The rule in corporate organisations is that you’re either one of two things:

1. a specialist business focusing on one market segment; or

2. a multi-focused business specialising in a number of business areas across the market.

However, multi-focused businesses only succeed by joining the dots and applying commercial advantage gained in one area to other parts of the business. Otherwise, they are vulnerable to – and usually lose to – specialist businesses.

To apply this to a law firm setting, let’s imagine a firm with a banking sector group. Its banking lawyers are going to be at the core of the group, doing banking work. But, the firm also puts some real estate lawyers in the banking group in order to target bank clients looking to move premises.

Part of the problem with this approach is the way that law firms remunerate partners. While it may be helpful having a sector group meeting to discuss who to target next, spending valuable fee-earning time on service design – how do we use our combined experience and expertise to design a compelling real estate product for banking clients – may not be high up on the agenda of the banking partner if he’s not getting any revenue in his kitty as a result.

That highlights the next issue for sector groups: composition.

Costs and revenues

One of the problems with sector groups is that they sit on top of departments, and budgets are usually allocated on a departmental basis. The result is that the sector group head – who is sometimes also a department head, which further complicates things – often has little ?real power.

That extends also to recruitment. If there is no mandate for the sector group to drive recruitment, it is essentially playing the hand the departments deal it. So, in our imaginary firm, it might be necessary for the sector group to have a good banking regulatory person, for instance, to knit everything together. But regulatory sits within commercial, which sits within corporate, and the head of corporate doesn’t want a cost item sitting on his balance sheet if he isn’t getting all the benefit of any revenue it brings in.

The result is that, seen from the client’s point of view, a sector group might look to have holes in it. Yes, other lawyers may stretch their capabilities to fill that hole, but when the chips are down they will focus where the revenue trickles to and can simply withdraw their interest if there are more important – i.e. departmental – considerations in the offing.

This is far less of a problem where sector groups and practice areas marry up – real estate is a good example – because the core individuals and core revenues both sit in the same place. Any problems there might arise around the fringes.

For instance, construction is a key part of most real estate offerings, but in many firms construction sits within the litigation department, not real estate. If a non-contentious construction specialist is needed, the question becomes: where do they sit?

If the answer is litigation, they are surrounded by litigators, which may feel curiously isolating. However, if they sit within real estate, this may mean that they need to sit within the real estate budget, and extra care will need to be taken to mix them with the contentious construction lawyers to ensure that box is ticked.

The obvious answer might be to ?have the sector lead, and treat the departments as suppliers of legal talent to the sector; this is almost certainly how it would work in other industries. But, the political and administrative issues raised by this are immense.

Group focus and size

Another bedevilling issue is that of the sector that is simply too big to function. A real estate sector group might have real estate at its core, with planning, environment and construction subsets, and then have input from real estate specialists in corporate and finance, for instance.

But where a law firm is using a sector group to sweep up a batch of services with very disparate client bases under what seems like a convenient umbrella, the resultant sector can become unwieldy.

Take, for instance, a financial institution group, which is a favourite among law firms and a classic example of a supplier-led way of organisational thinking. This might encompass a client base of banks, insurance companies (life and general), funds of varying types, brokers, intermediaries and even professionals like financial advisers.

This might, from a firm’s point of view, usefully corral banking lawyers, both contentious and non-contentious and of various stripes (structured finance, asset-based lending and so on), commercial litigators, real estate investment lawyers, real estate finance lawyers, financial services lawyers, funds lawyers, ?insurance lawyers (do we include insurance litigators here?), employment lawyers, pensions lawyers, employee benefit lawyers and so on. Before you know it, half the firm is in it.

Now the trick becomes how to share knowledge to improve client service. But, what does a second-tier German investment bank have in common with a UK hedge fund, Hong Kong commodity broker, French general insurer and American pensions consultancy? Only that they are all serviced by the financial institutions group.

It quite likely that many insurance clients would consider themselves part of the insurance sector, if asked, although it may be that their real estate investment people might consider themselves part of the property sector, and their investment products people might consider themselves part of financial services. They might, at a stretch, say they all work in financial services, but don’t bet on it.

Ah, you might say, how about constructing a sector group along client-market lines? This takes us neatly on to the principle of the phantom sector.

The phantom sector

This corralling of law firm services often takes place from the point of view of perfect logic but ends up nowhere. ?A great example of this is a lawyer ?who worked in a law firm’s motor ?industry sector.

The motor industry is one of those sectors we all know to exist from news reports and government pronouncements. The trouble is that, once the firm had gathered together its broad group of lawyers under this banner, it realised that, in the words of this lawyer, “it wasn’t really a sector”.

There was, to begin with, something of a lack of uniqueness in the legal services needs of the various clients, which didn’t help. But then it was quickly realised that the legal services profile of a car dealership – even a chain of dealerships – was massively different from that of a motor manufacturer.

The firm’s clients might all describe themselves as working in the motor industry, but their lack of common ?needs or interests were plain to see. Acting for one type of client provided very little benefit with the other and, given the sometimes antagonistic relationship between dealers and manufacturers, was a difficult balance to strike. In the end, learning points were taken and the initiative was transformed into a rather less grandiose effort.

Lessons from history

So what are we to make of law firms’ efforts at creating sector strategies? The lessons of the past 20 years seem clear (see box).

Sectors are here to stay in law firms. But are there sectors that really ‘live’ for clients? These are still very much under construction.

 

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Creating a sector strategy

• A sector strategy needs to be client led, with caveats.

• A firm cannot be sector focused simply by presumption; there need to be some tangible benefits in terms of service delivery.

• There needs to be some overarching logic or the firm can become siloed.

• Structure is important: if the sector head has no power, the power of the sector is diminished.

• Knowledge needs to be shared between the component parts of the sector group to gain benefits from being multi-focused.

• Time needs to be given over to service design to make the sector ‘live’ for the client.

• Some recruitment power needs to be held at sector level to avoid service gaps.

• Sector groups can be too big and too all-encompassing, and thus become unwieldy and illogical, diminishing the power of the offering.

• Care needs to be taken when fashioning sector groups not to create sectors clients don’t feel part of, and not to create sectors where no benefit can be gained by combining the component parts.

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Mark Brandon is the managing director of Motive Legal Consulting